On December 23, 2021, Judge Stacey Jernigan of the U.S. Bankruptcy Court for the Northern District of Texas issued a verdict, following a bench trial, in favor of the Chapter 7 trustee of a metal manufacturing business and the business’s owner against a factoring lender. As detailed in the court’s 145-page findings of fact and conclusions of law, Bailey Tool & Manufacturing Company (and affiliates) entered into an agreement with Republic Business Credit, LLC for a loan and factoring of accounts receivable. After another lender declared Bailey in default for failing to pay certain taxes—an issue Republic was aware of when it entered into its agreement—Republic declared its own default and thereafter engaged in a series of actions that the court determined caused Bailey’s demise. For example, although it continued to collect on Bailey’s accounts receivable, Republic stopped transferring cash to the company and “took complete and total control of Bailey’s cash”—paying employees and vendors directly, but only to the extent Bailey could persuade Republic that the payments were necessary to generate revenue. At the same time, Republic applied the cash it received to Bailey’s loan balance, even though payments were not due, and to various fees and penalties that Republic assessed—all without adequate disclosure to Bailey. Republic later pressured Bailey’s owner to grant a lien on, and to give proceeds from the sale of, his personal residence, in violation of Texas’s homestead exemption, with a false promise that doing so would allow additional cash to be available to Bailey.
The court held that, while many of Republic’s actions were permitted under what it described as an “amazingly one-sided” agreement between the parties, Republic nevertheless breached certain provisions of the agreement, as well as its duty of good faith and fair dealing. The court further found Republic liable under tort claims, including fraud—for having misrepresented the status of accounts receivable collections and the availability of funds under the agreement—and tortious interference with contractual and business relationships—for improperly “injecting itself into corporate governance” and preventing Bailey from fulfilling its customers’ orders. Finally, the court found that Republic violated the Bankruptcy Code’s automatic stay by continuing to seek direct payment of accounts receivable after Bailey’s bankruptcy filing and that Republic’s claims in the bankruptcy were equitably subordinated to the claims of all other creditors.
The court awarded the trustee just under $17 million—which included contract damages, tort damages based on the “destruction” of Bailey’s existing and expected future business, and punitive damages—plus attorneys’ fees. The court awarded Bailey’s owner $1.16 million for his claims arising from the lien on, and sale of, his homestead.
The case is Bailey Tool & Manufacturing Co. v. Republic Business Credit, LLC, No. 16-ap-3025 (Bankr. N.D. Tex. Dec. 23, 2021). The trustee is represented by Passman & Jones, P.C. and Sommerman, McCaffity, Quesada & Geisler, L.L.P. The owner is represented by Martin Walton LLP and Rochelle McCullough LLP. Republic is represented by Husch Blackwell LLP and Crowe & Dunlevy, P.C. The order is available here.
