Hope Valley Industries Inc. had carved out a nice business supplying
vinyl floor mats to the likes of Mercedes-Benz, Volkswagen and a number of other
major automobile manufacturers since 1975.
But in the late 1990s, the North Kingstown company decided to jump into the
red-hot fiber-optic cable business. It built machines that manufactured the
core membranes that go into cables.
Selling Luxury Real Estate Requires More Than Exposure
By Emilio DiSpirito IV License Partner | Private Office Advisor Engel & Völkers Oceanside www.DiSpiritoteam.com…
Learn More
The move flopped, according to people familiar with the private company. Its
cash flow dried up and its debt mounted to more than $3 million.
In a last-ditch effort to save the business, shareholders requested that the
Superior Court in Washington County appoint a receiver – a move that is employed
with unusual frequency in Rhode Island as an alternative to federal bankruptcy,
insolvency attorneys say.
“Very few (states) have a receivership statute with as much flexibility and
offering as much time- and cost-effectiveness as Rhode Island’s,” said Jonathan
N. Savage, a partner at the firm Shechtman Halperin Savage LLP in Providence.
Savage was appointed receiver for Hope Valley Industries in September 2001.
Though the company was in tatters from its foray into fiber-optic cable, Savage
says he recognized the value of the core mat-making business, and sought to
keep it afloat.
After consulting with the company’s secured creditors, the decision was made
to stabilize cash flow and continue operations before eventually marketing its
assets.
The receivership team worked with the company’s management to wipe out a backlog
of orders, which helped patch up customer relations. It also negotiated a sale
of the company’s floundering fiber-optics division – once thought virtually
worthless – for roughly $300,000, Savage said.
That money was plowed back into the mat-making business, which still employs
nearly 60 people. The company’s secured creditors were paid in full and unsecured
creditors were paid at least some dividend on their claims. Hope Valley Industries
last year was sold to two local businessmen: Thomas A. Melucci and Richard Bready,
chairman and chief executive officer of Nortek Inc.
Savage says Rhode Island’s receivership laws allow receivers to take that
sort of entrepreneurial approach to an insolvent business, giving them the leeway
needed to do what needs to be done to keep it going.
“You can always liquidate assets, but the ideal situation is to operate the
business and in some cases grow value for a shareholder buyout or third-party
buyout,” Savage said. “I’m not sure things would have moved fast enough in the
bankruptcy arena to salvage the situation. I think we probably would have been
looking at liquidation.”
State court receivership and federal bankruptcy are designed to accomplish
essentially the same thing: shield insolvent businesses from their creditors
while they reorganize or sell their assets to pay back creditors. But insolvency
lawyers in Rhode Island have fallen into something of a comfort zone with receivership,
many say.
“It’s almost become the vehicle of choice when dealing with an insolvent corporation
or entity in Rhode Island,” said Charlie Lovell, a partner at Partridge Snow
& Hahn LLP.
Lovell and other attorneys attribute the wide use of receivership here mostly
to the system’s flexibility and speed compared with federal bankruptcy court,
where Chapter 11 cases can drag on for years.
“Chapter 11 can be fairly cumbersome, and most of the time it’s in the best
interest of the creditors and equity holders to get the assets sold quickly,”
Lovell said. “Under receivership, everything still gets reviewed by the court,
but things tend to happen quickly.”
Receivership does not always result in keeping the business running – in fact,
most of the time, the receiver ends up administering a quick liquidation of
the company, according to Matthew J. McGowan, a partner at Salter McGowan Sylvia
& Leonard in Providence.
For example, McGowan was appointed receiver in 2001 for Elizabeth Webbing
Mills, a textile company in Central Falls that once had 160 employees and revenues
of $40 million. The receivership team operated the business for a few weeks
while trying to find a buyer, but to no avail. The mill closed in June of that
year.
Another reason for the receivership preference is a perception that the state
court is better about paying attorneys fees, McGowan said.
“The perception over the years has been that bankruptcy court is a tougher
place to get paid your fees,” he said. “All things being equal, attorneys probably
would rather go where they’re more likely to get paid.”
That, however, is changing, McGowan said. He said bankruptcy court in Rhode
Island has been quicker to acknowledge the extra filings and motions associated
with bankruptcy proceedings, and has been “allowing fee applications on a more
fair and equitable basis.”
