In re Crouse Group, Inc.
| Decision Date | 16 March 1987 |
| Docket Number | Bankruptcy No. 87-00576S to 87-00583S. |
| Citation | 71 BR 544 |
| Parties | In re The CROUSE GROUP, INC., Related Cases: Aronimink Corporation, Crouse Combustion Systems, Crouse Company, Inc., Crouse-Mitchell Fabricating Company, Inc., Crouse Recovery of Delaware Inc., Crouse of New Jersey, Inc., Y-E-P Industries, Inc., Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Peter Platten, Limerick, Pa., Alexander N. Rubin, Jr., Robert Lapowsky, Philadelphia, Pa., for debtors.
Baldo M. Carnecchia, Jr., Philadelphia, Pa., for Wilmington Trust.
Richard E. Fehling, Reading, Pa., for Hamilton Bank.
Jestyn Payne, Wyomissing, Pa., for Boyertown Nat'l Bank.
William A. Harvey, Rona J. Rosen, Philadelphia, Pa., for GECC.
Morton Newman, Philadelphia, Pa., for Continental Bank.
Marvin Krasny, Robert Levin, Philadelphia, Pa., for Creditors' Committee.
Peter S. Clark, Marjorie O. Rendell, Philadelphia, Pa., for Meridian Bank.
Grant McCabe, Philadelphia, Pa., for The Federal Ins. Co.
James M. Matour, Philadelphia, Pa., for Matabassset Sewer Auth.
At issue in these Motions by four (4) related Debtors-in-Possession who have recently filed, with several other related entities, jointly-administered Chapter 11 bankruptcy Petitions, is whether we should grant contested Motions seeking approval of certain Stipulations by which the Debtors propose to obtain credit for the purpose of meeting direct job costs in connection with certain construction projects through loans, pursuant to 11 U.S.C. § 364(c), from the bonding company on those projects. We hold that, in order to obtain our approval of these Stipulations, the Debtors must prove that (1) They cannot obtain credit unencumbered by super-priority status; (2) The credit transactions are necessary to preserve assets of their respective estates; and (3) The terms of the credit agreements are fair, reasonable, and adequate. Finding that the Debtors failed to prove any of the foregoing elements, we are constrained to deny the Debtors' Motions, although we will allow the present Stipulations to remain in effect through March 23, 1987, with certain limitations, in order that the Debtors can attempt to make alternative arrangements for financing.
At the outset, we must observe that the record is less complete than we would like it. For instance, we do not have, in the record, any copies of the bonding agreements between the Debtors and the proposed lender through consideration of which we could have determined, with precision, the rights of the proposed lender were the Stipulations not effected. Nor do we have any evidence of the extent, nature, and priority of any security interests of any of the creditors, including a creditor which has pressed an Objection, Continental Bank. However, the lack of clarity of the record on these points works to the disadvantage of the party with the burden of proof on the issue in question. While we recognize that the emergent nature of the circumstances reduced the parties' time to prepare a full record, we must also observe that the continuing notice of these proceedings has provided the parties with what we believe has been a full opportunity to make the necessary record. The parties have had two (2) chances to present testimony in a period of time of two (2) weeks. Moreover, in the case of the Debtors, the second opportunity was subsequent to our warnings at the close of first hearing that we perceived shortfalls in their initial presentation. Their failure to make a record which satisfies their rather substantial burdens on their second attempt leads us to conclude that the evidence necessary to meet their burdens is simply absent.
The Moving Parties herein are The Crouse Group, Inc. (hereinafter referred to as "the Parent"), Crouse Combustion Systems, Inc., Crouse Company, Inc. and Crouse of New Jersey, Inc. (hereinafter collectively referred to as "Crouse Companies"). The Crouse Companies are Debtors-in-Possession who filed Petitions for relief under Chapter 11 of the Bankruptcy Code on February 4, 1987, along with several other Crouse Companies identified in the case caption. Crouse Combustion Systems, Inc., Crouse Company, Inc. and Crouse of New Jersey are wholly owned subsidiaries of the Parent and are each engaged in the construction business.
At the hearing on this matter on March 10, 1987, we granted the Motion of the Crouse Companies to incorporate the record of the initial hearing, held on February 25, 1987, to consider approval of a prior Motion for Post-Petition Financing, into the record of that hearing. Also, on March 10, 1987, this Court heard additional testimony from Joseph Smith, the Executive Vice-President and Vice-Chairman of Crouse Group, Inc., who had also testified at the hearing on February 25, 1987.
