co-authors: Daniel Hart and Salene Kraemer
The story behind the Chapter 11 filing of PTC Seamless Tube Corporation (Seamless) is a cautionary tale for Steel Valley businesses, both big and small, as to the dangers of overexpansion and the importance of business planning. Here is what you can learn from it:
On April 26, 2015, Seamless filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for the Western District of Pennsylvania. Seamless estimates its assets to be between $50-100 million with liabilities between $100-500 million.
Seamless is a subsidiary of PTC Group Holdings Corp.. It manufactures steel tubing, tubular shapes, bar products, fabricated parts, and precision components. In 2013, Seamless invested more than $102 million to reopen a manufacturing plant in Kentucky. This project involved the acquisition of a large manufacturing facility, property adjacent to the existing site, re-working the layout of the facility and the installation of manufacturing equipment.
After the initial wave of enthusiasm, Seamless faced problems which eventually led to the bankruptcy filing. Just a year and a half after initial construction, Seamless was forced to lay off nearly twenty-five percent (25%) of its workforce. These layoffs were part of a slowdown at the plant as the company was forced to re-bid on the installation of costly equipment and a miss-estimation on the price of oil. Seamless substantially underestimated costs. The opening also was eight months behind schedule. Thus, Seamless tripped restrictions in its credit agreement, leaving it unable to borrow more money. The operations of the KY plant never were in full swing before Seamless declared bankruptcy.
It appears that the filing for Chapter 11 relief occurred, at least in large part, because of overexpansion into this new Kentucky facility and not performing sufficient due diligence regarding the price of equipment and oil. Also, as of late March 2015, Seamless was also named as a defendant in lawsuit. As with many Chapter 11 debtors, the filing of this lawsuit likely also played a part in the decision to file for bankruptcy.
PTC Group Holdings Corp. is fortunate that Seamless’ bankruptcy has not yet affected the business of its other, much more profitable subsidiary, PTC Alliance. As separate entities under the parent business, Seamless and PTC Alliance operate distinctly as separate businesses. Thus, PTC Alliance is still operating and producing strong results.
- CAUTIOUSLY EXPAND. Expansion in business can be a great thing. It shows that your business is in a growth stage. However, a business at the expansion stage must thoroughly vet forecasts of future demand for product. By performing the necessary due diligence, a business can plan for the proper expansion of its business and all the details that go into an expansion, i.e. size of new business location, needed number of employees, costs of equipment, supplies, utilities, etc…
- TWO DIFFERENT BUSINESSES; TWO DIFFERENT BUSINESS ENTITIES. Take note also regarding PTC Group Holdings Corp.’s business model. By strategically place two different businesses into two separate business entities, PTC Group Holdings Corp. avoided dragging its successful subsidiary, PTC Alliance, into the murky waters of Seamless.
BUSINESS OWNERS: Think Before You Leap. Before you make a material business decision, thoroughly vet the project with a board of directors, trusted advisors, accountants and/or lawyers. Obtain impartial advice. Discuss the advantages/disadvantages. Contemplate and be prepared for worst case scenarios.
by Matthew Smith, Associate
The August Wilson Center for African American Culture is at the center of a legal battle in the Allegheny County Court of Common Pleas, Orphan Division. The stunning Center is housed in a 65,000 square-foot location at 980 Liberty Avenue in Downtown Pittsburgh’s Cultural District. The location was built in 2006 using a nearly $8 million loan from Dollar Bank. As collateral for the loan, Dollar Bank has a mortgage on the property. However, by September, 2013, the Center had become delinquent in its loan payments, and Dollar Bank began foreclosure proceedings. By November, 2013, former Chief Bankruptcy Judge for the Western District of Pennsylvania Judith K. Fitzgerald was appointed as a conservator. A conservator is a guardian and protector appointed by a judge to manage the financial affairs and/or daily operations.
Since the Center has entered into conservatorship, a New York development company, 980 Liberty LLC, has put forth a $9.8 million bid for the Center. 980 Liberty proposes to convert roughly half of the Center’s square-footage into a 200-room luxury hotel. Local foundations have resisted this overture. Instead, the local foundations prefer to allow a sheriff sale of the property scheduled for October 6, 2014 to proceed. However, former Judge Fitzgerald filed a motion on September 17, 2014 with the Allegheny Court of Common Pleas seeking to delay the sheriff sale. However, Judge Lawrence O’Toole rejected this motion, yesterday.
