Yesterday, we reported a decision from Delaware that every trustee should read. Today, we report an opinion from Dallas that should be read by every lender and every lender’s counsel.
For breach of contract, fraud, willful violation of the automatic stay and other misdeeds, Bankruptcy Judge Stacey G.C. Jernigan socked a commercial factor for almost $17 million in damages. She also hit the lender with an award of almost $1.2 million in favor of the debtor’s owner.
And if that wasn’t enough, she subordinated the lender’s claim to the claims of unsecured creditors and even to the equity interest of the owner.
In her 145-page opinion handed down on December 23, Judge Jernigan said that the lender’s misconduct had destroyed the debtor’s “enterprise value, and future as a going concern.”
Doubtless, there will be an appeal in the absence of settlement. The tab will only grow, because Judge Jernigan has yet to assess the trustee’s and owner’s attorneys’ fees to be included in the judgment against the lender. One wonders whether Judge Jernigan will waive a bond for the lender to obtain a stay pending appeal.
On appeal, the lender is likely to stress Judge Jernigan’s finding that the corporate debtor’s business was among the “walking wounded,” but she said it “could have reorganized, if not for improper actions of the factoring company.”
The first 100 pages of Judge Jernigan’s opinion were her findings of fact. The last 45 were her conclusions of law. The findings had citations to the record of the trial, which took place over almost eight days. The record included more than 1,000 exhibits and testimony from 11 witnesses.
The Genesis of the Factoring Arrangement
The existing revolving credit lender told the debtor that it wanted out, because the debtor was considerably behind in payment of state taxes. To replace the existing lender, the debtor signed a factoring agreement with a new lender.
Although it performed due diligence over several months, the new lender declared a default soon after closing. Judge Jernigan said that the new lender was aware before closing that the debtor was behind in taxes. The lender also knew, she said, that a major customer, the U.S. Army, was slow and irregular in paying its accounts payable.
After the lender declared itself “‘insecure’ almost immediately,” Judge Jernigan said that the lender’s advances were less than the 90% that the debtor had expected. The lender, she said, claimed to be “over-advanced,” although the term was not defined in the lending agreements.
On the day the lender told the debtor it had no availability, an internal email from the lender said there was “$100K in availability.” Sometime later, Judge Jernigan said that the debtor’s “true availability” was almost $160,000, as shown by the lender’s internal communications. At the same time, the lender was telling the debtor there was no availability.
With lending cut off, the debtor missed a payroll. Later, the lender began making advances once again, but at reduced rates.
Judge Jernigan said it was “clear that [the lender] began to substantially improve its own position, to [the debtor’s] detriment.”
The lender began what Judge Jernigan called “micro-managing,” including making decisions about whom to pay and whom not to pay. She said, “It appears to this court that [the lender] was, in fact, conducting an ‘unannounced liquidation’ of” the debtor.
At the same time, Judge Jernigan said that collections on accounts receivable “were good and steady” and that the lender had “no reasonable cause . . . to ‘feel insecure.’” In the last 55 days of the factoring arrangement, Judge Jernigan said the lender collected $921,000 but made no advances to the debtor.
Judge Jernigan said the lender’s witness “admitted in her testimony that there was no way to reconstruct what was eligible or ineligible on any given date from any of the records [that the lender] produced or introduced into evidence or discovery.”
After the lender had been repaid in full, it was holding $150,000 that belonged to the debtor. As the story was told by Judge Jernigan, the lender refused to turn over the $150,000 unless the debtor signed a general release in favor of the lender.
The debtor refused to sign a release. After termination, Judge Jernigan said, in substance, that the lender continued collecting and retaining receivables, although it was not entitled to do so.
Judge Jernigan gave a list of “examples that the court finds [to demonstrate the lender’s] bad faith and, at times, even malice toward” the debtor and its owner.
The lender continued collecting and holding receivables even after the debtor filed a chapter 11 petition. The case converted to chapter 7 one year later.
A trustee was appointed and sued the lender. So did the company’s owner. Together, they raised a plethora of claims.
Judge Jernigan recited testimony from the trustee’s forensic accountant that the lender was holding $584,000 that it had “over-collected” from the debtor. The judge said that the lender’s expert “did not challenge” the testimony.
If the debtor had $584,000 on the filing date, Judge Jernigan said it “not only would have made a difference in the case, but it may have made the filing unnecessary.” Later, she said, “but for the actions of [the lender], [the debtor] would not have failed as a going concern and would not have had to go into bankruptcy.”
Judge Jernigan said that the lender’s “actions destroyed a decades-old company, put dozens of employees out of work, and took away [the owner’s] homestead equity.”
Judge Jernigan devoted the last pages of her opinion to the calculation of damages. All totaled, she fixed the company’s damages at almost $17 million on claims for breach of contract, breach of duty of good faith and fair dealing, fraudulent inducement, the torts of contractual and business interference, and willful violation of the automatic stay. The $17 million does not include duplication of damages that could be awarded on more than one claim.
Disclosure: This writer’s brother is one of the attorneys for the debtor’s owner.
Yesterday, we reported a decision from Delaware that every trustee should read. Today, we report an opinion from Dallas that should be read by every lender and every lender’s counsel.
For breach of contract, fraud, willful violation of the automatic stay and other misdeeds, Bankruptcy Judge Stacey G.C. Jernigan socked a commercial factor for almost $17 million in damages. She also hit the lender with an award of almost $1.2 million in favor of the debtor’s owner.
And if that wasn’t enough, she subordinated the lender’s claim to the claims of unsecured creditors and even to the equity interest of the owner.
In her 145-page opinion handed down on December 23, Judge Jernigan said that the lender’s misconduct had destroyed the debtor’s “enterprise value, and future as a going concern.”