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Judge Sides With Creditors In Lumenate's Chapter 11 Bankruptcy Filing
U.S. Bankrupcy Court Judge Stacy Jernigan has sided with creditors in Lumenate's Chapter 11 filing, paving the way for the potential dissolution of the company.
"Dismissal of this Chapter 11 case is in the best interest of the debtor, its estate and creditors," Jernigan, a U.S. Bankruptcy Court judge for the Northern District of Texas, wrote in a June 26 order.
Both Lumenate's former distributor Avnet Technology Solutions (owed $25.5 million) and secured creditor MidCap Financial (owed $2.1 million) called for outright dismissal of the case rather than a conversion to Chapter 7 liquidation. Both believe there are essentially no assets to be liquidated.
Avnet Technology Solutions has agreed to subordinate its secured debt to MidCap so that creditors can pursue other options under state law. The distributor had previously cut off its vendor financing and refused to engage in business activities with Lumenate, according to court filings.
Jernigan's decision followed a hearing Monday on MidCap's motion to dismiss the case. Expected witnesses during the hearing, according to court filings, were: Lumenate President Reagan Dixon; Kenton Getz, Lumenate's vice president of finance and controller; Bruce Jennings, MidCap's managing director of due diligence; and Jolea Kidd, Avnet Technology Solutions' vice president of credit and collection.
Dixon didn't immediately respond to requests for comment, while Tech Data – which bought Avnet Technology Solutions in February for $2.6 billion – declined to comment.
Lumenate - No. 148 on the 2017 CRN Solution Provider 500 - indicated in a June 9 court filing that it was working out a long-term budget that paves the way for either a successful reorganization or sale.
Now that the case has been dismissed, secured lenders such as MidCap and Avnet Technology Solutions would be able to go into Lumenate and obtain the collateral needed to satisfy the company's debt, according to Adam Stein-Sapir of bankruptcy claim buyers Pioneer Funding Group, which is not directly involved in the case.
MidCap and Avnet Technology Solutions should have the cooperation of local law enforcement in taking possession of Lumenate's collateral, Stein-Sapir said, and aren't required to undertake anything more than a straightforward procedural filing to initiate this process.
From there, any leftover money is returned to Lumenate, at which point Stein-Sapir said unsecured creditors can race back to the courthouse, obtain judgments against Lumenate, and look to enforce those judgments in order to get repaid on their debt.
Lumenate has identified IT vendors and distributors such as Cisco, Westcon, Ingram Micro, Veritas, Pure Storage and Symantec as unsecured creditors with claims ranging from $170,000 to $2.1 million. MidCap said Lumenate's total debt might be as high as $50 million, while Lumenate indicated at the time of its May 26 bankruptcy petition that its assets only totaled between $1 million and $10 million.
Although the dismissal of Lumenate's Chapter 11 filing doesn't automatically dissolve the company, Stein-Sapir said the only way Lumenate could continue operating is if it satisfied the obligations of all of its secured and unsecured creditors and still had money left over.
"I think, for all intents and purposes, this spells the end of Lumenate," Stein-Sapir said.
Stein-Sapir estimated that just one percent of Chapter 11 bankruptcy cases end with the judge cutting the case short via dismissal rather than providing the debtor with plenty of time to organize their affairs. Debtors in Chapter 11 are typically granted extension after extension to formulate a go-forward business plan, Stein-Sapir said, even if creditors are looking to speed up the case.
"The default reaction is to allow the debtor more time to restructure itself and maximize value for everybody," Stein-Sapir said. "This is an unusual and extreme remedy."
MidCap therefore must have met the tests in the bankruptcy code required for dismissal of a Chapter 11 case, Stein-Sapir said, which include no hope for rehabilitation, no need for the expense of a Chapter 7 trustee, and lenders capable of liquidating their own collateral without the assistance of a trustee or other third party.
Lumenate's accounts receivable had decreased from $8.5 million at the end of April to just $2.5 million at the end of May, according to MidCap, which the creditor said is a sign that Lumenate has "essentially been in liquidation mode."
Lumenate, for its part, said it court filings that it was unable to generate any new sales or accounts receivable after Avnet Technology Solutions stopped selling or shipping equipment to the solution provider. This, in turn, generated a liquidity crisis, according to Lumenate.
Additionally, four of the nine members of Lumenate's leadership team had left the company since the start of May. And Lumenate's website was last viewable June 15, with a message now telling visitors that the HubSpot account associated with Lumenate's domain has expired.
"Sometimes being in bankruptcy serves creditors, and sometimes it doesn't," Stein-Sapir said. "They [MidCap] got exactly what they wanted."