Stephanie Gleason
Cengage Learning Inc. is suing its lenders, who are owed $5.8
billion, to erase the claim that group is asserting on thousands of
copyrights.
The copyrights are part of a package of assets that Cengage is
hoping to use to pay unsecured creditors, who are owed $487.7
million and can only see a recovery from assets that are free of
lender claims. Cengage identified these copyrights at the beginning
of its Chapter 11 case as assets that lenders, represented by J.P.
Morgan Chase Bank N.A., aren't entitled to. The lenders have
disputed this.
The liens on these copyrights were asserted within the three
months leading up to Cengage's Chapter 11 filing, making them
invalid, Cengage argued in documents filed with the U.S. Bankruptcy
Court in Brooklyn, N.Y. Some of the liens weren't even acknowledged
by the U.S. Copyright Office yet, the company said.
The Bankruptcy Code generally allows transfers made prior to a
Chapter 11 filing, but while a company is insolvent, to be undone
or avoided.
Cengage has identified 15,750 copyrights that it says fall into
this category. The copyrights represent the intellectual property
of thousands of individual textbooks published by Cengage.
In addition to the copyrights, Cengage has pointed to two other
possible sources of recovery for unsecured creditors--$273.9
million and a 35% equity stake in Cengage's foreign subsidiaries.
This is the second lawsuit filed recently by Cengage to protect
these assets. In late September, it filed a similar lawsuit over
the cash portion of the package.
Cengage, based in Stamford, Conn., filed for Chapter 11
bankruptcy in July after negotiating a restructuring deal with its
first-lien creditors that would eliminate more than $4 billion in
debt from its balance sheet.
Its first-lien debt is held by Apax Partners LP, Searchlight
Capital Partners, Kohlberg Kravis Roberts & Co., BlackRock
Financial Management Inc., Oaktree Capital Management LP, Oak Hill
Advisors LP, Franklin Mutual Advisors LLC, and Deutsche Bank Trust
Co. Americas.
Under the proposed restructuring, this group would get 100% of
the equity in the reorganized company, along with a new note worth
$1.5 billion or a $1.75 billion cash payment.
Unsecured creditors and second-lien bondholders haven't agreed
to support the restructuring proposal.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Stephanie Gleason at stephanie.gleason@wsj.com
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