Freedom in 'death spiral,' bankruptcy judge told
CHARLESTON, W.Va. --
A federal bankruptcy judge said a loan he tentatively approved during a hearing Tuesday would allow Freedom Industries to pay its employees and also pay to clean up a chemical leak into the Elk River earlier this month.
The coal-processing chemical known as Crude MCHM contaminated the West Virginia American Water system in Charleston and led officials to tell residents in nine counties not to drink, wash or cook with their water for days.
Freedom filed for Chapter 11 bankruptcy, which allows companies to reorganize under bankruptcy protection, on Friday. In Tuesday's hearing, U.S. Bankruptcy Judge Ronald Pearson called the case "one of the most unique Chapter 11 cases I've ever seen."
Freedom's president, Gary Southern, and chief financial officer, Terry Cline, testified at the hearing, which lasted a little more than six hours.
Southern told the judge, "Freedom Industries, from where I sit, is in a death spiral." Customers aren't buying from Freedom, he said, and suppliers aren't selling to them.
About 80 percent of Freedom's business is providing protection against freezing for coal, Southern testified Tuesday. The other 20 percent, which Southern called the chemistry business, includes the chemical that leaked into the Elk.
The company's busiest time is usually November through March, Southern said.
Cline said Freedom had already put $300,000 toward remediation of the spill, and told the judge the overall cost to the company might be $800,000. But Southern testified later that Freedom had already contributed $800,000 toward remediation costs.
Mark Freedlander, an attorney for Freedom, said company officials weren't willing Tuesday to discuss culpability for the chemical spill.
About an hour after Freedom filed for bankruptcy Friday, the company filed an emergency motion for "debtor-in-possession" (DIP) financing, which would allow it to secure a loan up to $5 million to continue to function in some capacity. The loan would, according to the filing, "provide additional liquidity to [Freedom] in order to allow it to continue as a going concern."
DIP lenders are often among the first agencies to get their money back from bankrupt companies.
Freedom's proposed DIP lender is WV Funding LLC, which was incorporated in West Virginia on Friday, the day Freedom filed bankruptcy.
WV Funding's one listed member is a company called Mountaineer Funding LLC. Mountaineer Funding also was founded Friday, according to filings with the Secretary of State's Office. There is also a space for Mountaineer Funding to sign on the DIP agreement.
Mountaineer Funding's one listed member is J. Clifford Forrest -- whom Southern said in court Tuesday is also the owner of Chemstream Holdings, Freedom Industries' parent company.
In a filing Sunday, West Virginia American Water Co. asked the judge to deny Freedom Industries' request for a loan, which the water company said "smells of collusion."
The water company called Freedom's request a "loan to own scheme."
"Freedom seeks to stampede this court into irrevocable and improvident actions which will likely result in the selective dismemberment of the Debtor's business to the permanent and immeasurable detriment of its creditors," the water company's filing states.
In its bankruptcy filing, Freedom described the DIP agreement as being negotiated between the parties "in good faith and at arms-length." But the water company notes the fact that the DIP lender that owns Freedom isn't disclosed in the bankruptcy filings.
"The terms of the DIP facility would provide the lender with a lien on all of the Debtor's assets, a superiority claim, and the ability to foreclose selectively on the assets and take away the most valuable assets from the Debtor's estate, leaving behind only the toxic facilities and huge damage claims caused by the Freedom spill," the water company's filing states.
In documents filed Sunday, West Virginia American Water says it has been sued 23 times over Freedom's chemical leak. Because of that, the water company says, it is Freedom's "largest single creditor" in the bankruptcy case.
On Tuesday, the judge tentatively approved a modified DIP agreement for $4 million. The money is to pay Freedom's 51 employees, clean up the environment and pay back "critical vendors" that agree to continue supplying Freedom with products.
Freedom owes $3.6 million to its top 20 unsecured creditors, according to bankruptcy documents.
The loan, which WVAWC agreed to, wouldn't allow the DIP lender to have priority over liens. It does, however, allow the lender priority over administrative costs, like legal fees and insurance costs, the judge said.
A bankruptcy filing puts a temporary hold on all claims for a company to pay its debts. All of the lawsuits also are put on hold. The courtroom was packed Tuesday with attorneys representing plaintiffs in civil cases filed against Freedom.
The judge also approved a motion made this week by several of those attorneys to preserve evidence at Freedom's office.
In a separate filing Monday, eight business owners in the Kanawha Valley filed an "adversary complaint," or a lawsuit within the bankruptcy, against Freedom Industries, Chemstream Holdings, Rosebud Mining Co., Gary Southern, J. Clifford Forrest and 99 unnamed individuals that acted with Freedom.
