More than 165 creditors received notice last week that Franklin Homes, Inc., has filed for bankruptcy. But ongoing negotiations to sell the business to a Mississippi corporation could provide much-needed capital for the Russellville business.
The petition, filed April 29, 2015 in the United States Bankruptcy Court for the Northern District of Alabama, Northern Division, seeks relief in the form of a Chapter 11 bankruptcy. Bankruptcy law requires the debtor to notify creditors to whom it is indebted of its filing. The Franklin Group, Inc., which owns Franklin Homes, Inc., is wholly owned by Jerry James, according to court documents.
A Chapter 11 bankruptcy, if granted, allows a corporation to reorganize while continuing business operations in an effort to return to profitability. But the bankruptcy court in a Chapter 11 retains control over significant business decisions, according to www.Investopedia.com.
A first-day meeting was held Monday on Franklin Homes' bankruptcy petition. According to an affidavit signed by Peter James, president of Franklin Homes, Inc., the company's “historically incurred payroll obligations for 115 full-time employees” has been reduced to 35 as of April 29, as a result of “present sales conditions.”
The petition states the company expects to manufacture an average of six floor “units” per week, which will require 100 employees. With an average weekly payroll of $66,000-$70,000, the Isbell plant, which assembles manufactured and modular homes, has a significant footprint on the local economy.
Some of Franklin Homes' listed creditor obligations are are low as $51.40, the amount owed to United Parcel Service according to court documents. On the other end, Franklin Homes' primary secured creditor is CB&S Bank, which holds a $7 million security interest in inventory and equipment. Court documents indicate CB&S Bank's debt is also secured by a mortgage on the plant property as well as mortgages personally secured by Jerry James.
A Chapter 11 filing is considered less drastic than a Chapter 7 bankruptcy, which involves the corporation ceasing all business operations with the end goal of full liquidation.
Under Chapter 11 payment priority, secured creditors and employees are paid first, followed by bondholders, preferred shareholders and stockholders. Franklin Homes has requested court orders requiring uninterrupted service from utility providers, in exchange for payment guarantees. Additionally, the company filed motions requesting authorization to pay pre-petition wages, worker's compensation premiums and other insurance payments.
With a negative cash flow, mortgage payments, Internal Revenue Service tax liens and bond obligations, it's apparent Franklin Homes, Inc., was in financial strife, but the news isn't all bad.
Court documents indicate Franklin Homes has been “negotiating a sale as a going concern of its business, with a potential purchaser, C-3, LLC.” If the company is sold pursuant to a Section 363 sale, the buyer would take ownership subject to paying or assuming debts to secured creditors and fund trade vendors in return for keeping Franklin Homes' assets, dealer base and retention of employees.
C3Design, Inc., a Mississippi corporation comprised of three former Viking Range Corporation employees and executives, was organized in 2014. According to a February 11, 2015, article in the Jackson Clarion-Ledger, C3Design's business plan “will offer an array of contemporary prefabricated luxury homes that are designed, engineered and constructed to provide the discriminating high-end consumer with a superior product in every respect.”
When contacted by the Franklin Free Press Monday, Brian Waldrop, C3Design's co-founder and CEO, withheld comment until the conclusion of the first-day meeting. Late Monday, C3Design released the following statement to the Franklin Free Press:
“C3Design, Inc., has submitted an asset purchase agreement to purchase Franklin Homes as a going concern through the chapter 11 bankruptcy process.
Through the acquisition of Franklin Homes, C3Design is confident that it can bring its home building heritage and track record of successful manufacturing operations and leadership in high-end consumer products to compliment Franklin Homes' long history of quality service and integrity in order to build on and expand Franklin Homes' legacy in Russellville, Alabama and throughout the Southeast and beyond.
C3Design's commitment to purchase the assets of Franklin Homes as an ongoing business in Russellville includes C3Design providing debtor-in-possession bankruptcy financing to Franklin Homes to help fund business operations at Franklin Homes over the next several weeks pending the closing of the sale of the business to C3Design, Inc.
In the bankruptcy proceedings, the parties are seeking that the sale of Franklin Homes as a going concern be finished on or before June 26, 2015.”
Fred Carl, founder of Viking Range Corporation, organized C3Design last year. Carl's success with Viking, combined with C3Design's available resources, could bring much-needed stability to the Russellville plant if the deal is completed. Viking was known as an innovator in the upscale professional-style major appliance market. Viking sold to Middleby Corporation in 2012.
While C3Design officials did not specifically use the term 'stalking horse agreement,' some aspects of the proposed sale appear to fit within the definition.
A stalking horse bid takes place when an interested buyer makes an initial bid on a bankrupt company's assets. From a pool of prospective bidders, the debtor company chooses a 'stalking horse' to make the first bid, according to www.Investopedia.com.
This practice allows the debtor company avoid lowball bids on its assets. The stalking horse makes a reasonable offer that prevents other bidders from offering lowball bids.
A 'stalking horse' bid may include a provision that if the proposed buyer is eventually outbid, the debtor company must pay the 'stalking horse' reimbursement for its expenses.
Court documents indicate Franklin Homes retained the Birmingham law firm of Benton & Centeno, LLP, for representation in the bankruptcy proceedings. Franklin Homes paid the firm an initial retainer of $15,848.22 and hourly fees for legal services will range from $175 to $375 per hour through the Chapter 11 process.
Court documents indicate Franklin Homes' bank accounts to be overdrawn in an amount of approximately $375,000.
Franklin Homes is located at 10655 Highway 43 and consists of a manufacturing facility of 270,000 square feet with five buildings located on 19 acres. Repeated efforts to contact Franklin Homes officials for comment were unsuccessful.
