See the Fountain Powerboats Docsheet Report for subsequent developments in the Fountain Powerboats bankruptcy proceedings.
Following five and a half hours of testimony and final argument, Judge Randy D. Doub of the Bankruptcy Court for the Eastern District of North Carolina ruled on October 9, 2009 that the proposed Section 363 sale credit bid of Oxford Financial Group (“Oxford”) for the operating assets of Fountain Powerboat Industries, Inc. (“Fountain Powerboats”) was not in the best interest of the Debtor’s estate. The court instead approved a motion for Fountain Powerboats to obtain debtor in possession financing from Liberty Associates for an amount up to and including $1.5 million.
Fountain Powerboats Bankruptcy – 363 Sale Credit Bid Rejected, Proposed DIP Financing Motion Approved
The rulings were good news for suppliers and other unsecured creditors. There remains a reasonable prospect that Fountain Powerboats will reorganize and emerge from bankruptcy. There also remains the possibility for a plan of reorganization that might provide $1 million to be divided among the unsecured creditors plus the shared recovery from any bankruptcy preference and other transfer avoidance actions.
As indicated in the prior post, however, the amount of the unsecured creditor recovery likely will be low. Oxford acquired the approximate $19.5 million secured loan held by Regions Bank for only $6.5 million creating a likelihood that $13 million will be added to the previous $1.8 million in pre-petition general unsecured trade claims. If this reallocation of secured debt number holds up, the percentage of the general unsecured claims held by trade debt will be less than 12 percent. The unsecureds are looking the real possibility of a less than 7 cents on the dollar recovery from the $1 million to be put in the general unsecured creditor pot. But that is 7 cents on the dollar higher than that offered by Oxford.
This case just reinforces lessons for unsecured creditors that have been taught by numerous recent 363 sales. The case again demonstrates the chilling effect on the 363 sale bidding process when a pre-petition secured loan is acquired in anticipation of the sale and at a substantial discount. The case also again demonstrates the need to accelerate the appointment and ramp up of the official committee of unsecured creditors in the case of these blitzkrieg 363 sale tactics. The creditors committee in this case was a non-factor because it simply could not get geared up fast enough.
The real lessons in this case are for private equity distressed opportunity investors. This is a case study on what not to do to close a section 363 sale credit bid. This is not to detract from the substantial skill shown by Debtor’s counsel, John A. Northen of Chapel Hill, North Carolina, but the Debtor and the white knight DIP lender were hugely aided by the credit bidder’s gross mis-steps.
We could go on for pages about what the credit bidder did wrong. But this site is for suppliers and other unsecured creditors. All that should be said here is “Good Luck Reggie.”