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Creditors Seek Involuntary Bankruptcy for Drexel Subsidiary

May 9, 1990

NEW YORK (AP) _ A group of Drexel Burnham Lambert Group Inc. creditors asked a federal judge Wednesday to place a commodities trading subsidiary into bankruptcy court because it is not paying more than $500 million in debts.

The move by several large foreign central banks and other creditors would toss Drexel Burnham Lambert Trading Corp.into involuntary Chapter 7 liquidation proceedings, removing the company from control of its parent.

Drexel said in a statement it would not challenge the petition but would exercise the right to convert it to a Chapter 11 case, which allows a company to reorganize its assets and business under protection from creditors.

The petition was filed in U.S. Bankruptcy Court in Manhattan, where the parent of the Wall Street firm sought protection from creditors on Feb. 13 after a cash crunch and continued problems from its 1989 securities fraud guilty plea.

Drexel Burnham Lambert Inc., the brokerage subsidiary, is liquidating its assets outside of bankruptcy court. Creditors were said to be considering whether to place the firm in involuntary liquidation, where its actions would be controlled by the court.

The bankruptcy petition filing by the commodities subsidiary was made by creditors Banco de Portugal, the National Bank of Yugoslavia, Nissho Iwai Corp., a Japanese trading concern, and Ultramar Energy Ltd., an oil trading company in Tarrytown, a New York suburb.

The commodities subsidiary owes those and several dozen other creditors between $500 million and $550 million, said Barry Dichter, an attorney for Banco de Portugal.

DBL Trading’s largest asset is a $645 million claim against the parent company for money that was funneled to the parent before it filed for Chapter 11 protection under the U.S. Bankruptcy Code, Dichter said.

Drexel said the commodities trading subsidiary has estimated net liabilities of $505 million, while its claim against the parent company is about $558 million.

″DBL Trading indicated that the amounts recoverable from Group represent the balance of loans and advances made to DBL Group in line with similar transactions dating back over a number of years,″ the statement said.

The commodities subsidiary, based in Fort Lee, N.J., traded in oil, precious metals and foreign exchange. It has ceased operations. Attorneys said it had resolved its trading positions except for several involving the future delivery of gold from foreign mining companies.

″The creditors believe that their future is tied to exercising control over the matter,″ Dichter said. ″Basically it was a rudderless ship on which we were all passengers and we wanted to steer the vessel.″

He said DBL Trading’s employees, including senior officers, had left the subsidiary and the parent company was controlling its destiny, which he called ″much like having the fox to guard the chicken coop.″

″We had no confidence the claim would be actively pursued for the benefit of Trading’s creditors,″ Dichter said. ″We feared the claim would be dealt with for Group’s benefit.″

The hundreds of millions of dollars owed by Drexel to the subsidiary involves precious metals such as gold and platinum that were leased from central banks of various governments, a common trading practice.

The metals then were used in other transactions that generated cash for the commodities trading subsidiary. That money then was ″upstreamed″ into the parent company, which was short on cash.

Under the filing, Dichter said, the subsidiary’s creditors would retain an independent consultant to examine the relationship between the subsidiary and parent and make recommendations on how it should resolve its liabilities.

Drexel still would control the company with oversight by creditors and U.S. Bankruptcy Judge Howard C. Buschman III. In a Chapter 7 case, a trustee is appointed who must collect and liquidate all property of the debtor’s estate and investigate any claims made by creditors.

Lawyers said Nissho Iwai is owed about $160 million, Portugal’s central bank $95 million to $120 million, Yugoslavia’s central bank about $70 million and Ultramar Energy $11 million.

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