CHARLESTON, W.Va. -- The company at the heart of the Elk River chemical spill will get some of the temporary financial relief it requested and be allowed to carry on business.
Freedom Industries appeared before U.S. Bankruptcy Judge Ronald Pearson Tuesday in a 6-hour-long hearing on several first-day motions in the case, which Pearson described as one of the "the most unusual Chapter 11 cases" he has seen.
Freedom sought approval for what's known as debtor-in-possession financing while it reorganizes under Chapter 11 bankruptcy code. This type of financing allows a lender to inject new money into a company and get priority among other creditors when the company emerges from bankruptcy.
Freedom will get less money than it requested in its initial financing proposal, and its lender, Mountaineer Funding, will not receive top priority among creditors.
Freedom initially asked the judge to allow Mountaineer Funding to lend it $5 million to continue operating. Mountaineer would then be first in line -- ahead of anyone else with a claim against the company -- to recoup its funding.
Mountaineer Funding is owned by J. Clifford Forrest, who also owns Chemstream Holdings, Freedom's parent company. Mountaineer Funding was incorporated Friday, the same day Freedom filed for Chapter 11 bankruptcy protection.
Attorneys in the case called it "insider lending."
West Virginia American Water Co. previously filed an objection to Freedom's proposal, saying the financial agreement was not negotiated at "arms-length" because the same person owns the lender and the company's parent.
The water company also argued the terms of Freedom's financing proposal would give the Mountaineer a lien on Freedom's assets, a "super priority" claim and the ability to foreclose selectively on assets, taking away the most valuable assets from Freedom's estate, "leaving behind only the toxic facilities and huge damage claims caused by the Freedom spill."
However, attorneys said this had been resolved in the resolution reached in Tuesday's hearing.
Under that resolution, Freedom will instead get a $3 million cash infusion from Mountaineer with the potential for an extra $1 million later. Freedom also agreed there would be no liens on the assets to support the loan.
Attorneys said this now creates an "arms-length" negotiation.
The next step is a meeting next month where creditors can ask questions of Freedom.
Gary Southern, Freedom's president, testified the company is in a "death spiral." He said employees have been talking to competitors and suppliers don't want to supply to him.
When asked by reporters for a comment following the hearing, Southern said he had a meeting to attend.
Freedom's attorney, Mark Freedlander, agreed this is an unusual case.
"There's no other way around it," he said. "A single incident created the issues the debtor now faces."
Freedlander said bankruptcy proceedings are no stranger to insider financing.
He said the company wouldn't make it without financing. It also wouldn't be able to comply with environmental remediation, he said.
Terry Cline, Freedom's chief financial officer since 2005, also testified Tuesday.
Cline said part of the acquisition would retire Freedom Industries' debt in a consolidated form. He said Freedom's predecessor companies typically received 20 to 30 percent of their revenue during the period of November to March.
Cline said the company has spent $800,000 so far on remediation. He didn't know who Chemstream's shareholders were and had only heard of Forrest in relation to these proceedings.
When attorneys asked if Cline knew Chemstream's who shareholders were, he said he didn't know. Cline said he had only heard Forrest's name mentioned related to bankruptcy proceedings.
Southern testified he did not know if Forrest was the owner of Mountaineer Funding.
Freedlander asked Southern to describe the effect the Jan. 9 chemical leak had on Freedom's customers and business.
Southern said it has been "completely chaotic." He said there has been a problem with perception among customers and vendors of Freedom's viability to survive as a company.
For that reason, he said it was imperative to come up with a plan of action.
Southern said some competitors have said Freedom is going out of business and telling employees to "jump ship while they still can."
Southern said the chemical leak has caused an "otherwise profitable and successful company" to endure consequences and later turn into a death spiral.
"If we can't buy, we can't sell, if we can't sell, we go out of business." he said.
Southern said Chemstream paid $20 million for Freedom Industries and $15 million was paid at closing. The remaining obligation was the $5 million.
One of the attorneys representing plaintiffs in the chemical spill litigation, Jesse Forbes, asked about the money set aside for the containment area.
Southern responded it was a provision made in the sale of assets of Freedom Industries to Chemstream to make certain upgrades in the facilitation of business. He said it was about $1 million in escrow but he didn't know where the escrow was.