On March 26, 2009, 48 days after the Chapter 11 filing, the sale of the fluid routing business and assets of Fluid Routing Solutions was approved. The winning bidder a/k/a the only bidder was FRS Holding Corp., (“FRS Deux”) who was the “stalking horse bidder” and an admitted “affiliate of an insider of the Debtors” and affiliate of the DIP lender, Sun Fluid Routing Finance, LLC (“Sun”). The purchase price is $11 million “less Cure Amounts less Prorated Taxes, minus/plus the Closing Net Assets Shortfall/Surplus.”

“Cure Amounts” are those paid by FRS Deux to cure any defaults under contracts to be assigned to FRS Deux.

“Closing Net Assets Shortfall/Surplus” means the amount (if any) by which the Closing Net Assets is less/more than $19,422,000. “Closing Net Assets” includes AR which are not outstanding more than thirty (30) days plus (ii) the value of the Inventory minus (b) the aggregate amount of accounts payables included in the Assumed Obligations, in each case determined in accordance with GAAP.

The total of the “Cure Amounts” identified with the original purchase agreement, appear to be $716,435. However, there were several hundred thousands of dollars in additional cure amounts approved with the Sale Order. It is not clear to us which of these additional approved cure amounts will further reduce the purchase price.

Whether there will be a Closing Net Assets Shortfall or Surplus has yet to be disclosed.

The $11 million (plus/minus) will be paid by reduction of the DIP Financing provided by Sun. The facility amount is $12 million. Today’s filings said that $9,726,000 is currently outstanding. Given the cash burn shown by the monthly operating report, it is reasonable to expect that the full $12 million will be drawn.

So how much of the DIP balance will remain after the asset sale.  At a minimum, there will still be a $2 million DIP balance if the $11 million purchase price stays firm, the Cure Amounts is in $1 million range and there is no “net asset” adjustments in the purchase price. This DIP balance may go much higher depending on facts that we simply don’t know.  Based on out quick review of the numbers we have access to, we think the DIP deficiency might go as high as $5 million.  This “deficiency” has a super priority lien on all remaining assets of the Debtors, including proceeds from any bankruptcy preference recoveries.

The creditors’ committee strenuously objected to the sale to FRS Deux. By clicking this link you can review a copy of the creditors’ committee’s objection to the Fluid Routing Solutions sale of assets to FRS Deux. The creditors’ committee summarized its objections as follows:

(a) the proposed sale to an insider of the Debtors and the DIP Lender (defined below) on an extremely expedited basis is not in the best interests of the bankruptcy estates or their creditors, and has in fact chilled bidding; (b) the Stalking Horse Bidder (defined below) is not a good faith purchaser and is not entitled to a good faith purchaser finding under section 363(m) of the Bankruptcy Code; (c) Sun Fluid Routing Finance, LLC (“Sun”) should not be entitled to credit bid the amount of its Prepetition Claim (defined below) under section 363(k) of the Bankruptcy Code; and (d) the proposed sale to the Stalking Horse Bidder was not the result of arms’ length negotiations, and the terms set forth in the Asset Purchase Agreement are unfair and will not benefit the bankruptcy estate or any creditor other than Sun.

One additional point made by the Creditors’ Committee deserves special note.  The Creditors’ Committee argued:

The Buyer is purchasing all Accounts Receivable, but is only responsible for paying for Accounts Receivable which are less than 30 days old. The Committee is advised that the Debtors’ Accounts Receivable are paid on average within 52 days. Because the Buyer will get all Accounts Receivable, the Buyer is effectively receiving 22 days of good Accounts Receivable without paying any additional consideration. This is improper.

We think the creditors’ committee is unlikely to do anything further about the sale.  When the bankruptcy court approved the terms of the DIP financing, the sale practically was assured.  In retrospect, the valiant efforts of the creditors’ committee likely were doomed from the beginning.

Regardless of whether the sale was good or bad, what does this mean for the suppliers and other unsecured bankruptcy creditors? We will have to see as the dust clears what is left in the bankruptcy estate. The creditors’ committee was not optimistic, stating in its objection that “The Stalking Horse Bidder intends to submit a credit bid (apparently assigned to it by Sun) to acquire the assets related to the fuel routing business, effectively leaving the unsecured creditors without any possibility of recovery.”

If the predictions of the creditors’ committee prove true, many of the 800 plus suppliers and other bankruptcy creditors of Fluid Routing Solutions will be disappointed.

We have a lot of problems with a case like Fluid Routing Solutions.  We see what is happening fairly early on and we don’t like it.  However, we also realize that, with the present economic conditions, the bankruptcy process struggles to produce a good result for anyone.

We have heard arguments that at least the jobs were preserved. In an economic vaccum, that sounds pretty good.  We like people to have their jobs.  But what about the thousands of employees of those suppliers and other bankruptcy creditors who will collect nothing on the prepetition claims?  Haven’t the jobs of those employees just become more tenuous?