by Group states that $16.5 million secured loan from entity created by owner Bruce Berman should be recharacterized as an unsecured claim
CHICAGO — A committee of unsecured creditors in The RoomPlace bankruptcy is asking the court to recharacterize a $16.6 million secured claim — filed by an entity created by CEO and owner Bruce Berman — to an unsecured claim.
This means that instead of being treated as a secured creditor in the case, the entity likely would be placed among the more than 200 unsecured creditors identified in the case, which was filed on Feb. 2 in U.S. Bankruptcy Court for the Northeastern District of Illinois. Unsecured creditors typically only can recoup a portion of the funds they’re owed in a bankruptcy case after the secured creditors — often banks — receive their money first.
The June 10 complained noted that in 2019, Berman made a secured loan to TRP Acquisition Inc., the predecessor of debtors TRP Brands, and entered a subordination agreement with CIBC Bank.
The complaint notes that Berman created Furniture Asset Partners in 2020, which ended up purchasing the $13.5 million revolving line of credit TRP Acquisition had secured with CIBC Bank USA in 2016. At the time, the facility carried a zero balance, the suit said.
The complaint notes that the debtors, TRP Brands and the The RoomPlace Furniture and Mattress, built up significant cash reserves because of money borrowed under the Paycheck Protection Program backed by the Small Business Administration during Covid. It went on to note that by September 2021, the debtors had more than $10 million in cash, which decreased to $430,763 by February 2022.
And since then, FAP made $15 million in advances, “pursuant to the Eleventh Amendment to the old CIBC revolving line of credit,” which accrued payment in kind interest at 9.75%, bringing the total secured claim of $16,599,459.15.
The unsecured creditors committee wants to have this “insider loan” recharacterized or subordinated to what is described as an “equity interest.” An equity security holder typically is allowed to vote on a plan of reorganization and may file a proof of interest, rather than a proof of claim normally allowed creditors in Chapter 11 bankruptcy cases.
In their complaint, the unsecured creditors committee said, “The defendant’s conduct has been inequitable, causing injury to the unsecured creditors and providing an unfair advantage to the defendant.” In other words, as a secured creditor, sources interpret, it appears that FAP would be able to recoup its money before whatever remaining funds are available to be claimed by unsecured creditors.
Home News Now has reached out to legal counsel for both the defendant and the plaintiff and was awaiting a response as of press time to gain further clarity on the issue.
Yet the complaint adds further insights of its own, through the following statements:
“Factors supporting recharacterization include the insider status of Bruce Berman, the absence of a fixed maturity date, the lack of fixed repayment terms and the use of funds for general operations,” the complaint states, adding. “When funds are used for operational expenses, it suggests the provider of the funds is willing to bear the operational risks of the business, like that of an equity investor. Equity investors typically provide capital to cover ongoing operational costs, knowing their return depends on the overall success of the business.”
“Defendant’s cash advances — masquerading as a secured credit facility — directly harmed the unsecured creditors,” the complaint also noted. “Defendant obtained a first lien on the debtor’s assets. Next, Bruce Berman caused the debtors to make distributions to Mr. Berman and for Mr. Berman’s benefit. Then Mr. Berman injected the cash back into the debtors as a purported secured credit facility.”
The unsecured creditors committee added that it has reviewed the debtor’s bank statements and general ledger and “based on that review, the committee alleges that grounds exist to support an order equitably subordinating or recharacterizing the insider loan. …Subordination of FAP’s claim is consistent with the provisions of the Bankruptcy Code.”
