iGPS $52 million asset sale approved; dispute with depots unsettled

By Jim Witters

Wilmington, Del., July 23 - iGPS Co. LLC received approval for the sale of substantially all of its assets to stalking horse bidder iGPS Logistics LLC, but no sale order can be entered until the debtors, the buyer and depot facility service provider Belacon Pallet Services, LLC.

iGPS Logistics was the lone bidder.

The total deal is worth about $165 million, because the buyer has agreed to waive a $150 million deficiency claim, contribute $2.5 million to a recovery pool for general unsecured creditors and pay off the $12 million debtor-in-possession financing facility.

Judge Kevin Gross approved the sale over the objections of the U.S. Trustee's Office and former iGPS CEO and chairman Bobby L. Moore, who claimed the credit bid by iGPS Logistics significantly undervalued the debtor's assets.

The hearing in the U.S. Bankruptcy Court for the District of Delaware concluded on July 23 after nearly three days of witness testimony and presentation of evidence.

David Buchbinder, representing the trustee, said the deal should have been presented to creditors through a Chapter 11 plan and disclosure statement, which would have provided creditors with a chance to vote on it.

Moore argued that the truncated sale process, coupled with the sale of $148 million in secured iGPS debt for about 20 cents on the dollar, chilled bidding on the assets.

Moore said the salvage value of the resin pallets with embedded radio-frequency identification tags exceeded $200 million.

Gross said that the case raised suspicions at the outset because the buyer is a joint venture that includes one company that lost an arbitration case with the debtor and faced an award said to be worth hundreds of millions of dollars.

Case background

The controversy and suspicions center on an arbitration award the debtors received in a dispute with SAS Schoeller Arca Systems over SAS' failure to honor its 10-year warranty on the RFID pallets.

SAS was found liable and ordered the company to repair or replace about 2.2 million defective or broken pallets. A second phase of arbitration would have established monetary damages, but the company did not pursue the claim.

The debtors touted the liable award to potential bidders as potentially worth hundreds of millions of dollars.

The sale of iGPS's assets, including the arbitration award, to iGPS Logistics neutralizes the award, because the buyer has agreed not to pursue the claim.

iGPS Logistics is a joint venture formed by Balmoral Funds, One Equity Partners LLC, SAS Schoeller Arca Systems, and Jeff and Robert Liebesman.

One Equity is a subsidiary of JPMorgan Chase and the owner of SAS Schoeller.

Chase is one member of the eight-bank consortium that sold $148 million of prepetition secured iGPS debt to the joint venture for $28 million.

The ruling

"My philosophy is that I don't gamble with my own money, so I won't gamble with the money of others," Gross said in issuing his ruling. "In the end, evidence trumps suspicion."

The gamble would have been rejecting the sale when no funding is in place to pursue a Chapter 11 plan, he said.

Gross said he found the debtor's witnesses credible. And he said the evidence supported the debtor's statement that it used sound business judgment in striking the deal.

The true test of the value of the assets was the "free market" and the marketing efforts of investment banker Houlihan Lokey.

The fact that an eight-bank consortium sold its secured claim so cheaply and two private equity firms - Kelso & Co. and Pegasus Capital Advisors, LP - walked away from a combined $500 million investment also weighed in favor of the reduced valuation of the assets, the judge said.

Under the asset purchase agreement, the sale is scheduled to close on July 31.

Depot dispute

Left open at the July 23 hearing is a dispute among the debtors, the buyer, Belacon and an informal group of depot owners who are under contract to Belacon.

Many of the debtor's pallets are housed at depots under contract with Belacon, and the buyer has stated that it has no intention of assuming the Belacon contract.

Attorneys for the debtor and the buyer called the Belacon contract "onerous" and said the buyer does not need "this expensive middle man."

The debtors and the buyer want to negotiate directly with the depot owners concerning fees for storing and transporting the pallets, but the contract between the depots and Belacon prohibits direct contact.

Belacon attorney Dennis J. Connolly said the proposed sale order contains language that obligates Belacon and the depot owners as third parties, and the bankruptcy court has no jurisdiction in their business affairs.

Judge Gross said that, if there is no practical solution the parties can agree upon, he will order mediation. The mediation would include the depot owners, he said.

The parties agreed to defer entry of a sale order to allow time to negotiate a resolution to the impasse.

The judge scheduled a hearing for 2 p.m. ET on July 26.

If an agreement is reached, the final form of order will be submitted under certification of counsel, and the hearing will be canceled.

iGPS, an Orlando-based operator and owner of a global pallet rental pool with embedded RFID tags, filed for bankruptcy on June 4. The Chapter 11 case number is 13-11459.

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