By Craig Webb
True Value Co. and its lenders must start in earnest to settle their differences over how the lenders' money is used while True Value is in Chapter 11 bankruptcy status with a plan to sell to Do it Best, a federal Bankruptcy Court judge warned the parties.
"It's the debtor's burden to provide adequate protection to the lenders," Judge Karen B. Owens said at a hearing Oct. 23, according to a partial transcript obtained by Webb Analytics.
Failure to start discussions in earnest with the PNC Bank-led lending group, Owens said, "will not end positively for the estate." This appears to be a warning that Owens could force the liquidation of True Value rather than let it stay alive and sell itself--as it has agreed to do under a "stalking horse" agreement--to Do it Best.
"I am going to keep the hearing on Monday and I look forward to the evidence and the arguments that will be presented at that time," Owens said near the hearing's end, "but I would strongly encourage you to increase your settlement discussions in earnest as this type of argument is not relevant to adequate protection. Does everyone understand?"
Bloomberg Law defines "adequate protection" as involving"compensation to a creditor for the debtor's continued possession and/or use of property in which the creditor has a property interest." Under Section 361 of the federal Bankruptcy Code, lenders are entitled to some compensation if the debtor uses the lenders' collateral while in Chapter 11. (Under Chapter 11 of Bankruptcy Code, a company is protected from creditors while seeking to reorganize. Chapter 7 deals with the company's liquidation.)
PNC Bank leads a group of financial institutions that has provided True Value with $219.46 million in revolving loan borrowings and $18.75 million in outstanding term loans. Under a "stalking horse" arrangement in which True Value identified Do it Best as its preferred buyer, Do it Best would acquire True Value for $153 million plus assumption of certain liabilities and up to $45 million in trade payables.
Such a sale means the lenders would lose $100 million. PNC prefers liquidation. It also has sought--unsuccessfully, so far--to keep True Value from using its credit to keep the company going while in Chapter 11.
"Whether the value of the stalking horse bid or the sales process is superior to a liquidation is simply not the test for adequate protection," Owens said Oct. 23, according to the transcript. "That is set forth in 361, and it's clear what needs to be provided. I was reluctant to make this statement at the first day hearing, because it puts my thumb on the ultimate scale of the issues that will be presented to me later in the case and I wanted to give the parties the opportunity to be free of my thoughts when negotiating a settlement of their own accord. However, it does not appear that that is happening and you brought this opportunity for me now to give you my thoughts ahead of time to avoid a very costly dispute."
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