Tug of war



It seemed a simple enough deal at the time. In 2003, US regional wholesaler Emco Sales & Service Holdings (ESS) and its two operating units, Emco Sales & Service and Action Wholesale Service, were struggling, short of cash and in need of resuscitation.
Private investment firm Centre Partners and a management team led by Bob Scribner moved in to take over the assets of the firm on 19 September. A new firm – ActionEmco Holdings – was created with Scribner at the helm.
Fast forward a few months and an administrative, PR and financial nightmare is about to unfold for ActionEmco and its OP supplier base, as ESS files for involuntary bankruptcy. As part of the original purchase agreement with ESS, its senior debt holder IBJ/Whitehall (part of Webster Bank) received about 80 per cent of what it had loaned, which was the full value of the company at the time. Albion Investors, meanwhile, a non-secured subordinated debt holder, received no payment at all, neither from what remained of the old firm nor from the new ActionEmco.


Then there were the vendors, companies that had supplied goods to ESS in the months preceding the sale of its assets and that hadn’t got paid. Scribner says: "As a wholesale distribution company, we felt we needed to maintain good relationships with suppliers so that they would ship us product. We had no legal obligation, but we ended up paying them near 100 per cent, and we went merrily on our way operating the business."
But while Scribner and the team started to get their house in order, ESS filed for involuntary bankruptcy, registered on 5 December 2003. Scribner recalls: "In early 2004, we got notice that Albion had pushed ESS into Chapter 7 liquidation, which is bankruptcy and a forced liquidation under the US bankruptcy rules.
"What Albion did was to go after our suppliers for payments we made after we bought the business, not just the payments made before we owned the business. A law firm was appointed by the bankruptcy judge to be the trustee for the bankruptcy which then decided to go after the vendors seeking the repayment of any payments that had been made 90 days before the bankruptcy filing."
Understandably, ActionEmco’s vendors involved weren’t too pleased about being asked to return money they received for goods supplied – in total about $25 million. And ActionEmco – which is sitting on the sidelines now – was their first port of call. Scribner says: "Some of them were very upset at first. They’ve got lawyers and educated themselves about what’s going on. I don’t think they’re upset at us, they’re very upset at Albion and this law firm. There have been some minor interruptions by a couple of vendors that didn’t understand the whole story, but once we’ve had the opportunity to explain, they’ve opened us right back up and started shipping us again."
All the vendors contacted by OPI, among them Esselte and Smead, declined to comment on this ongoing legal matter. Gould Paper’s president Harry Gould meanwhile had the following message: "Gould Paper, along with the rest of the creditors, are in complete disagreement with the trustee’s position."
To the casual observer it’s easy to see why, but US bankruptcy law is a complex area. An Albion spokesperson reluctantly said to OPI: "We were not a secured creditor. But neither were the vendors, so we are similarly situated. But their debts were assumed by the new company – ActionEmco."


Albion uses the argument that some payments made to the suppliers in the 90 days preceding the bankruptcy filing on 5 December were made by or on behalf of the old company and as such are preference payments, to which it is partly entitled.
The court, in a bankruptcy case, is keen to reach a settlement, most commonly in a ‘cents to the dollar’ arrangement. Options are being discussed, but a settlement endorsed by all the vendors involved could be hard to reach.
In addition, there are a number of defence claims that vendors are bringing forward and that the trustee will have to consider. One of these is that not all payments were preference payments, but just the usual payment for new products, ordered by and shipped to ActionEmco. Also, it is understood that ESS made payments which could be characterised as preference payments and which amount to about $1 million (made between 5-18 September – before the new ActionEmco, but within the 90-day period prior to the bankruptcy filing) – a much reduced total that could thwart any previous settlement attempts.
While painful at the moment, it’s likely that the long-term repercussions of this ongoing saga will be minor. And one cannot help but feel that it’s the lawyers who will be laughing all the way to the bank.