Beth Steel creditors pressured to return pre-bankruptcy payouts

Villa Julie and Barnette among parties named

March 09, 2004|By Dan Shope | Dan Shope,THE MORNING CALL

About 3,000 companies, partnerships, ventures and consultants are being drawn into U.S. Bankruptcy Court in New York because they received money from Bethlehem Steel during the 90 days before it filed for Chapter 11 bankruptcy protection.

The defendants include a Maryland college, a Cleveland uniform company, a Lehigh Valley computer company, a Bethlehem, Pa., photographer and a retired chairman of Bethlehem Steel Corp.

The actions came because bankruptcy court is wary of "sweetheart deals leading up to the bankruptcy - the equivalent of inside trading," said Bruce Davis, counsel to the Retired Employees' Benefits Coalition at the former Bethlehem Steel.

Paul Schoff, an Allentown, Pa., attorney who handles bankruptcy cases, said that complaints to avoid preferential transfers are common in bankruptcy cases. Beverly Richards, a clerk for the bankruptcy court in New York, said it's routine. She added that it's "hard to say" when actions will be concluded.

"This is normal," agreed Peter A. Chapman, president of Bankruptcy Creditors' Service of Trenton, N.J., which studies large bankruptcies.

"Creditors who received preferential payments during the 90-day period prior to the bankruptcy filing are being pressured to return those funds, and the resulting pile of money will be divided equally among all unsecured creditors."

Bethlehem Steel filed for Chapter 11 bankruptcy protection Oct. 15, 2001. The company's pension plan was taken over by the federal Pension Benefit Guaranty Corp., and it received Bankruptcy Court permission to end retiree health benefits last March.

The company subsequently sold most of its plants, including its Sparrows Point complex in Baltimore County, and other assets for $1.5 billion to International Steel Group of Cleveland. Bethlehem Steel dissolved at the end of 2003.

Among those who have received notice from bankruptcy court are members of the company's former board of directors and Curtis "Hank" Barnette, former chairman emeritus and former chairman of Bethlehem Steel.

"I was serving as a consultant to Bethlehem Steel," Barnette said recently. "Mine was for future service, not in the past."

He was wired $50,000 on Aug. 31, 2001, according to a court exhibit.

"I believe that the action taken by the bankruptcy court was not meritorious," he said. "The court has to see if the payments are of merit. Many of the cases will hopefully be dismissed."

Barnette, 69, has continued to live in Bethlehem since retiring in 2000. He is practicing law in Washington, D.C., and has testified before congressional committees about matters involving issues such as international trade and corporate governance.

Villa Julie College in the Stevenson area of Baltimore County had a $5,375 check questioned by the bankruptcy court. Brian Shea, public relations manager for Villa Julie, said the check was tuition for a worker, likely from the company's plant in Sparrows Point.

Edward Mendez, a former Bethlehem Steel photographer, founded his own company, Lehigh Valley Photographic Services, with several other steel employees several years ago.

The bankruptcy court later disputed $1,384 in payments his company received in the summer of 2001.

"We talked to our lawyer and decided to write it off as a loss," Mendez said.

"They were only offering us $65, and it paid off better by writing it off against our taxes."

Gloria Gladney of Goldfish Uniform Store in Cleveland said Bethlehem Steel owed her money.

She said she was unaware of the $2,252 in checks in August and September of 2001 that are being questioned.

The plan by the bankruptcy court is to contact all 3,000 people, companies and organizations by early April, unless they can establish an exception or make a repayment, said Davis of the Retired Employees' Benefits Coalition.

"The response can take one of several forms," he added. "The party can acknowledge the complaint and seek a settlement for the amount preferentially paid.

"Or they can rebut the position taken in the notice. A third, and most likely, position is to say they were paid, but paid in the ordinary course of business - there was no preferential payment.

"Finally, a defendant cannot file anything with the court. That would be done at their peril. The judge could enter a judgment against the defendant for the full amount."

If the payments came under the ordinary course of business, the court shouldn't have a case, Davis said. "One instance would be people who were regular suppliers of goods and services," he said.

Money that's returned would be used to pay administrative and legal expenses involved in the Bethlehem Steel bankruptcy. Any extra will be passed onto International Steel Group, Davis said.

Defendants who might be forced to repay, Davis said, include some newly hired consultants, such as those who were hired in September 2001 and had no previous relationship with the company. And, of course, there may be the rare case of preferential payments.

The Morning Call in Allentown, Pa., is a Tribune Publishing newspaper.

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