Largest secured creditor cites examples of ‘gross mismanagement, lack of integrity and ongoing incompetence’ in how UFI has handled matters since its sudden Nov. 21 shutdown
ABERDEEN, Miss. — Citing examples of “gross mismanagement, lack of integrity and ongoing incompetence” from United Furniture Industry’s ownership and management, Wells Fargo Bank continues to seek court appointment of a trustee that would oversee the company’s ongoing bankruptcy proceedings.
These and other claims were part of the bank’s response Wednesday to United’s Jan. 6 request that the U.S. Bankruptcy Court for the Northern District of Mississippi convert the case to a Chapter 11. United’s attorneys submitted the request just shortly before the court was to hold a hearing last Friday for the appointment of an interim trustee in the involuntary Chapter 7 case, which Wells Fargo and two other creditors filed Dec. 30.
While opposing United’s request to convert the case from a Chapter 7 to a Chapter 11, the bank still believes it is necessary for the court to appoint an individual trustee in either scenario to independently oversee the liquidation of its assets and payment of creditors from those proceeds.
In its filing Wednesday, the bank noted that United continues to be controlled by its largest equity holder, David Belford, “whose family trust has security interests in certain of UFI’s real estate and who is hopelessly conflicted with UFI’s interests and its creditors. UFI now proposes to convert the case into one under Chapter 11 with Belford at the helm in order to run a process intended for the sole benefit of himself and UFI’s real estate secured creditors.”
Converting the case to Chapter 11, observers have said, would allow Belford to have more of a voice in the plan moving forward involving the sale of the company’s assets, including a significant amount of company real estate that he owns.
“In its own words, UFI’s main goal in bankruptcy, with an alleged $10 million in funding, is ‘to run a sale process for the company’s real estate portfolio,’ which UFI claims without any substitution, ‘is believed to potentially have in excess of $50 million in unencumbered value,’” the bank said in its Jan. 11 filing. “As an initial matter,” the bank continues, “UFI provides no support for its statement that there is $50 million in unencumbered value.”
Belford has not returned repeated phone calls from Home News Now seeking comment regarding United’s sudden closure just before Thanksgiving along with developments since, including the filing of class action lawsuits on behalf of employees who were not given 60 days’ notice of the closing as required by law. United’s legal counsel also has not responded to requests for comment.
But the bank states that the company’s actions up to this point have given it zero credibility, including no confidence among creditors.
“In view of UFI’s pre-petition conduct, including the complete abdication that led creditors to self-help to redress their claims, UFI’s failure to address creditor claims at any time (other than facilitating return to employees of their personal belongings) and UFI’s flagrant conflicts of interest, creditors should have little confidence in UFI’s current management, which was installed by the same actor — Belford — that gave rise to UFI’s situation in the first place.”
Here the bank refers to the employment of various individuals in the weeks after the immediate shutdown.
“While UFI may have hired a CFO, a CRO (chief restructuring officer) and outside professionals, it did so only weeks after UFI’s abrupt shutdown and abandonment on Nov. 21, 2022,” the bank said. “None of these individuals have taken any material action to preserve and protect UFI’s assets or to address the myriad of claims asserted by numerous creditors, arising in the seven weeks since UFI’s closure. None were on the ground or even retained in the immediate aftermath of UFI’s sudden closure of what was previously a $600 million-per-year revenue business. None took any measure to secure and protect UFI’s assets in the month of November 2022 following UFI’s shutdown. Moreover none of these individuals were provided the financial support and resources to undertake any of the necessary tasks.”
Wells Fargo said that it has worked with turnaround firm Focus Management Group to help preserve the company’s assets for the benefit of all creditors at a cost to the bank that has exceeded $1.5 million.
In a separate declaration also filed with the court Wednesday, Michael Grau, a senior managing director at Focus Management Group, said that during subsequent visits to United’s headquarters in Tupelo and its Belden, Mississippi, and Winston-Salem, North Carolina, plants and other facilities, it found unlocked exterior doors, open bays in shipping areas, opened drums of flammable materials, water leaks at multiple locations and third parties at facility entrances demanding access to their equipment.
Due to this “dire security situation at these facilities,” Focus Management Group hired Security Associates of Mississippi and Allied Universal to secure the sites. Grau further stated that Focus also learned that UFI’s IT systems were not secured and that all former employees with remote access continued to have access as their access privileges had not been revoked. Since then, he said, a former UFI employee was retained to begin revoking access privileges to former employees.
Grau noted that the bank also obtained insurance on UFI’s inventory, which officials believed was set to expire on Nov. 30.
He also noted that Focus has also helped the bank perform other necessary tasks including maintaining or restoring utility services to UFI’s sites, securing emergency maintenance at UFI’s sites, including during periods of inclement weather, corresponding with landlords regarding six of UFI’s leased sites including landlords that locked the facilities, and corresponding with creditors of UFI that have contacted the bank regarding claims against UFI.
Grau also cited other tasks Focus and the bank have had to manage, absent any involvement from UFI, including addressing ground shipments of UFI goods in transit at the time of the shutdown, addressing customer questions regarding undelivered shipments and facilitating former employees’ access to facilities to retrieve their personal belongings by arranging for additional security staff beyond the two security team members provided by UFI.
“While Focus on behalf of Wells Fargo has worked with creditors as they have come forward to resolve claims and these other issues, the magnitude of claims and other issues are accelerating,” Grau said, noting that at least one UFI site has had its utility and water service suspended, “creating a fire hazard due to the lack of a functioning sprinkler system. In addition, new creditors continue to come forward with claims that need to be addressed and redressed. … Given the irresponsible actions of UFI ownership and its inability or unwillingness to fully address the issues described above, an independent Chapter 7 trustee, or in the absence of a Chapter 7 trustee, a Chapter 11 trustee, is needed to address these issues.”
Other allegations that the bank summarized and cited involving UFI’s “lack of integrity” “gross mismanagement” and “ongoing incompetence” include:
+ United’s decision to not only abandon its business and properties but also its failure to provide 60 days’ WARN Act notice of its planned shutdown to its 2,700 workers.
+ United’s plan to “emerge from the ashes and steer this case into a Chapter 11 process that appears to benefit no one other than a secured party and UFI’s largest equity holder, with no mention of any specifics of how UFI proposes to address the claims and concerns of UFI’s other creditors in an orderly and fair fashion.”
+ UFI, the bank said, “has provided no evidence on what efforts, if any, UFI’s current ‘management’ has undertaken post-petition to preserve UFI’s assets or to establish a viable path forward in Chapter 11.”
+ Even after appointing a CFO and CRO, the bank said, “Wells Fargo and Focus were required to continue efforts to secure and preserve UFI’s assets and address other ancillary issues to fill the void left by the company because UFI’s current management has not stepped in to undertake these tasks.” This included maintaining security at UFI’s 15 sites, maintaining insurance on UFI’s inventory, addressing questions and requests from third parties seeking to recover their property allegedly held by UFI on their behalf, working to prevent the shutdown of utility services, reconcile and collect accounts receivable, identify equipment owned by third parties, among other tasks.
In summary, the bank asks the court to consider that “in light of the documented improprieties and UFI’s gross mismanagement, ample and adequate cause has been established for the appointment of a trustee, whose appointment will be in the best interest of the estate and its creditors.”
The court is expected to consider the request to convert to a Chapter 11 on Friday, Jan. 13. It is not clear how soon it will act on the request to appoint a trustee.