Veg Liquidation, formerly known as Allens Inc., is asking a federal Bankruptcy Court to shift its Chapter 11 bankruptcy status to Chapter 7 in a bid to help liquidate the remaining debt still owed after the sale of the company to Sager Creek Acquisition Corp.
Earlier this week, the company filed a motion seeking to convert its bankruptcy status, effective next Wednesday. Generally, Chapter 11 bankruptcy allows for the reorganization of debt while a company continues to operate, while Chapter 7 focuses primarily on the liquidation of debt. Bankruptcy Judge Ben Barry is hearing the case.
Those objecting to the motion have 21 days to file with the court. Veg Liquidation has asked for a hearing on the matter at the first available date after the objection deadline.
According to documents filed by Veg Liquidation, substantially all the assets of Siloam Springs-based Allens were sold to Sager Creek and Veg Liquidation only as funding for professional and responsible officer fees through the end of the month. Veg Liquidation said it’s consulting with the Official Committee of Unsecured Debtors and Sager Creek to settle some remaining debt issues and, if settlements are reached, it requested the right to withdraw the motion.
Veg Liquidation contends it has virtually no liquid assets. The purchase price for the company paid Veg Liquidation’s first lien lenders in full and included a credit bid as part of the second lien secured parties’ debt and the assumption of much of the remaining second lien secured parties’ debt by Sager Creek. Despite that, there is a minimum of $2.3 million of second lien debt claims remaining against the company’s estates, according to the motion.
Joshua Silverstein, a professor at the W.H. Bowen School of Law at the University of Arkansas at Little Rock, researches and writes about bankruptcy law. He said in Chapter 11 cases, debtors have to deal with creditors more directly and require their general consent or at least cooperation in most cases to take certain actions. In Chapter 7, an appointed trustee settles questions and debts more directly.
He said the threat of shifting to Chapter 7 is sometimes used as a negotiating tactic to nudge some creditors into settling their claims while they have more control of the process. He noted it also could be simply that the debtors are out of money.
“It’s possible little cash came in [from the sale],” he said.
In late October, Allens filed for Chapter 11 protection in U.S. Bankruptcy Court for the Western District of Arkansas. Allens owed its primary lenders $114.36 million and its secondary lenders $65.6 million.
Sager Creek, owned by investment funds controlled or advised by two of Allens’ creditors, bought the company in February with a winning bid of $123.8 million. The total value of the deal is just shy of $160 million.
Allens employs nearly 1,200 people across its U.S.operations. In addition to its Siloam Springs plant and other Arkansas holdings, the company has operations in Georgia, North Carolina and Wisconsin.
The court filing by Veg Liquidation indicates that after the sale of Allens, the debtors and Sager Creek have worked to resolve disputed claims under the Perishable Agriculture Commodities Act, and plan on continuing to resolve disputed claims under the act and will follow the current trial scheduled for those claims.
The Perishable Agriculture Commodities Act regulates the sale of fresh and frozen produce to avoid unfair-trade practices and ensures sellers are paid in a timely manner. Valid claims are paid dollar for dollar in bankruptcies, and valid claims under the act are moved to the head of the line for payment, even ahead of secured debt.
According to court documents filed earlier in April, $19.18 million in Perishable Agriculture Commodities Act claims had been made since Allens Inc. filed for bankruptcy, and a little more than $12 million of them are disputed.
In its motion, Veg Liquidation noted Sager Creek posted $7.7 million in cash in escrow and Sager Creek’s equity holders provided a funding commitment of an additional $11.66 million for a total of $19.36 million available to pay for claims allowed under the act.
Several hearings on the disputed claims are scheduled for May.
Business, Pages 25 on 04/24/2014