American LaFrance's prediction in late January that it would sail through the Chapter 11 bankruptcy reorganization process and emerge stronger in less than 90 days appears unlikely.
On Feb. 19, the Official Committee of Unsecured Creditors filed objections in U.S. Bankruptcy Court in Delaware to the company's plans to obtain financing and sell its assets. The creditors committee asked for 120 days to conduct an investigation.
"This is a most unusual and disturbing Chapter 11 case," wrote James C. Carignan, the committee's lawyer. "The debtor commenced this Chapter 11 case not for the purpose of reorganizing, but instead with the goal of summarily transferring its assets to an insider in a manner that may doom the unsecured creditors to a zero recovery."
The insider is Lynn Tilton, the manager of Patriarch Partners LLC, a private equity and investment firm that bought American LaFrance in December 2005 from Freightliner LLC.
Carignan accused Tilton of self-dealing and not acting in good faith because she is the agent for a group of secured lenders that financed her purchase of the company with $150 million, because she controls the management of the company and because she is the company's choice for providing further secured financing and for buying its assets.
"As the person on every side of the negotiating table," Carignan wrote, "Ms. Tilton was hopelessly conflicted and in a position to simply dictate terms that suit her needs."
He called the proposed sale of the company's assets "a thinly-veiled attempt to permit Patriarch to escape with all assets of the debtor while at the same time divesting itself of any liability for unsecured claims."
Lawyers for American LaFrance responded quickly to the creditors committee's objections, characterizing them as "unsubstantiated attacks on ALF's secured lenders" that are not supported by evidence and that should not dissuade the court from approving the company's proposed financing and sale.
In its filings, American LaFrance estimated its unsecured creditors are owed about $62.5 million. The company, which is based in Summerville, S.C., has filed a plan of reorganization in addition to a proposal to sell the assets.
Carignan told the court Tilton is using the proposed sale as "a shake-down to coerce the unsecured creditors into supporting a [reorganization] plan that may be inadvisable." The plan, he said, provides for his clients to receive a "meager $5 million in cash plus the proceeds of certain commercial torts and avoidance actions, the values of which are unknown."
He suggested the businesses that are owed money by American LaFrance might receive more compensation through a Chapter 7 liquidation sale.
"Though the [reorganization] plan does not offer an attractive option," Carignan wrote, "the alternative [sale to Patriarch] is even worse" because the unsecured creditors could end up with nothing.
"It is imperative that the [creditors] committee be able to conduct a thorough review of the debtor, its relationship with Patriarch Partners, and its business to determine how best to maximize its value," he wrote.
If Carignan is able to convince the Bankruptcy Court judge that the case deserves much more time than the company anticipated to conduct an in-depth investigation of Tilton's many roles, the future of American LaFrance is uncertain.
In the first three weeks after the company sought Chapter 11 protection from its creditors on Jan. 28, American LaFrance and its creditors filed more than 130 motions and documents with the court.
In the two years prior to its bankruptcy filing, American LaFrance said it lost more than $100 million. The company furloughed many of its employees in mid-December, and six weeks later, when it went into Bankruptcy Court, it predicted they would return to work by March 10.