Analysis also explains decision to appoint independent trustee to oversee proceeding
ABERDEEN, Miss. — In deciding to covert United Furniture Industries’ bankruptcy to a Chapter 11 and name a trustee to oversee the case, presiding judge Selene D. Maddox offered a detailed analysis that weighed several factors including UFI’s past and present performance and the confidence of creditors in its current management.
Regarding the appointment of a trustee, it also weighed potential conflicts of interest involving UFI and its equity shareholders, including owners David Belford and Stage Capital.
These and other factors help explain the process to the general public, thus showing how the court is looking out for the interests of creditors, equity shareholders and the overall estate.
Wells Fargo initially petitioned for a Chapter 7 bankruptcy on Dec. 30, 2022, which would involve a liquidation of the company’s assets. However, UFI said on Jan. 6 that the matters should be handled as a Chapter 11 case instead, which observers noted would place more control in the hands of UFI and also allow it to receive debtor-in-possession financing to manage the liquidation of various assets.
Wells Fargo said the court should deny a conversion to a Chapter 11 based on UFI’s prepetition activity, which it described as a show of bad faith that resulted in the abrupt termination of 2,700 workers. It also cited UFI’s alleged mismanagement of its facilities and business in the aftermath along with its inability to meet its current expenses.
The court, however, said that the company’s actions — including the abrupt closure that put 2,700 people out of work — did not illustrate that the case should not be converted to a Chapter 11 bankruptcy.
“Based on the parties’ arguments and evidence produced through testimony and several documents, UFI’s business decision to shutter operations, however devastating to thousands of employees, does not rise to the level of bad faith,” the court said. “In addition, UFI’s inability, post-closure, to take the appropriate steps to secure its real and personal property leaves the court at a loss for words — almost. UFI and its management made serious errors in business judgment and displayed clear financial incompetence, but Wells Fargo failed to show how those actions or inactions are fraudulent. … To put it simply, the court does not equate UFI’s conduct with that of debtors committing fraudulent acts.
“Even more, while UFI made considerable error in judgment relating to the failure to timely secure or preserve its real and personal property for weeks after shuttering operations, UFI attempted to remedy these issues by the retention of professionals to assist with asset preservation and cooperate with creditors and other parties,” it said, noting that it hired key execs and legal counsel within a week post-closure. “UFI also reemployed former employees several days later to assist with a variety of internal issues, and then on Dec. 9, 2022, employed a group of advisers to assist in filing for bankruptcy relief. The totality of the circumstances show that UFI exercised bad judgment pre-petition, but no evidence presented to the court suggests its actions or inactions constitute bad faith, or an abuse of the bankruptcy process. …”
The court also noted that UFI has some process in place to handle inquiries from landlords and other creditors and that there were no facts presented to prove outright gross mismanagement by UFI regarding its estate.
These were some of the arguments the court made that stated Wells Fargo did not provide ample evidence on why the case should not be converted to a Chapter 11.
However the court said that given the circumstances provided through testimony and documents, that “UFI should not be allowed to “drive its own car” as a debtor-in-possession in a Chapter 11 case. Rather, a Chapter 11 trustee should be appointed … because such an appointment is in the interest of the creditors, equity shareholders and the estate,” the court said.
One of the concerns the court expressed was Belford’s and Stage Capital’s role in the bankruptcy case and their relationship to UFI and its current management team.
“During the relatively short pendency of this bankruptcy case and at the hearing on Jan. 13, Belford (and at times board member Jason Gabauer) were referred to in a myriad of ways, including “equity” or an “insider” and “Stage Capital.” All of these identities have been discussed in the context of funding, whether that be a proposed $10 million debtor-in-possession loan offered to UFI for the sale of its real estate or to (consulting firm) Riveron Management Services for compensation for their work. This raises a question of control. If allowed to operate as a debtor-in-possession, will UFI and its current management (who were all appointed by the original board, including Belford) operate independently of Belford?”
“Put another way, would UFI operate to the benefit of creditors, equity shareholders and the estate, or would UFI operate to benefit only Belford and certain real estate security holders?”
The court added that while there is no “smoking gun” before the court that indicates Belford is working behind the scenes to control UFI as a debtor-in-possession, “There is more than enough evidence demonstrating an overlap between current management and Belford that raises questions as to whether UFI will perform its fiduciary duties as expected.”
It further described a Chapter 11 trustee as an independent party holding no biases that will investigate any matters relating to the case independent of any interest that would be adverse to the estate and that can serve in a “capacity of disinterestedness above that of UFI. Accordingly, considering the aforementioned factors and totality of the circumstances, and considering the best interests of the creditors, equity shareholders and the bankruptcy estate, the court finds that a Chapter 11 trustee should be appointed in this case.”
As previously reported by Home News Now, the court appointed Derek Henderson as the trustee in the case on Jan. 23.