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A federal bankruptcy judge has approved the appointment of a chief restructuring officer in the bankruptcy case of Donna-based Garcia Grain Corp., igniting new hope that the beleaguered company can restructure and avoid liquidation.
Chief U.S. Bankruptcy Judge Eduardo V. Rodriguez approved the appointment of Richard S. Schmidt, a retired bankruptcy judge, as the CRO for Garcia Grain in an order handed down Tuesday.
With the appointment, Schmidt will have total control over the agricultural company’s bankruptcy estate, including access and control to all its finances, operations and grain sales.
He will also be the estate’s decision maker, with the power to hire and fire employees, and retain additional consultants needed for the bankruptcy process. In addition, Schmidt will interface with the bankruptcy court, as well as the U.S. Trustee, to provide financial and other reports and testimony.
But Schmidt’s appointment came only after a lengthy court hearing during which Judge Rodriguez cautioned both Garcia Grain and its creditors about what path they are taking in their attempt to move forward.
Initially, Garcia Grain hired Schmidt to serve as a mediator meant to bridge divides between the company and its creditors over a proposal to lease some of its grain elevators to a third party in order to generate cashflow as the bankruptcy process continues.
As a mediator, Schmidt held certain professional responsibilities to Garcia Grain and the creditors — responsibilities that would be in conflict if he then became the estate’s restructuring officer.
And that concerned the bankruptcy judge, who required all parties involved in the bankruptcy to not only sign waivers to those rights, but also to unanimously agree to the appointment order before he signed it.
“So that, along with a comprehensive waiver under 502 of the attorney and client work product, must be included in that order, must be submitted as an agreed order signed off by the parties to the mediation,” Rodriguez said during an Aug. 4 hearing.
“If there is even one missing, I will not sign that order,” he said.
Rodriguez was referring to Rule 502 of the Federal Rules of Evidence regarding attorney/client privilege.
He also ordered that Schmidt retain his own independent legal counsel to advise him as he carried out his duties as a CRO — someone not in any way affiliated with the bankruptcy case.
Finally, Rodriguez ordered Schmidt to step down from the position immediately at the first hint of additional professional conflicts.
“And any conflict that arises during this case — that he perceives as a conflict because of the mediation and the privileges being waived — he must withdraw. Immediately,” Rodriguez said.
Last month, Rodriguez expressed similar reservations when Garcia Grain’s attorney, David Langston, outlined the plan that would allow the estate to generate much-needed income by leasing elevators to a third party.
It was during that hearing that Rodriguez first learned of Garcia Grain’s plans to hold mediation sessions — something which the judge said he should have been informed of beforehand.
Though Rodriguez had previously authorized the lease of Garcia Grain’s Santa Rosa grain elevator to a third-party company out of Harlingen, the judge expressed concerns about allowing the lease of elevators in Progreso and Edcouch.
That’s because the deal with that company — Edinburg-based Elkins Grain Company — hinged on being financed by McAllen-based agricultural technology company, GrainChain Inc.
GrainChain is one of Garcia Grain’s four secured creditors and currently holds claim to about $8.1 million worth of the bankruptcy estate.
That not only concerned Rodriguez, but led him to admonish Langston and the parties.
“There’s free rein going on here without disclosure. … I need to understand why … we’re operating in a fashion that essentially skirts the (bankruptcy) code,” Rodriguez said during a July 7 hearing.
“I’m very uncomfortable with this agreement. I just don’t understand how I can approve such an agreement without some fiduciary that I can hold accountable,” he added a moment later.
During the hearing earlier this month, Langston said he and the other attorneys in the case took that admonishment “to heart.”
“In that regard, we immediately filed a motion for the appointment of a mediator. Richard Schmidt was put in that position,” Langston said.
During the mediation, the parties came to a tentative agreement about pursuing a path that could allow for Garcia Grain to successfully restructure itself.
The parties also agreed on an attorney they hoped could serve as the chief restructuring officer, Diann Bartek.
But, ultimately, she had to withdraw her name from consideration after “her general counsel and her management committee would not let her serve in that capacity,” Langston explained.
That led Garcia Grain and its creditors to turn their attention back to Schmidt, who — as mediator — had already gotten a crash course on the complexities of the Garcia Grain bankruptcy and its history.
“The parties put their heads together and determined that the best candidate that we could come up with, one that already had a head start on understanding all the various pieces of this case, was Richard Schmidt,” Langston said.
The bankruptcy estate will pay Schmidt a flat rate of $20,000 per month, plus expenses for food, lodging and travel.
And GrainChain, which holds claims to Garcia Grain’s sunflower seed operations, has agreed to allow up to $250,000 in profits from that enterprise to be used to pay Schmidt.
In turn, GrainChain will be reimbursed from any funds leftover from the property insurance claim Garcia Grain filed this spring after a severe windstorm destroyed nearly 90% of the capacity at its Progreso grain elevator.
One by one, the attorneys for Garcia Grain’s creditors voiced their support of Schmidt’s appointment as chief restructuring officer — including GrainChain, as well as the Unsecured Creditors Committee, which represents the dozens of local farmers who stand to lose out should the restructuring fail.
And just one day after Schmidt’s appointment, Garcia Grain’s largest secured creditor, StoneX Commodity Solutions, withdrew its motion to convert the bankruptcy from a Chapter 11 filing to a Chapter 7, which would allow for liquidation.
StoneX, which has a claim to about $20 million of the grain company’s liabilities, asked the court to convert the bankruptcy to a Chapter 7 on April 12, citing Garcia Grain’s then-nonexistent cashflow, its expiring insurance coverage and more.
“Simply put, the Debtor does not have any reasonable prospect to fund its reorganization expenses and re-establish itself,” StoneX’s motion stated.
“This debtor has no reasonable likelihood of rehabilitation,” the motion further stated to justify the conversion and potential fire sale liquidation.
But now, Garcia Grain is expressing a glimmer of hope.
“(We) were able to put together rough pieces of a plan of reorganization,” Langston said.
