Freedom Industries filed Chapter 11 bankruptcy after some of its
chemicals leaked into the Charleston, West Virginia water supply,
forcing it to shut down.
Filing any chapter of bankruptcy invokes the automatic stay, stopping
all collection actions, like, lawsuits.
Which are flowing fast and furious out of the chemical spill.
West Virginia-American Water said it has a big stake in Freedom’s Chapter 11 because the utility suffered expensive damages as a result of the water shut-down. The utility added that, in those suits naming it as a defendant, the company plans to file cross-claims shifting liability to Freedom. West Virginia-American Water ultimately will become “the largest creditor by far in this bankruptcy case,” the utility said. (from the Business Week article linked to above)
Basically, it does not matter how you became a creditor, what wrongs were done to you, you are stayed, frozen, prevented, stopped, from taking action to collect once a bankruptcy case is filed.
Does this mean people harmed by the West Virginia chemical spill will get nothing?
Chapter 11 bankruptcy is to re-organize, to keep a company, or, in some cases, an individual, operating.
However, 100% plans are unusual.
You have to file a claim in a Chapter 11 to get paid anything. And these water spill claims are unliquidated, a fancy legal term meaning the amount of the debt has not been determined.
Like, you know exactly how much you owe on your car or house or credit card. But if your water was shut off for 3 days, how much are you owed?
The bankruptcy stay can be lifted to allow other lawsuits to proceed to judgment, if only to determine the amount of the claim.
Once there is a judgment, the claim is liquidated, that is, the amount of the claim is fixed.
Who Owns Freedom Industries?
Ownership, along with mucho other stuff, must be disclosed in Chapter 11 bankruptcy filings.
In this case, though under some layers, it appears one individual owns Freedom Industries.
Chapter 11 bankruptcy cases frequently involve something called Debtor In Possession financing.
Debtor In Possession, or DIP, is just the name for the entity in bankruptcy. Once you file Chapter 11, you are operating with the legal duties of a trustee, for the benefit of the creditors.
Often, a company filing needs immediate financing. Which, given that it is in bankruptcy, is tough to get.
So, there is a cottage industry of financing such companies with DIP financing, which is customarily secured by all the assets of the company that filed Chapter 11.
Some are crying “foul” in the Freedom Industries Chapter 11 case because it appears the owner is trying to provide
$5 million of DIP financing, thus getting a $5 million lien on assets, putting him ahead of other creditors.
I will have to blog on this one further.