A Status On Lionel’s Bankruptcy; How Long Will It Last? By Erol B. Gurcan
Those of us following the various legal proceedings in the 3 rail world know that Lionel has been in bankruptcy since November 15, 2004, now a period of 20 months. While that may not sound like a long time to some, by comparison, K-Line’s bankruptcy was over and done with in 8 months, and they did not emerge from it. (K-Line’s tooling and assets were purchased by its principal manufacturer Sanda Kan in April 2006, who in turn, licensed them to Lionel as part of a licensing and marketing agreement). Click on the link below to read on.
As some will recall, the only reason Lionel filed for chapter 11
bankruptcy protection (reorganization) according to company president
and CEO Jerry Calabrese, was because of the $40.7 million dollar
judgment obtained against it by MTH . On June 7, 2004, a jury in
Detroit, Michigan awarded MTH that amount of money against Lionel and
codefendant Korea Brass involving the alleged theft of trade secrets
involving the design plans for articulated locomotives and
misappropriation of MTH production schedules. Lionel appealed that
judgment in January 2005, and the appeal was heard by the Sixth Circuit
Court of Appeals in Cincinnati Ohio on June 7, 2006. A decision on the
appeal is expected late this year or early next year.
The question now becomes, how much longer will Lionel remain
in Chapter 11 bankruptcy, and when will they begin the process to emerge from
it. A motion (an application for a court order) filed by Lionel’s lawyers with
the bankruptcy court last week, offers some answers (the information for this
article was obtained from the motion papers).The motion is currently scheduled
to be heard on July 25, 2006. (As a side note, a court conference concerning
Union Pacific’s trademark infringement lawsuit is scheduled for that day as
well. That case has been stayed since Lionel filed for bankruptcy).
The key factor in the bankruptcy reorganization process will
be the decision in the trade secrets appeal which is expected late this
year/early in 2007. Lionel’s lawyers have informed the bankruptcy court that
they can not file a plan of reorganization (which would start the process to
emerge from bankruptcy) until they know the outcome of the trade secrets
appeal. The motion specifically requests that once there is a decision in the
trade secrets appeal, Lionel be given 120 days (four months) after the decision in which to file a
reorganization plan with the court. It also seeks an additional 60 days (two
months) to allow other interested parties, such as Lionel’s creditors (like
MTH) to file their own reorganization
plan with the court.
The appeals court decision is important in the bankruptcy
process because it will directly impact the terms of any reorganization that
may be proposed and confirmed, and in particular, the recoveries provided to
unsecured creditors. For example, if all or most of MTH’s $40.7 million dollar
judgment is affirmed, the recovery by other unsecured creditors would be small.
If the appeals court reverses the jury’s verdict, Lionel’s unsecured creditors would
be paid in full according to its lawyers motion papers (the total of all other
unsecured claims other than those of MTH totals $12 million). Beyond the $40.7
million trade secrets judgment, MTH has a separate $17.5 million dollar claim
filed with the bankruptcy court in August 2005, which also became the subject
of a lawsuit filed with the bankruptcy court on June 12, 2006, to repel an
earlier Lionel motion for discovery documents and depositions (the patent
infringement lawsuit is currently stayed). In a nutshell, the MTH $40.7 million
trade secrets judgment and $17.5 million dollar MTH patent infringement lawsuit
are by far the two largest unsecured claims against Lionel, when compared with
the other 12 million totals of all other unsecured creditors.
I expect that the bankruptcy court will grant Lionel’s
motion (its third request for an extension since filing for bankruptcy) because
it is reasonable to conclude that a reorganization plan can not be proposed
until the outcome of the single largest potential unsecured debt facing Lionel
is determined. When one calculates that a decision in the trade secrets case is
not rendered until at least late this year, a period of over four months, and
another six months will go by before Lionel and/or others propose plans of
reorganization to the bankruptcy court, it will be almost another year (mid
2007) before Lionel begins to emerge from bankruptcy. At the very least, and
this is an optimistic possibility, in my opinion, it will take at least another
nine months from the present time.
Lastly, as part of its motion rational for the extension,
Lionel’s attorneys have argued it has made substantial progress to date in
their reorganization efforts to emerge from bankruptcy. Specifically, they cite
that 1) in September 2004, Jerry Calabrese was hired as president and CEO and
Mark Erickson as VP of Marketing and Business Development after terminating
their prior CEO, 2) entered into licensing agreements with NASCAR and the New
York City MTA, 3) they entered into a licensing and marketing agreement with their principal
manufacturer Sanda Kan to use the K-Line name and assets, and sell products
under that name, 4) entered into a joint
venture agreement with Creative Trains Company for the development TMCC II
(which will be demonstrated publicly for the first time next week at the LCCA
convention in Denver, Colorado, and 5) have began to rebuild their customer
base by selling trains in more mainstream retail stores, instead of only
through the hobby store route. The
bankruptcy court should be well aware of at least the agreements with Sanda Kan and Creative Trains, since it
specifically approved them earlier this year. Moreover, Lionel’s attorneys have stated its finances have improved,
with earnings before interest, taxes, depreciation and amortization (EBITDA) of
approximately $10.2 million (before restructuring costs) on sales of $56.6 million
for the fiscal year ending December 31, 2005. By contrast, for the fiscal year
ending December 31, 2004, EBITDA was only approximately $7.2 million on sales
of $52.3 million. Furthermore, orders for the week ending July 2, 2006 were
approximately $54.2 million to date, compared to $46.6 million for the same
period last year.
I will continue to keep all updated as necessary.
Erol B. Gurcan, an O Gauge industry legal expert, is a regular contributor to OGaugeWatch.com.
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- Neil Young And Lionel To Buy Out Partner Of Creative Trains
- Lionel Execs Get Pay Raise
- Bankruptcy Court Grants Lionel 7th Extension: MTH Motion to Extend TRO Granted by Erol Gurcan
- MTH Attempts To Collect $$$ From Korea Brass by Erol Gurcan
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