Now, the fate of the Center will likely be determined at a critical hearing on Monday, September 29, 2014. The Court is set to review the covenants on the property put in place by Pittsburgh Urban Redevelopment Authority when it granted the right for the Center to be built. These covenants may restrict the use of the Center solely to promotion and advancement of African-American arts and culture. The covenants also require the approval of the city for any changes to the exterior of the complex. If Judge O’Toole upholds the covenants, not only will the offer of 980 Liberty become moot, it could jeopardize the viability of the sheriff sale on October 6th. In such an instance, local foundations would likely be the only bidders, and Dollar Bank would be left with millions in losses. However, if Judge O’Toole strikes down the covenants, then the path would be cleared either for the bid from 980 Liberty or for the sheriff sale.
Your loved one is in a hospital or nursing home that just filed for Chapter 11 bankruptcy. Should you be concerned about care?
A patient ombudsman will be appointed any time a “health care business”(i.e., a hospital or nursing home facility) files for bankruptcy. Specifically, Rule 2007.2 of the Federal Rules of Bankruptcy Procedure provides that the bankruptcy court “shall order the appointment” of the ombudsman unless a party in interest or the United States trustee files a motion within 21 days of the commencement of the case (unless the court sets another deadline). See Fed. R. Bankr. Proc. 2007.2.
It is questionable whether some facilities are classified as “health care businesses”.
The Bankruptcy Code defines “health care business at 11. U.S. C. § 101 (27A):
The term “health care business”—
`(A) means any public or private entity (without regard to whether that entity is organized for profit or not for profit) that is primarily engaged in offering to the general public facilities and services for— (i) the diagnosis or treatment of injury, deformity, or disease; and (ii) surgical, drug treatment, psychiatric, or obstetric care; and
(B) includes— (i) any— (I) general or specialized hospital; (II) ancillary ambulatory, emergency, or surgical treatment facility; (III) hospice; (IV) home health agency; and (V) other health care institution that is similar to an entity referred to in subclause (I), (II), (III), or (IV); and (ii) any long-term care facility, including any— (I) skilled nursing facility; (II) intermediate care facility; (III) assisted living facility; (IV) home for the aged; (V) domiciliary care facility; and (VI) health care institution that is related to a facility referred to in subclause (I), (II), (III), (IV), or (V), if that institution is primarily engaged in offering room, board, laundry, or personal assistance with activities of daily living and incidentals to activities of daily living.
A patient ombudsman is appointed to ensure the quality and continuity of medical care provided and to represent the interest of patients. During a chapter 11 bankruptcy of a health care business, Section 333(a)(1) requires the Court to appoint an ombudsman to monitor the quality of patient care “unless the court finds that the appointment of such ombudsman is not necessary for the protection of patients under the specific facts of the case.” Such a finding is largely a factual determination, and should be made only after an evidentiary hearing. See generally, In re Alternate Family Care, 377 B.R. 754, 758, 58 Collier Bankr. Cas.2d 1531 (Bankr. S.D. Fla. 2007).
The Alternate Family Care Court laid out “nine salient factors” for examining whether a patient ombudsman was required. Id. These factors have subsequently been adopted by other courts. In re Valley Health System, 381 B.R. 756, 761 (Bankr. C.D. Cal. 2008); In re North Shore Hematology-Oncology Associates, P.C., 400 B.R. 7, 11 (Bankr. E.D.N.Y. 2008). Some of these salient factors include: ”
- the cause of the bankruptcy
- debtor’s past history of patient care
- the ability of patients to protect their rights;
- the presence and sufficiency of internal safeguards to ensure appropriate level of care
- the impact of the cost of an ombudsman on the likelihood of a successful reorganization.”
In re Alternate Family Care, 377 B.R. at 758.
Other factors include:
- adequate internal protocols for protecting patient information.
- revenue projections through the bankruptcy would allow for a maintaining of the current quality of patient care
- additional administrative cost of an ombudsman was not justified as it may impair the ability of debtor to reorganize. Id.
