$40 Million Agricultural Manufacturer
Chapter 11 bankruptcy resulting in sale to new owner
HAMSTREET ROLES: Assessment, Financial Restructuring
SUMMARY: Complex case where agricultural liens trumped bankruptcy powers and threatened liquidation of company with minimal payment to lenders. Hamstreet’s creative solution brought disparate laws into harmony and satisfied liens, while also rescuing the company, preserving jobs, and finding a buyer.
THE BACKGROUND: This company operated two facilities that produced dehydrated potatoes from raw inventory. After modernizing its plants and speculating unsuccessfully in the potato market, the firm fell behind in providing collateral statements to the secured lender. Analysis revealed that growers’ liens on the company’s potato inventory and receivables left the lender in a radically unprotected position, which led it to pull the plug on further financing. The firm halted operations, laid off staff, and turned to Hamstreet for help.
THE CHALLENGE: Our assessment concluded that the client had a sound core business compromised by a combination of risky decisions and bad luck. But now, in the absence of financial support, the company had shut down. Its creditors were already fighting over receivables and warehouses full of potatoes, all subject to special provisions of agricultural law that interfered with the normal distribution of assets. Under the Perishable Agricultural Commodity Act, growers’ liens took priority over other claims, effectively destroying the client’s ability to use its potato inventory in an effort to reorganize. Determining which growers had perfected liens on which potatoes, and whose liens had priority, would take over a year to resolve. There seemed little alternative to liquidation.
Left to itself, however, liquidation would benefit no one: the client’s inventory, losing value along with freshness, was locked in place by the PACA claims, while the sale of facilities and equipment would yield cents on the dollar to the primary secured lender and nothing to anybody else. The farmers would lose a buyer, the community would lose jobs, and the bank would lose collateral.
THE RESULTS: Despite these formidable circumstances, in just three weeks on the job our firm obtained new funding and restarted this client’s operations in Chapter 11. A minor equipment lender, familiar with our successful work on other cases, agreed to provide unsecured operational financing, despite the client’s lack of inventory and accounts receivable. We then developed a unique scheme that enabled the client to use its potato inventory after all and run the business before the PACA liens were settled. On the one hand, we segregated pre-petition inventory and receivables into a protected “potato trust” to service those and other secured claims. On the other hand, using cash from the new loan, we hired back workers, reopened the plants, and improved operations. We purchased potatoes from the trust until that account was reduced to cash. As the courts ruled on the various claims, the client paid them from the segregated account. Shortly after restarting operations, the company was profitable. Thanks to its new earnings, along with the money it paid into the potato trust and the proceeds from its eventual sale to a new owner, all creditors received a significantly higher return than was otherwise possible. The client recovered its important place in the local community, and its previous owner stayed on to help manage the new company.