August/September 2003

Recently I worked with a company attempting to complete an out-of-court orderly liquidation. The company had two secured lenders. The working capital lender had a first secured position on all trade receivables and fixed assets of the company. The second lender provided funding for certain retail financing activities, and had a first secured position in the underlying receivables (retail finance contracts) and a second position on the fixed assets of the company.

The company, its working capital lender, and one of its customers had successfully negotiated a sale for certain of the company’s assets to the customer. These assets were used to support operations that had been outsourced to the company by the customer. The customer wanted to purchase the assets and move them to their location to avoid interruptions in their operations.

The company, its customer, and the working capital lender had agreed to the purchase price and timing of the deal for the assets. Meanwhile, the secured lender who had funded the retail financing activities was being uncooperative. The value of the contracts supporting the retail financing activities were well in excess of the outstanding debt and would be realized through the normal consumer payments over the following year. But, the financing lender wanted to accelerate its exit and decided it would attempt to hold the other parties hostage by not releasing its second lien on the assets, thereby preventing the sale and transfer that was scheduled to take place within 3 days. We had teams assembled and ready to bring down the systems, physically relocate the workstations, servers and mainframe, and reinitiate the system within a 48 hour window.

Our solution was to use a bailment agreement between the company and its customer. We put the bailment in place the day before the scheduled transfer, and concurrently the working capital lender proceeded with a foreclosure and auction of assets. The auction was scheduled to take place at the customer’s location after the transfer. The customer had stipulated that its minimum bid would be the agreed upon purchase price (based upon a third party appraisal). Through the professional cooperation of the working capital lender, the company, and its customer we were able to complete a transaction that was in the best interest of all parties and prevent a rogue creditor from holding us “hostage.” So, the next time you have a deal barreling toward derailment, contemplate bailment.

Again, thank you to everyone who has contributed to this edition. Please feel free to submit articles for future issues, or send a letter to me about things bugging you.