- whether current operations were very limited.
See In re William L. Saber, M.D., P.C., 369 B.R. 631, 637–38 (Bankr. D. Colo. 2007)(avoiding appointment of ombudsman where sole practitioner filed for bankruptcy as a result of contractual dispute with a former employee). See also In re Banes, 355 B.R. 532, 536 (Bankr. M.D.N.C. 2006) (court declined to appoint patient care ombudsman where debtor had ceased operations and closed her dental practice).
If your local hospital files for Chapter 11 bankruptcy and you have any concerns regarding patient care, contact the attorney for the debtor. His or her information will be listed on the docket which should appear in a google search of the name of the debtor. Or, call the Bankruptcy Court in which the case is pending.
By: Matthew B. Smith, Law Clerk
Medford Trucking, LLC filed for voluntary Chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of West Virginia on June 27th, 2014. The case has been assigned to the Honorable Robert G. Pearson under case number 2:14-bk-20354 .
Debtor claims assets of less than $50,000 with liabilities of less than $50,000. However the enumerated claims exceed $1 million. Among the debtor’s 19 creditors are Petroleum Products, Inc., American Express, Bank of America, and several other companies and law firms. Debtor is represented by Brian R. Blickenstaff of Turner & Johns, PLLC from Charleston, West Virginia.
Debtor is a transport company that was founded in 2001 and headquartered in Charleston, West Virginia. Debtor has operated as many as 82 tractor-trailer rigs, and employed as many as 160 drivers. Debtor carries a USDOT Number permitting it to haul non-hazardous materials within the state of West Virginia. Debtor specializes in light freight and coal hauling.
by Justin A. Saporito, Law Clerk
Aramid Entertainment Fund, Limited filed for Chapter 11 protection in the Bankruptcy Court for the Southern District of New York on June 13, 2014. Debtor has declared assets of $237.3 million and consolidated debt of $11.5 million. Debtor was assigned case number 1:14-bk-11802, a judge has yet to be assigned. Approximately 96 creditors were listed in the petition; among them are several other Aramid entities including Aramid Liquidating Trust, Ltd. and Aramid Entertainment, Inc. which jointly filed with the Debtor and were assigned consecutive case numbers.
Aramid Entertainment Fund, Limited is part of Aramid Capital Partners, LLP, a London based hedge fund that specializes in financing movies. According to their website, Aramid Capital has provided financing for thirty-two (32) movies including Paranormal Activity, W., and How to Lose Friends & Alienate People. Please click here for a list of their productions.
Debtor filed for Chapter 11 protection due to the cost of ongoing litigation against several of its borrowers who failed to repay loans or violated film-financing agreements. One such suit began in February 2012 and is over an alleged $44 million in losses. Debtor invested $22 million in a financing deal between Relativity Media, LLC and Sony Pictures. Debtor alleges that executives from Fortress Investment Group, LLC used Aramid’s confidential information, which was allegedly obtained during a 2010 portfolio review as part of a proposed purchase of Debtor’s assets, to make a deal with Sony that destroyed Debtor’s investments.
By: Justin A. Saporito, Law Clerk
Bradford & Byrd Associates, Inc. filed for voluntary Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of New Jersey on May 23rd, 2014. The case has been assigned to the Honorable Christine M. Gravelle under case number 3:14:bk-20478.
Debtor claims assets of less than $50,000 with liabilities ranging between $500,000 and $1 million. Among debtor’s 21 creditors are the Internal Revenue Service, New Jersey Department of Labor, New York State Workers Compensation Board, Mercedes Benz, and several other companies and private individuals. Debtor is represented by Bunce Atkinson of Atkinson & DeBartolo, PC from Red Bank, New Jersey.
Debtor is a janitorial firm that was founded in 1989 and headquartered in Freehold, New Jersey. Debtor provides janitorial services clients in New York, New Jersey, Pennsylvania, Georgia, and North and South Carolina. Some of debtor’s more notable clients include UPS, the Social Security Administration Headquarters, and Public Service Electric and Gas Company. In debtor’s more than 20 years in business, it has achieved some noticeable accomplishments including servicing the Statue of Liberty in 1996 and being contracted to clean vintage chandeliers at West Point Military Academy in 2001.
