Navigating a First-Of-Its-Kind Bankruptcy Case

Express Grain Terminals, LLC (“EGT”) was a grain elevator operator and processor of soybeans and corn producing oil and other byproducts. As the only soybean processor in the state, EGT operated three locations in the Mississippi Delta region. The company was family-owned by a father and son team with annual revenues at $165MM and 160 employees.

On September 15, 2021, EGT submitted an out-of-compliance borrowing base certificate to its secured lender. What followed was a novel bankruptcy case marked by massive complexity and a near-impossible positive outcome.

Background

Founded in 2007 by a father and son team, Michael and John Coleman, EGT was the sole soybean processor in the state of Mississippi, operating in three locations in the Delta region – Greenwood, Sidon and Minter City. EGT operated grain elevators as well as a crushing operation that converted corn and soybeans to oil, biodiesel, and other byproducts. Farmers from all over the region would sell their grain to EGT.

On, or about, September 15, 2021, EGT submitted a misleading borrowing base certificate to its secured lender that triggered the beginning of the end of EGT as it was once known.

The September 15th borrowing base certificate, significantly different than previous submissions, raised serious questions regarding the viability of the business. Enough so that upon further investigation, the secured lender moved to dismiss the current management and the Colemans and appoint a receiver.

As a counter to the lenders’ motion to appoint a receiver, the Colemans on behalf of EGT, filed for Chapter 11 protection on September 29, 2021, in the Northern District United States Bankruptcy Court District of Mississippi with Judge Selene Maddox presiding.

With $186MM of debt, $156MM secured by grain and other assets, and uncertainty around the true value of the grain and other assets, the fight over the proceeds commenced immediately.

Bankruptcy Proceedings: Maximizing Recovery for All Constituents

The Debtor’s first of several cash collateral motions was heard and approved by the Court on October 1, 2021. Given that the prepetition grain in the possession of the Debtor was the sole source of post-petition proceeds, certain farmers filed an emergency motion to 1) set a deadline where the Debtor needed to accept or reject prepetition grain contracts and 2) expedite the determination of interest in, and disposition of, its grain assets.

Despite the bankruptcy filing, the pursuit to appoint a receiver to safeguard assets continued. The court appointed Dennis Gerrard of CR3 Partners (“CR3”) as the interim Chief Restructuring Officer (“CRO”) on October 13, 2021, and he was supported by a team of CR3 professionals including Marc Patterson, James Baring, and Heather Williams acting as the de facto interim Chief Operating, Financial, and Accounting Officers, respectively. The team had their work cut out for them.

Shortly after CR3 was engaged, due diligence uncovered that EGT owed a total of $186MM to its creditors and had assets totaling $96MM.

Creditors:

• $71MM to the secured lender – secured by a blanket lien on all EGT’s assets
• $45MM to the warehouse lenders – secured by grain inventory
• $40MM to the farmers – grain delivered to EGT for processing
• $30MM to all other creditors – unsecured

Assets:

• $5.2MM of cash and accounts receivable
• Additional working capital of $54MM
• $36.7MM of property, plant, and equipment

CR3 identified several complex issues that would guide the engagement, including determining who had security in the grain/proceeds, how the inventory should be monetized, and what actions would create the greatest recovery for all constituents.

The prepetition inventory was co-mingled and individual ownership could not be determined, with the value of the claims exceeding the available grain. The senior secured lender asserted its lien superseded all claims, while the two warehouse lenders believed they were owed proceeds from the prepetition inventory. The farmers also contended that they held an interest in the prepetition inventory, with production lenders asserting claims via their loans to the farmers.

With the amount owed being insufficient to satisfy the claims, the overarching battle during the pendency of the case was how the inventory should be monetized and for which creditors’ benefit. The options available to the debtor were to liquidate the inventory on the spot market, convert/process the inventory into multiple byproducts to generate higher returns, and/or maintain the business and operations to position the company to be sold as a going concern business.

Each constituency had conflicting opinions on the best approach. The farmers and production lenders were proponents of liquidating the inventory as quickly as possible and postponing the argument over which creditors had rights to the proceeds. Meanwhile, others supported keeping the facility open to process the inventory in the ordinary course of business and maintain the operations and current workforce.

CR3 recognized the greatest value for all stakeholders would be generated from maintaining ongoing operations, converting/processing inventory into multiple byproducts to generate higher returns for the inventory, while positioning the company to be sold as a going concern business. To ensure the crushing process was effective and the enterprise sale strategy could be executed, CR3 needed to improve the productivity of the plant operation. However, there was a finite amount of prepetition inventory and additional beans would have to be purchased to maintain the crushing operation. The Debtor sought debtor-in-possession financing to purchase additional soybeans but was unsuccessful so, without any CAPEX expenditures, CR3 was able to execute the purchase of 280,000 bushels within the existing budget, through careful liquidity management.

A critical point of contention was that 11 U.S.C. §§ 557 had never been argued in conjunction with a processing operation, making it unclear whether EGT could or should be allowed to operate through a sale process instead of liquidating the inventory.

