An increasingly popular alternative to bankruptcy, especially for businesses, is a receivership under Wis. Stat. Ch. 128. Unfortunately, little case law exists in this area and many circuit court judges are generally unfamiliar with this chapter of the Wisconsin Statutes. Consequently, errors frequently ensue many of which fly right in the face of clear Wisconsin law, such as this situation in Green Lake County, which given a careful review of applicable statutes could have been avoided.
Olsen’s Mill, one of Wisconsin’s largest grain mills, entered into a Chapter 128 Receivership in 2009 by entering a written agreement for assignment for the benefit of creditors. The assignment was approved by the Green Lake Circuit Court and an interim Receiver was appointed with authority to sell any and all of Olsen’s property free and clear of all liens, with all liens attaching to the proceeds of the sale, subject to prior consent of the creditors holding perfected liens of the assets sold and the approval of the court.
Olsen’s largest creditor was a French bank, BNP Paribas, which had provided Olsen’s Mills with an 80 million line of credit, of which $58 million was due and owing. It’s clear that Paribas had a properly perfected security interest in various assets of Olsen’s Mill, that Olsen’s Mill defaulted on its obligations, but it was unclear what part of the amount owed represented a secured interest. The Receiver moved the Court to sell certain assets of Olsen’s Mill under terms proposed by the Receiver and consented to by BNP Paribas. These terms were explicit that the court not approve a bid over a secured creditors objection to the sale of collateral.
The Receiver held an auction on April 7, 2009. The highest bid was ultimately submitted by PRM Wisconsin LLC, an affiliate of Paribas. The second highest bid was submitted by Olsen’s Mill Acquisition Corporation (OMAC), affiliated with Olsen’s Mill’s prior management. At the hearing to approve PRM’s bid, Olsen’s Mill’s attorney objected saying that PRM’s bid was not in the best interest of the creditors as it would be difficult to operate the mill as a going concern under their bid and urged the court to accept OMAC’s bid. The Receiver objected stating Paribas had not consented to OMAC’s bid, and that under Ch. 128 if a secured creditor is to receive less than the full amount due and owing they must consent, further pursuant to the Auction Terms they must consent. The hearing was ultimately put on hold when Olson’s Mill announced it would file federal bankruptcy. After the federal court dismissed Olsen’s bankruptcy petition, the hearing was resumed on April 14th where the Green Lake Circuit Court ultimately, after ignoring objections from Paribas, the Receiver and Baylake Bank, a second secured creditor, allowed for an adjournment during which OMAC negotiated a new handwritten bid and reconvened to accept OMAC’s handwritten bid. The Receiver upon receipt of the new bid again objected stating that not only had Paribas not consented to this sale but the new offer would disrupt the priority scheme for distribution as laid out in Wis. Stat. §128.17. Paribas’ attorney again made his objections on the record.
The Green Lake Circuit Court, without citing any statutory text, approved OMAC’s revised offer stating it “works for the balanced interest of those who are entitled to be protected.” Paribas then appealed to the Wisconsin Court of Appeals, which upheld the Circuit Court in a roundabout rationale stating that Chapter 128 allows a circuit court to value a secured creditor’s security interest and the circuit court valued Pariba’s collateral at 9 million and because Paribas had been paid 9 million for their interest in the inventory under OMAC’s purchase, Paribas’ arguments were moot. Paribas then appealed to the Supreme Court of Wisconsin which overturned the Court of Appeals and remanded to the Green Lake Circuit Court for a determination of what remedy is available under the circumstances.
In overturning the Court of Appeals, the Supreme Court noted the significant lack of case law with respect to Chapter 128 proceedings. In coming to its conclusion, the Supreme Court relied upon the significant difference in treatment of secured and unsecured creditors under Chapter 128, and cited to an earlier case, Wisconsin Brick & Block Corporation v. Vogel, which held that without a secured creditor’s consent the court does not have the power under ch. 128 to sell property that is collateral, free of the creditor’s mortgage. [1]The Supreme Court rejected OMAC’s assertion that by consenting to the 128 voluntary assignment, Paribas had consented to the sale. In their rejection they noted the specific requirements of the Auction Terms, which required Paribas’ consent, as well as the multiple objections that Paribas made on the record. Further, the circuit court did note Paribas objection as a finding of fact. The Supreme Court held that by ignoring this objection, the circuit court erred by ordering a sale of the property without Paribas consent. OMAC then tried to offer the theory accepted by the Court of Appeals that the circuit court valued Paribas security interest at 9 million and since they received 9 million they were not injured by the sale.
This assertion was also rejected by the Supreme Court, because while they acknowledged it was unclear how much of Paribas claim was secured, even if Paribas secured interest had been satisfied as OMAC contended their remained a significant unsecured claim. Under the order of distribution approved by the Circuit Court, the order circumvented the mandatory order of distribution under Wis. Stat. §128.17(1) and provided for payment of certain unsecured claims, ignoring others, ultimately allowing $10 million to be paid for specified unsecured creditors as opposed to being distributed on a pro-rate basis among all unsecured creditors. The Supreme Court after rejecting OMAC’s arguments and reversing the Court of Appeals, ultimately remanded to the circuit court to decide what remedy would be appropriate. As two years has now passed since the circuit court had approved the sale, even Paribas has acknowledged reversing the sale at this point would not be feasible. On remand, the Court ordered that the circuit court take all necessary and appropriate actions to determine the existence of a remedy that is fair to all parties under the circumstances. It remains unclear at this point, what that remedy will be.
[1] 54 Wi.2d 321, 326, 195 N.W. 2d 664 (1972).