The Riverhounds Event Center, L.P. and Riverhounds Acquisition Group, L.P., the limited partnerships that own and operate Highmark Stadium and the Pittsburgh Riverhounds Professional Soccer Club respectively, jointly declared voluntary Chapter 11 bankruptcy on March 26, 2014. Debtors filed in the United States Bankruptcy Court for the Western District of Pennsylvania, assigned case numbers 2:14-bk-21180 and 2:14-bk-21181 respectively. Both cases have been assigned to the Honorable Jeffery A. Deller.
The Riverhounds Event Center, L.P. owns and operates the newly constructed Highmark Stadium located in the South Side area of Pittsburgh and claims assets ranging from $1 million to $10 million with liabilities between $10 million and $50 million. Of those liabilities, $7.2 million is mortgage debt and $1.5 million in bank loans.
The Riverhounds Acquisition Group, L.P. is the limited partnership that owns the Pittsburgh Riverhounds minor league soccer team and claims assets ranging from $500,000 to $1 million with liabilities between $1 million and $10 million. The Pittsburgh Riverhounds was founded in 1999 and currently plays in the United Soccer Leagues. Much of the debt leading up to the bankruptcy was incurred in 2012-2013 during the construction of Highmark Stadium. The bankruptcy is not expected to affect the 2014 season.
Debtors share some creditors such as Shallenberger Construction, Inc., First National Bank of Pennsylvania, and Urban Redevelopment Association of Pittsburgh. Both debtors are represented by John M. Steiner of Leech Tishman Fuscaldo & Lampl, LLC.
By: Stephen Krug, Law Clerk
The various entities that comprise the Quiznos sandwich chain (“debtors”) filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the District of Delaware on March 14, 2014. A motion filed by debtors for joint administration of the cases was granted on March 17, and the case has been assigned to the Honorable Peter J. Walsh.
While debtors’ liabilities range from $500 million to $1 billion, the assets are only estimated to fall between $0 and $50,000. However, Debtors maintain that, although assets are low and 10,001 to 25,000 creditors exist, funds will be available for distribution to unsecured creditors. U.S. Bank National Association, as administrative agent and collateral agent under debtors’ second lien financing facility, is the largest unsecured claimant with a claim for approximately $174 million. Horizon Media Inc., MG-1005, LLC, and ESPN Inc. also hold substantial unsecured claims.
Debtors have proposed a pre-packaged reorganization plan that would slash debt by more than $400 million and would permit the handful of company-owned sandwich shops to remain operational. Sandwich stores operated by franchisees are not part of the bankruptcy proceedings and thus are not provided for in the pre-packaged plan.
Debtors hope to emerge from bankruptcy more viable than ever. Moving forward, debtors hope to reduce food costs and place more of an emphasis on advertising.
The University of Pittsburgh Institute for Entrepreneurial Excellence Celebrates 20 Years of Empowering Local Entrepreneurs!
Founded in 1993 and run out of the University of Pittsburgh Joseph M. Katz Graduate School of Business, the University of Pittsburgh Institute for Entrepreneurial Excellence (IEE) began with a $300,000 grant and the mission of being the “innovative leader of economic renewal and growth serving enterprising people and businesses in the region.” In pursuit of this mission the IEE utilizes a dynamic approach of programs and services including monthly workshops, customized consulting, social initiatives, educational programs, professionally-led peer forums, and social events.
This dynamic program has led the IEE to grow to $3 million in annual revenue and the annual serving of hundreds of businesses through its seminars, customized consulting, and millions of dollars in raised capital and revenue. Last year alone the IEE served 824 businesses, helped create 39 startups, raised $10.7 million in capital, increased $14.4 million in revenue for clients, and educated more than 1,400 business leaders through 56 programs and seminars. (according to its 2012 Community Impact Report)
The IEE provides its services through its 8 institute centers and programs. These centers/programs consist of Agricultural Entrepreneurship, a 12-month Entrepreneurial Fellows Program, the Family Enterprise Center, the Information Technology Program, PantherlabWorks, the Small Business Development Center, Student Entrepreneurship program in conjunction with Katz School of Business, and the Urban Entrepreneurship Program. For more information about these programs please click here. To take advantage of one or more of these programs an individual or firm must become an IEE member. Membership includes benefits in addition to participation in IEE programs. For more information about membership please see the IEE’s membership brochure or contact the IEE’s membership director Shelley Taylor.