Series of Events

Between October 19, 2021 and December 7, 2021, there were five interim cash collateral hearings, during which the employment of a CRO in lieu of a trustee was the centerpiece of each hearing. Despite opposition from farm groups and production lenders, CR3 maintained that the highest value could be created by continuing to operate the business and convert the prepetition soybeans into finished products. However, concerns were raised that the value of the prepetition inventory would not be preserved during the sale process. This led to the development and implementation of a complex formula to track soybean components per ton of meal, pound of oil and ton of hulls and pellets along with when each was collected by customer. All constituents were able to track progress of the various initiatives by participating in a weekly web conference hosted by the CRO.

On December 14, 2021, the argument surrounding the employment of CR3 was settled when the motion to employ on a permanent basis was granted and the appointment of a trustee was denied.

In mid-January, it was discovered that prior company management submitted fraudulent audited financial statements as part of its application for Mississippi state permits necessary to operate the facilities. This led to the Mississippi Department of Agriculture (“MSDA”) filing a motion to have the warehouse licenses revoked. This action was supported by the farm groups and production lenders.

A hearing was held on January 26, 2022 to consider the following motions: 1) continued use of cash collateral, 2) MSDA’s request to lift the automatic stay to revoke the licenses and shutter the facilities, and 3) conversion of the case to a Chapter 7 and/or have a trustee appointed filed by the farm groups and production lenders. At this hearing, CR3 presented the following:

• a summary of the sale process, including the status of due diligence of potential buyers;
• two different winddown scenarios and related budgets to complete the process by March 2022; and
• a proforma comparison of costs to-date, expected costs to complete, and estimated recovery.

At the conclusion of the hearing, use of cash collateral was approved, the motion to convert denied, and the sale process continued with an auction process being requested. The Judge lifted the automatic stay, but the only action MSDA took was retrieving the certificates from the company office and operations continued. In addition, Judge Maddox’s opinion indicated that working capital assets had increased since the petition date, suggesting over $5MM in value was created.

Adding to the drama, on February 24, 2022, the eve of the auction, EGT’s offices were raided by the FBI and other law enforcement agencies in connection with the activities of the prior management group. The auction was held on February 25, 2022 in Aberdeen, MS, where the secured lender credit bid $25MM. The assets were resold in June 2022 to two different buyers who would operate the facilities as going concerns, preserving many of the jobs from former EGT.

On April 6, 2022, a settlement was reached among the various claimants – farm groups, warehouse lenders, production lenders and secured lender – to distribute $58.9MM in net proceeds from the sale of the grain and grain products. This settlement eliminated potential appeals, and all appeals previously filed were withdrawn.

Insights & Outcomes

This was the first bankruptcy case of its kind; a bankrupt grain elevator with a crushing operation requesting the use of grain as cash collateral to process the grain and liquidate it under 11 U.S.C. §§ 557. The objective was to provide a higher value for the grain as well as to increase the value of other assets by preserving business operations, while in the process preserving 160 jobs in an economically challenged region.

While the production lenders and farmers argued that 11 U.S.C. §§ 557 required the immediate liquidation of the grain and that the conversion process degraded the value of their collateral, the Debtor believed the conversion process was consistent with the intention of the statute’s directive to have the grain liquidated and provided the best value for all constituents. Additionally, there was an ongoing dispute between the production lenders, farmers, warehouse lenders, and the senior secured lender over the ownership of the grain and its proceeds.

The CRO on behalf of the Debtor provided a plan which forecasted a higher return for the grain through its conversion and sale process rather than forced liquidation. The plan also provided a proposal to market and sell the business’ other assets for higher value in an operating model rather than a mothballed state.

The plan was the focal point of claimant objections; their goal was to convert the case to Chapter 7 or appoint a trustee. This was argued contentiously at each of the five cash collateral hearings, as well as the hearing to employ CR3 as the CRO. Despite weekly reporting to the contrary, the claimants insisted the company was not generating cash, going as far as to provide an expert witness at a hearing. The expert witness, however, corroborated the testimony of CR3 and its reporting that, overall, cash flow was positive.

The plan for the conversion and sale of the grain was a success and generated so much cash that, by virtue of the settlement, $58.9MM was distributed to the grain interest holders, up from $54.3MM of gross value inventory at the beginning of the case. $10MM in additional value was created in the inventory, as the net forced liquidation value of the inventory was initially estimated at $49MM. Additional value was created from the PP&E, largely due to the preservation of operations through the bankruptcy process and a significant number of jobs were also preserved, with the prospect of additional job creation as the company resumes production.

About CR3 Partners, LLC

CR3 Partners, LLC is a national turnaround and performance improvement firm that assists, guides, and collaborates with management teams and their constituents facing any sort of transition, opportunity, stress, or distress. Dennis Gerrard is a Partner based in CR3 Partners’ Atlanta office. Heather Williams and James Baring are Directors based in the Richmond and Los Angeles offices, respectively. Marc Patterson is a Manager based in the Dallas office.