Mr. Smith testified that he was a certified public accountant and had been with the Crouse Companies for approximately eighteen (18) years. He identified and described various construction projects of the Crouse Companies which existed on the filing date. He testified that, based on his projections, excluding overhead and after payment of approximately $9,000,000.00 in pre-petition debt, the jobs would generate a gross profit of $2,000,000.00 to $3,000,000.00 based upon gross revenues of approximately $58,000,000.00 over a three to four year period. While Mr. Smith testified that none of the subsidiaries had the funds on hand necessary to finance completion of any of the projects, he did, at the second hearing, concede that the Parent had substantial funds available, but that it was not believed that making advances or loans to the subsidiaries was "the best utilization" of the Parent's funds due to the limited profit potential of the projects.
Mr. Smith testified that seven (7) of the projects, representing approximately ninty-three (93%) percent of the total, are bonded for performance and payment by Federal Insurance Company (hereinafter referred to as "Federal"), the proposed lender. He testified that since the filing, the Crouse Companies had been meeting with and negotiating with Federal concerning the completion of the jobs. According to Mr. Smith, Federal was advised immediately after the filing that the Crouse Companies would not support the bonded projects from general assets of the estate beyond payroll for the first week. Subsequently, the Crouse Companies did agree to fund payroll for the second week but, thereafter, refused to fund any other expenses of the bonded projects.
Based on the inability of the Crouse Companies to fund any further bonded project expenses, Stipulations were entered into between Federal and the Crouse Companies pursuant to which Federal was to loan to the Crouse Companies monies sufficient to meet payroll expenses for the week of February 25, 1987, in exchange for receipt of a "first position security interest" by Federal in the accounts receivable on the bonded projects. In the late afternoon of February 24, 1987, counsel for the Debtors proposed to file these Stipulations and have us approve them ex parte. We declined to do so, and required that notice be given to the largest creditors that a hearing would be held the next day before we would act. On February 25, 1987, numerous counsel appeared, including Counsel representing Continental Bank, apparently a secured creditor, and the Official Unsecured Creditors' Committee of the Parent. After a hearing to consider approval of the Stipulations, at which Mr. Smith was the only witness, on February 25, 1987, and over the objection of Continental Bank, we approved the Stipulations. However, at that time, we noted that the Creditors' Committee did not oppose the Stipulations, and we specifically advised the Debtors (1) That we considered its having met the burdens of proof imposed by 11 U.S.C. §§ 364(c), (d) doubtful; (2) That we were acting only because the sums to be advanced were modest; and (3) We did not anticipate approving the Stipulations for a longer period than the one week sought.
At the hearing on March 10, 1987, Mr. Smith testified that, on March 2, 1987, a meeting was held with Federal at which Federal expressed its belief that it could complete the bonded projects without the Crouse Companies. Per Mr. Smith, the Crouse Companies expressed to Federal their view that such a course of action would be much more expensive to Federal than it anticipated, based upon the unique engineering aspects of the jobs. After that exchange, Federal decided that further review was necessary and the Second Stipulations, presently before the Court for approval, were executed. These Stipulations proposed to extend the terms of the previous Stipulations through April 5, 1987.
Mr. Smith articulated that he had three (3) reasons for entering into the Second Stipulations. Primary was his concern that the general estate assets would not be utilized to support the projects. Second was his desire to minimize the escalation of any claims against the Crouse Companies by Federal. Such escalation would result to the extent the cost to complete the projects increased to the lack of Crouse participation and exceeded the sums remaining due from the owners. Third was his desire to maintain the potential that Federal, after further review, would agree that participation of the Crouse Companies, in some capacity, was in everyone's best interest. As to the third goal, Mr. Smith testified that, should Federal make such a determination, the services of the Crouse Companies would be available only under an arrangement which resulted in a profit to the Crouse Companies. Mr. Smith made clear that, during the period of the Second Stipulations, no profit would be realized. He also conceded that Federal had a very clear incentive for perpetuating the relationship with the Crouse Companies in any event, because it could use the period until April 5, 1987, to find replacements for the Crouse Companies on...
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