This bankruptcy started under a terrible set of circumstances, and the strain is carrying over into the bankruptcy. Prior to filing, DESA sought to have a ‘heart-to-heart’ talk with its lead lender. The lender responded by sweeping its cash collateral, refusing to lend additional monies, and DESA was left with its one remaining option – a Delaware bankruptcy, with practically no operating cash.
Even with the protections afforded by bankruptcy, the situation looks bleak and very uncertain.
Separate bankruptcy petitions were filed on December 29, 2008 by DHP Holdings II Corporation (Case No.: 08-13422) and five of its operating subsidiaries:
- DESA LLC Case No.: 08-13423
- DESA Heating LLC Case No.: 08-13424
- DESA Specialty LLC Case No.: 08-13425
- DESA FMI LLC Case No.: 08-13426
- DESA IP LLC Case No.: 08-13427
As part of the initial court orders, the cases were “administratively consolidated”. This is what it sounds like – the six cases are to be handled by the same clerk, on the same docket, using the same notice list, etc. This is very common in the case of affiliated companies. Administrative consolidation saves money and time. It is so common that it is done by order of the court without notice or opportunity for hearing.
When cases are administratively consolidated, the debtors still are to remain separate for all “substantive” purposes. They are to continue to have their own assets, their own liabilities, their own books and records, their own income, their own expenses, etc. The local rules of the Delaware Bankruptcy Court specifically say that an “order of joint administration under this Local Rule is for procedural purposes only and shall not cause a ‘substantive’ consolidation of the respective debtors’ estates.”
Why is that important to you, a supplier? Let’s say that you were a supplier to Debtor-A and, Debtor-A was in much better shape than Debtor-B or the other Debtors in an affiliated group. Looking at Debtor-A, you might be in line to get a distribution based on what you were owed pre-petition. You might have an administrative claim that Debtor-A has enough money to pay, which the other Debtors B-C-D don’t.
Of course, this could cut the other way as well. Debtor A might just have enough money to cover the secured debt. Supplier to Debtor A gets nothing. Debtor A is administratively insolvent – meaning even your 11 USC Section 503(b)(6) administrative claim is going to be seriously compromised or won’t get paid at all.
How do you get an idea of where you are? You should be able to look at the various schedules and reports filed by each debtor.
In the DHP Holdings II Corporation bankruptcy, the “Initial Monthly Operating Report” filed apparently “consolidates” the 12 Month Cash Flow Projection. Getting any idea as to how each DESA is going to fare is not possible.
The “consolidation” of the six DESA debtors might be seen as an indication that a motion for “substantive consolidation” is coming. We really can not tell. However, substantive consolidation is a big deal. It requires notice and a hearing. It is not to be lightly ordered by the court. Why? For the reason illustrated above – substantive consolidation puts everyone and everything in the same pot. Some suppliers may get more and some may get less because of a substantive consolidation.
As a supplier you should be aware that substantive consolidation is one of those potentially “tsunami” events that changes your fortunes. You also should be aware that you might be able to do something about it. You have the right to object to a motion for substantive consolidation. Even if substantive consolidation is granted over your objection, you may be entitled to seek and receive special treatment to lessen the impact.
You also have a right to file a motion for substantive consolidation. It gets complicated but the effort might be worth it.
Enough for consolidation, what does that Initial Monthly Operating Report show? Ugly, ugly, ugly…. The “Report” doesn’t report anything; rather, it appears to be a projection of the complete liquidation of all assets. All the inventory is going to be liquidated by April; all the equipment and machinery liquidation is to be completed by April as well; by May, the liquidation is to be mostly complete.
At the end of the 12 months, all the DESAs are supposed to have $22,361,000 cash in the bank. But the report does not show what happens to the senior secured debt ($40.8 million plus interest and costs) and the subordinated secured debt (about $15 million plus interest and costs).
Creditors are not told whether or not there are any other assets.
From a supplier/bankruptcy preference perspective, this is a complicated case. There are a lot of DESA creditors. The DESA debtors estimate there will be approximately 2,000 creditors holding claims against the debtors’ estates.
The best that can be said is that suppliers should monitor these cases closely.