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Battle of Orleans

As private equity steps in to help exit chapter 11, blindsided NVR files lawsuit for damages.

There's more than one way to buy a home builder out of bankruptcy, the recent Chapter 11 reorganization case of Orleans Home-builders shows.

There's the official, up-front way—you bid on the assets to be sold off in a court-supervised auction. That was NVR's approach when it became the starting “stalking horse” bidder on substantially all of Orleans' assets for $170 million. No doubt other bidders were also ready to bid on the company's assets, including potentially Toll Brothers, which had shown interest.

Then there's the stealthy back-door way—gain control of the company by buying its debt, perhaps from the banks that would be happy to take certain money now rather than wait for uncertain cash later. Own the debt, own the company, at least when the company has more debt than assets.

It was this stealth method, employed by what is said to be a consortium of private equity players, that snatched Orleans off the auction block in mid-May. The group bought what amounts to more than 80 percent of Orleans' debt, the home builder stated in court documents.

Orleans went from a prospective corpse, its parts being assessed for their individual values by other builders and investors, to a company with plans to survive into its 91st year of operations.

The debt buyers said they would “support” (translation, fund) the company's reorganization as a going concern. A reorganization plan is expected by late summer, and the company hopes to be out of bankruptcy by late fall.

The auction off, a blindsided NVR was not happy and swiftly sued Orleans, charging that it was unjustly left empty-handed after spending time and money on due diligence for the bid. It even alleged that its $170 million bid helped stir others' interest in the company, increasing its value.

“OHB (Orleans) may pursue a stand-alone reorganization plan it perceives to be in its best interests; however, as a matter of equity, justice, and fairness, the court should require OHB to pay NVR the substantial damages it has sustained in reliance on OHB's repeated representations and assurances concerning its commitment to the auction process,” NVR's lawsuit stated. —Teresa Burney

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