On December 23, 2021, Judge Stacey Jernigan of the United States Bankruptcy Court for the Northern District of Texas issued a verdict, following a trial, in favor of the Chapter 7 trustee of a metal fabrication company and the business owner against a factoring lender. As set forth in the court’s 145-page findings of fact and findings of law, Bailey Tool & Manufacturing Company (and its affiliates) entered into an agreement with Republic Business Credit, LLC for a loan and accounts receivable factoring. After another lender declared Bailey in default of certain taxes – an issue Republic was aware of when it entered into its agreement – Republic declared its own default and then embarked on a series of actions that , according to the court, caused the disappearance of Bailey. For example, although it continued to collect Bailey’s accounts receivable, Republic stopped transferring money to the company and “took complete and total control of Bailey’s money” – paying directly employees and vendors, but only to the extent that Bailey could persuade Republic that the payments were necessary to generate revenue. At the same time, Republic applied the money it received to Bailey’s loan balance, even though the payments weren’t due, and to various fees and penalties that Republic assessed, all without adequate disclosure to Bailey. Republic then pressured Bailey’s landlord to grant a lien on his personal residence and donate the proceeds from the sale of his personal residence, in violation of the Texas Homestead Exemption, with a false promise that it would give Bailey extra money.
The court found that although many of Republic’s actions were authorized under what it described as a “surprisingly unilateral” agreement between the parties, Republic nevertheless violated certain provisions of the agreement, as well as its duty of good faith and fair dealing. The court further found Republic liable under tort actions, including fraud – for misrepresenting the status of accounts receivable collections and availability of funds under the agreement – and tort interference with the contractual and business relationships – for improperly “injecting itself into corporate governance” and preventing Bailey from fulfilling its customers’ orders. Finally, the court found that Republic violated the Bankruptcy Code’s automatic stay by continuing to seek direct payment from accounts receivable after Bailey filed for bankruptcy and that Republic’s claims in the bankruptcy were fairly subordinated the claims of all other creditors.
The court awarded the trustee just under $17 million, which included contractual damages, damages based on the “destruction” of Bailey’s existing and future business, and punitive damages, plus fees of lawyer. The court awarded Bailey’s owner $1.16 million for his claims arising from the lien and the sale of his property.
The case is Bailey Tool & Manufacturing Co. v. Republic Business Credit, LLC, no. 16-ap-3025 (Bankr. ND Tex. 23 Dec. 2021). The Trustee is represented by Passman & Jones, PC and Sommerman, McCaffity, Quesada & Geisler, LLP The Owner is represented by Martin Walton LLP and Rochelle McCullough LLP. Republic is represented by Husch Blackwell LLP and Crowe & Dunlevy, PC Ordering is available here.