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Creditors Seek Involuntary Bankruptcy for Drexel Subsidiary

May 10, 1990

NEW YORK (AP) _ The central banks of Portugal and Yugoslavia and other creditors want to toss Drexel Burnham Lambert’s commodities trading unit into bankruptcy court to improve their chances of collecting about $500 million in debts.

The creditors asked a federal bankruptcy judge Wednesday to place Drexel Burnham Lambert Trading Corp.in involuntary Chapter 7 liquidation proceedings. That would remove the company from control of its parent, which already is in Chapter 11 bankruptcy proceedings.

Drexel said it would not challenge the petition but would exercise the right to convert it to a Chapter 11 case, which would allow to retain control over the winding down of the subsidiary.

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

The bankruptcy petition filing 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.

Dichter said the commodities subsidiary owes those and several dozen other creditors between $500 million and $550 million. The debt 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.

DBL Trading’s largest asset is a $645 million claim against Drexel Burnham Lambert Group Inc. for money that was funneled into 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.

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

″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,″ Drexel’s 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.

Dichter 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,″ he said. ″We feared the claim would be dealt with for Group’s benefit.″

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.

By exercising its right to convert to a Chapter 11 case, 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 between $160 million and $180 million, Portugal’s central bank about $115 million, Yugoslavia’s central bank about $70 million and Ultramar Energy $11 million. The central banks of Poland and Malaysia also are creditors.

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.

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