Le-Nature's asks court to convert case to Chapter 11, removes civil case pending in Delaware court

By Caroline Salls

Pittsburgh, Nov. 3 - Le-Nature's, Inc. asked the U.S. Bankruptcy Court for the Western District of Pennsylvania to convert its involuntary Chapter 7 bankruptcy case to Chapter 11 and informed the court that it has removed the civil action pending in the Court of Chancery for the State of Delaware, according to Friday court filings.

According to its response to the involuntary Chapter 7 filing, the company said it admits to the involuntary petitioners' contention that Le-Nature's is not paying its debts as they come due and will consent to entry of an order for relief if the case is converted to Chapter 11.

Le-Nature's said there is a substantial likelihood of a successful reorganization "under a proper and prudent administration," and the company believes neither its secured creditors nor its equity holders want to see the estate liquidated at this time.

The company said its value as an ongoing entity is substantially higher than the value that could be derived from liquidation under Chapter 7.

In addition, Le-Nature's filed notice of its removal of the civil case pending in the Court of Chancery in the State of Delaware.

According to the notice, the civil case involves a dispute between the company's original common shareholder and several creditors owning preferred shares, who are locked in a dispute for control of Le-Nature's operations.

Civil case details

As previously reported, in June, minority shareholders George K. Baum Capital Partners, LP; George K. Baum Employee Equity Fund, LP; and SW Pelham Fund, LP filed the civil lawsuit in the Delaware court against Le-Nature's and four of its inside directors, Gregory J. Podlucky, Andrew Murin, Robert B. Lynn and Jonathan E. Podlucky. The shareholders alleged various causes of action related to corporate governance disputes.

On June 6, the Delaware court entered a preliminary injunction, which restrained the company and the directors from incurring non-ordinary course capital expenses without the express prior written consent of the minority shareholders and required advanced notice to the minority shareholders of any proposed transactions that would obligate the company for more than $1 million.

On Oct. 4, the minority shareholders received evidence from AIG Commercial Equipment Finance, Inc. that Le-Nature's had presented false documents for the purpose of diverting about $23 million of funds provided by AIG to finance the purchase of new equipment at a German vendor, custodian Kroll Zolfo Cooper said in a Thursday filing.

At the same time, the minority shareholders learned that the directors had violated the preliminary injunction order, and, on Oct. 20, the Delaware court entered a temporary restraining order that kept the directors from performing some actions without the unanimous consent of the board of directors.

Under the temporary restraining order, the insider directors were also required to deliver some company property for safekeeping to its outside auditor within 48 hours, and the temporary restraining order specifically prohibited the insider directors from accessing, tampering with or destroying any company property, books or records.

Within days of obtaining the temporary restraining order, Kroll Zolfo Cooper said the minority shareholders found out that the insider directors had been violating the restraining order and learned of additional violations to the preliminary injunction.

As a result, the minority shareholders requested and received approval for appointment of Kroll Zolfo Cooper as custodian.

Le-Nature's, a Latrobe, Pa., manufacturer of flavored bottled water and other beverages, had an involuntary Chapter 7 bankruptcy case filed against it on Nov. 1. Its Chapter 7 case number is 06-25454.

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