Shepstone Management Company, Inc.
The Philadelphia refinery sale proposed by the debtor makes no sense and unsecured creditors are calling out what may be some serious corruption.
I wrote about the proposed bankruptcy sale of a Philadelphia refinery the other day noting things seemed awfully fishy. But, now the rot is becoming more clear. Unsecured creditors have pointed out huge problems with the proposed sale of the refinery to a developer for $25 million less than an offer received that would keep this Philadelphia refinery as an asset to help make the City of Brotherly Love the next Houston. And, believe me you’d rather be Houston—which has less unemployment, less expensive housing and much more opportunity— than Philadelphia.
Unsecured creditors are onto the rot. Here is the filing they made with the court on Thursday (go here for more docs) and below are some of the key points made in the filing (emphasis added):
- The Plan should not be confirmed. It is not proposed in good faith. Its terms do not comply with applicable provisions of the Bankruptcy Code. The Debtors have not, in prosecuting the Plan, complied with applicable provisions of the Bankruptcy Code. It provides for payments that are inappropriate and unreasonable, and for post-confirmation governance that is inconsistent with the interests of creditors and public policy. The Plan discriminates unfairly, is not fair and equitable, and otherwise fails the “best interests” test respecting unsecured claims. It is not feasible.
- The evidence will show that, in connection with the Debtors’ recent merger and acquisition (“M&A”) process, two serious bidders emerged. One bidder (IRG) proposed to buy the facility for $265 million, and rebuild/restart it as a refinery to be run by historical CEO Phil Rinaldi. That bidder offered future business partnerships with the Debtors’ historical suppliers, vendors, customers, and other trading counterparties; it envisioned continued collective bargaining and potentially returning nearly one thousand skilled employees who lost their positions. Another bidder (Hilco) proposed to buy the facility for $240 million (i.e., $25 million less than IRG’s bid), and largely raze it to the ground. The Hilco bid does not offer any opportunity for the Debtors’ historical trading partners, and it does not envision labor’s return. Neither bid complied with the Court-approved bid procedures. In the end, the Debtors decided to advance with Hilco’s bid due to a perceived risk that IRG might eventually fail to close. The Plan is now premised on the Hilco bid, thus rendering it a plan of liquidation, not a plan of reorganization.
- To confirm that particular kind of plan, the Court’s evaluation includes three important questions. First, if we are not reorganizing a business, if we are not preserving jobs and trading relationships, if we are not assuming contracts or borrowing on an exit line of credit, if the transaction in question is just a sale to Hilco for near-term bulldozing and building-over, what do we need the Plan for?
- The Plan, when reduced to its substantive elements (beyond serving as the conduit for a Section 363 sale to Hilco), does only three things: (i) vests asset/case control with the Debtors’ obviously preferred creditor constituents, the Term Loan Lenders; (ii) disenfranchises unsecured creditors from the post-confirmation resolution of important case issues; and (iii) doles out bonuses and releases to the directors, officers, and other insiders. All of this contravenes the Bankruptcy Code and foundational principles of bankruptcy jurisprudence.
- The Plan’s bonus and release scheme deserves particular attention. The Court was previously advised that, on the eve of the bankruptcy filing, the Debtors secretly doled out lavish “retention” bonuses to their executive team, with clear intent to evade Court evaluation under Section 503(c). These awards, given to just a few people, totaled more than $5.25 million and occurred at approximately the same time these same individuals were negotiating an amendment to the company’s collective bargaining agreement—presumptively telling their union counterparts that there was simply insufficient funds (beyond $2.8 million) to provide severance and other benefits to more than 500 laid off union employees. No one knew of these bonuses until months into these cases, when they were unveiled in the Debtors’ Schedules and Statements of Financial Affairs.
- But, it goes much further. The Plan allocates to these same individuals (who, in the meantime, have been drawing large salaries “running” a long-shuttered facility) a new, incremental bonus program, allocating to them potentially tens of millions of dollars more in bogus “incentive” bonuses, clearly in contravention of Sections 503(c) and 1129.
If these allegations are even partly true, this is a scandal. Worse, it’s is the trade unions and companies who were this refinery’s vendors who are taking the brunt of the alleged corruption involved with the refinery sale.
But, as I suggested in my earlier post, the hand of the City of Philadelphia is also on this fiasco. Here is an exchange between the Court, Attorney Serajeddini for the debtor and the City’s attorney, Megan Harper, from a transcript attached to the filing (emphasis added):
THE COURT: Is the City of Philadelphia involved in discussions at all, Mr. Serajeddini, at this point?
MR. SERAJEDDINI: So, Your Honor, we’ve had minimal discussions from the city, other than through our CEO, on the kind of — I’ll call it more business level. In terms of the bankruptcy process — and I believe counsel is here today — I don’t believe we have any open issues with them. But we’re always happy to engage and work with the city. And I suspect they may have more views in the future when they find out where we’re actually headed.
THE COURT: All right. I see the — Yes.
MR. SERAJEDDINI: Want to just address that?
MS. HARPER: Certainly.
THE COURT: I didn’t see you there. Good morning.
MS. HARPER: Good morning, Your Honor. Megan Harper for the City of —
THE COURT: Yes, Ms. Harper.
MS. HARPER: — Philadelphia. I can confirm that there have been business-level discussions to this point, and we expect to have more a focal role as the auction process unfolds, as has been forth in the order. So we appreciate the efforts so far.
THE COURT: All right.
Call me paranoid, but this suggests to me the City is very happy to see the refinery closed and they’re of the rot as well.
Where does all this take us? Nowhere good so far, but nothing is done until it’s all over and it’s time for the Trump administration, and maybe the Wolf administration as well, to step in with some advocacy on the part of the trades, Philadelphia’s economic future, the nation’s energy security and simple justice. There’s more than one swamp to drain.
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