For more information about the IEE please visit their website at http://www.entrepreneur.pitt.edu.
As is almost always the case, principals of a distressed business have personally guaranteed the debt on a credit line or property or equipment lease. When a business files bankruptcy, an automatic stay is imposed against any adverse actions taken against the business entity, the Debtor. But what about the owners of the business? Often, I find myself seeking to extend the automatic stay injunction to those principals. This issue came up in a recent case we had pending in the Fourth Circuit. We were compelled to find case law regarding the standard for relief.
A factual example would be as follows: A distressed business ABC Recylcing owns a building, and the building has a mortgage on it in favor of Meanie Bank, N.A. The business falls behind on payments. Meanie Bank initiates a foreclosure action to set an auction to sell the building. Jake, the owner of the business had to sign a guaranty in order for ABC Recycling to get the loan with Meanie Bank. ABC Recycling still operates with the faint hopes of reorganizing through a Chapter 11 bankruptcy. Once the Chapter 11 is filed, the foreclosure action is stayed as to ABC Recycling, but now the Meanie Bank is going after Jake. Help, my clients say.
ISSUE: Pursuant 11 U.S.C. §105 and §362 of the Bankruptcy Code, is a court likely to grant an injunction to protect the principal of a bankrupt business?
CONCLUSION: Where the principal Jack is a primary guarantor of the mortgage and Meanie Bank now intends to secure a judgment against the principal, the principal will only be able to obtain an injunction by demonstrating a mutuality of identity with the Debtor such that allowing Meanie Bank to proceed against Jake will substantially deprive the Debtor of a primary asset (its owner’s time and attention). In Plain English, how important is the principal Jake to the Debtor’s operations? A four-part test is employed to make that determination.
While automatic stay proceedings are usually only available to the Debtor, under unusual circumstances, the Fourth Circuit has held that the Bankruptcy Court can enjoin proceedings against third parties. In re F.T.L. Inc., 152 B.R. 61 (Bankr. E.D. Va. 1993). However, where no compelling or unusual circumstances exist, then under §362 the Debtor’s guarantors must file their own bankruptcy petition in order to be protected by the Bankruptcy laws. Id. at 63. (this also happens often).
A court is only likely to grant an injunction to a third party non-debtor principal in the unusual circumstance that it is evident that the identity of the debtor and the non-debtor third party is so interconnected that it is clear that the creditor is proceeding against the debtor. Under such circumstances, the court may apply a four-part test and equitably grant an injunction where the court finds that:
- the plaintiff principal has a greater likelihood of succeeding on the merits;
- plaintiff principal has shown that lack of relief will result in irreparable injury;
- an injunction will not substantially harm other interested parties, and;
- preserving the status quo until the merits of the controversy is decided will serve public interests. Id.
In re F.T.L., the primary secured creditor to a car wash company debtor, secured a judgment lien against the debtor’s guarantors, the plaintiffs. Plaintiffs are the primary owners and guarantors of the car wash and the creditor perfected its lien against plaintiffs’ personal residence. Id. at 62. Noting that the collection activities against the owners arose from the car wash’s debt to the creditor, the court applied the four-part test and found that the debtor was likely to succeed on the merits by proposing a confirmable chapter 11 plan; the debtor’s chapter 11 plan would be impossible if the owners were forced to file their own chapter 11 petition; very little harm was likely to come to the creditor if it was enjoined from collection activities against the owner, and; lastly the creditors as a whole were best served if the debtor were allowed to propose a plan for reorganization. Id. The Court extended the injunction to the owners.
If you own a business and are wondering the same questions, you should review the facts and circumstances of your workout with your attorney. I think, by and large, the automatic stay is difficult to extend in Bankruptcy Court. You have to make a really compelling argument that the principal will be so consumed with his or her own bankruptcy that the Chapter 11 reorganization will suffer.