Introduction
On May 6, 2019 (the “Petition Date”), Southeastern Metal Products LLC (“SEMP”) and SEMP Texas LLC (collectively with SEMP, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.
The Debtors are represented by Rayburn Cooper & Durham, P.A. as lead counsel and Gellert Scali Busenkell & Brown LLC as local counsel. The cases have been assigned to the Honorable Brendan Linehan Shannon. A hearing on the Debtors’ first day motions has been scheduled for May 8, 2019, at 11:30 a.m.
Background
The Debtors are headquartered in Charlotte, North Carolina. SEMP Texas, LLC is a wholly-owned subsidiary of SEMP and operates a facility located in Austin, Texas. SEMP was founded in 1952 as a two-man tool and die company. SEMP relocated to its current headquarters in 1960. In 2006, Juno Investment, LLC acquired SEMP. SEMP’s current equity holders are Juno Investment, LLC, JL Holdings 2002 LLC, and SEMP Henry LLC (collectively, “Juno”). Through a series of expansions, SEMP added metal stamping and fabrication services and expanded over time to a 100,000 square foot facility in Charlotte. SEMP’s total workforce as of the Petition Date was 173 employees. SEMP currently serves the telecommunications, transportation (including heavy trucking), appliance, and health and safety industries.
Debtors’ Financial Condition
The Debtors’ primary assets consist of SEMP’s real property and improvements, the Debtors’ machinery and equipment, the Debtors’ accounts receivable, and the Debtors’ inventory. As of the Petition Date, the Debtors estimated the value of its assets at approximately $15 million.
On January 4, 2010, and on March 10, 2016, the Internal Revenue Service (the “IRS”), filed a federal tax lien against SEMP in the amount of $217,836.77. The IRS asserted that the amounts reported on SEMP’s W-2 and W-3 forms did not match. Beginning in March 2017, SEMP has attempted to resolve the federal tax lien but has been unsuccessful in its attempts.
On January 3, 2018, South State Bank (“SSB”) and SEMP entered into an amended and restated loan agreement pursuant to which SSB extended credit facilities of up to $6,700,000 to SEMP, allegedly secured by a blanket lien on all of SEMP’s assets. The primary purpose of the loan was to fund SEMP expansion of its manufacturing facility in Charlotte. SSB was aware of the federal tax lien when it closed the loan and included a provision to reserve funds sufficient to pay the IRA claim.
Since late March 2018, Juno has loaned the Debtors over $5,000,000 and the current balance of the Juno loan is $5,162,806.62.
In April 2018, SEMP management discovered that SEMP’s former controller had been provided access to funds under SEMP’s undrawn line of credit with SSB. SSB permitted the controller to access these funds despite the requirement that SEMP’s president authorizes any draw. The unauthorized draws totalled approximately $800,000. These unauthorized draws delayed the Debtors’ management team from recognizing working capital imbalances resulting from the Debtors’ rapid growth. Due to a series of events, the expansion of the Debtors’ facilities was several months behind and, as a result, the Debtors began experiencing significant liquidity challenges, despite subordinated secured loans provided to the Debtors by Juno. SEMP notified SSB of the unauthorized draws and the Debtors’ financial difficulties ensuing from their expansion. The Debtors provided full transparency to SSB regarding their challenges and were assured by SSB that SSB would continue to work with the Debtors. SEMP has continued to make every principal and interest payment to SSB when due. SEMP, Juno and SSB tried to restructure their relationship through multiple forbearance agreements, none of which were contingent on the resolution of the IRS tax lien. On May 2, 2019, SSB sent SEMP and Juno a notice of termination of the forbearance agreement, a notice of acceleration, demand for payment and reservation of rights, stating the balance of obligations owed to SSB as of that date were $4,381,350.67. On May 3, 2019, SSB further issued an amended and restated confirmation of termination of swap transactions, whereby SSB purposed to unwind all swap agreements between SSB and SEMP and on May 3, 2019, debited $36,300 from SEMP’s account at SSB.
SSB’s actions through its refusal to permit the Debtors access to the held funds and the swap debt posed a severe threat to the Debtors’ ability to continue operations as a going concern. Because of SSB’s aggressive actions, the Debtors believed they had no choice but to seek bankruptcy protection.
Cash Collateral Motion
The Debtors are seeking emergency interim and final authorization to use the cash collateral of SSB and Juno and provide adequate protection to SSB and Juno for the use of its cash collateral for their ordinary course business operations.
Other Significant First Day Motions
Wages and Benefits Motion
The Debtors seek authority to pay certain prepetition employee obligations and maintain and continue employee benefits programs and schedule a final hearing on the motion. As of the Petition Date, the Debtors employ approximately 173 employees. Through the motion, the Debtors are seeking authorization to pay in the ordinary course of business, employee obligations whether they accrued pre or post-petition in the amount not to exceed $450,000 through the week of May 24, 2019.
Shipping Obligations Motion
The Debtors are seeking authority to pay and honour prepetition obligations and continue in the ordinary course prepetition programs and practices with common carriers. The Debtors list their common carriers as Integrated Logistics 2000 LLC, FedEx, and UPS. The Debtors submit that the total amount to be paid to the common carriers totals approximately $150,000.