McALLEN — A federal bankruptcy judge has approved Garcia Grain Trading Corp.’s request to hire attorneys and accountants to help it navigate through a Chapter 11 bankruptcy amid concerns that the floundering company has insufficient funds to pay its creditors, including dozens of local farmers.
Chief U.S. Bankruptcy Judge Eduardo V. Rodriguez approved Garcia Grain’s requests on Friday after a nearly hour-long hearing held the previous day.
The judge’s rulings come after farmers from across the Rio Grande Valley, represented in the bankruptcy by a committee of unsecured creditors, expressed concerns that the company doesn’t have enough cash on hand to afford the hires.
With the judge’s decision, however, Garcia Grain is free to continue employing attorneys from the Lubbock-based law firm, Mullin Howard & Brown LLP.
During Thursday’s hearing, one of the firm’s attorneys, David R. Langston, reported that Garcia Grain had engaged Mullin prior to the initial bankruptcy filing on Feb. 17.
Garcia Grain paid Mullin a $100,000 retainer, of which more than $38,000 already has been used, Langston said.
Going forward, Mullin will be required to seek the court’s permission for further payment for services.
The unsecured creditors committee, or UCC, also alleges that Garcia Grain has been working with some or all of its four largest creditors — whose claims are collateralized via multiple liens — to protect their self-interests in recovering assets during the restructuring in a manner that would leave farmers hanging out to dry.
Those creditors — Vantage Bank, Falcon Bank, StoneX Commodities Solutions and a McAllen-based supply chain tech company called GrainChain, have claim to more than $41 million in debt.
“(T)he claims of the secured lenders, that is, those with the most access and knowledge of (Garcia Grain’s) financial records … obtained ‘affiliate’ guarantees and pledges of their assets to secure the funds these lenders advanced to (Garcia Grain), not the affiliates,” the UCC stated in its March 20 filing.
The UCC claims the arrangement has allowed Garcia Grain to “denude” the estate of recoverable assets “in order to acquire ranches, farm land, and other valuable assets.”
It further claims that Garcia Grain doesn’t actually have plans to restructure, but instead is maneuvering toward a Chapter 7-style liquidation.
“Such a Plan, based only on the schedules of values of those assets and claims, leave nothing for unsecured creditors,” the UCC stated.
To that end, the unsecured creditors committee also filed a limited objection to Garcia Grain’s proposal to hire accountants D. Williams & Co, Inc., of Lubbock, just to go over the company’s books.
Instead, the UCC wanted the scope of any accounting firm to include “forensic fraud audit purposes.”
The UCC’s concerns that the farmers it represents may wind up without a penny of the debt Garcia Grain owes them are not without merit.
During Thursday’s hearing, David Houston, an attorney representing the largest secured creditor, StoneX, suggested that converting the bankruptcy to a Chapter 7 liquidation may be one of the only viable options.
Garcia Grain owes StoneX about $20 million. Houston estimated Garcia Grain will be $10 million short of satisfying that debt.
Houston surmised about a Chapter 7 conversion shortly after Langston had floated an improbable scenario for freeing up cash that Garcia Grain could then use to pay off its creditors, including the farmers.
“There are several different sources that have to pan out,” Langston said.
Part of the plan involves Garcia Grain CEO Octavio Garcia and his wife, Gabriela, selling off personal assets to satisfy the $5 million in corporate debts held by Falcon Bank.
If that could be achieved, it would free up collateral for other creditors.
Another part of the plan involves getting the company’s grain elevators back into service via a partnership of some sort with an outside investor.
Aside from a limited sale of grain that was already stored in Garcia Grain’s elevators at the time of the bankruptcy filing, the company’s operations have remained at a standstill due to revocation of its licenses by the Texas Department of Agriculture.
Langston said he hopes someone with a valid license would be willing to partner with Garcia Grain to reopen the elevators, adding that such a partnership would give the company the best shot at reorganization.
But the bankruptcy judge likened the scenario to a “white knight” swooping in to save the day.
StoneX’s attorney’s similarly panned the plan’s likelihood for success.
“There’s a lot of steps to get from where we are today to somebody operating these (facilities) successfully,” Houston said. “And they’d have to bring their own capital.”
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