Will Compass Group Get Paid?

by Dennis M. O'Dea on Aug. 05, 2015

Real Estate Foreclosure Bankruptcy & Debt  Bankruptcy 

Summary: When your debtor sends a letter that the bank foreclosed on its property and sold the assets to an unrelated party for less than the secured debt, what is a poor creditor to do?

On May 29, 2015, Compass Group (“Compass”) filed its lawsuit in Mecklenburg County, NC against Dixon Avenue Holdings Company f/k/a US Roasterie, Inc. (“Roasterie”) to collect payments due under a supplier agreement.  Compass Group USA, Inc. v. Dixon Avenue Holdings Company et al. 15 CVS 10266 Attached to the Complaint, however, is a short letter from the company sent three months earlier reporting that the bank had foreclosed on its security interests and sold “substantially all of the assets” to an unrelated third party at a price left nothing for unsecured creditors like Compass.

While some creditors would be deterred by such a notice, Compass was not. Attached to the Complaint is another document dated a few days after the bank sale from the Vending Market Watch website sale announcing that Ronnoco Coffee, LLC, a portfolio company of Huron Capital Partners, had acquired Roasterie’s assets. In addition the document purports to quote Roasterie’s CEO saying, “At 65, it was part of my exit strategy”. The document goes on to say that he would stay with the company for at least two years and that nothing would change for current customers.

No Answer or other response has appeared on the record yet, but the Complaint has taken a breach of contract claim and added claims against the acquiring company and the former CEO and asserted counts for fraudulent transfer, alter ego, successor liability, de facto merger, tortious interference with contract, and violation of North Carolina Unfair and Deceptive Practices Act against various defendants. Compass seeks treble damages, punitive damages and contract remedies.

Barring a settlement, a sealing order by the court, removal, dismissal on jurisdictional grounds or a forum non conviens ruling, if it stays here, the case is interesting to business litigators and lawyers who buy and sell distressed companies because it puts in issue just how secure an asset purchase in a bank foreclosure sale can be from the claims of the target company’s creditors.

The policies that support the enforcement of secured financing through public or private asset sales should validate a properly conducted sale and a buyer should be confident that when he or she buys assets, only those liabilities that are voluntarily assumed (or imposed by foreseeable statutory risks such as taxes, environmental claims, and other regulatory  claims), The buyers should be confident that unsecured creditors not holding special lien rights or special claims that may attach to the assets will not follow the assets after they have been sold by the bank.

Of course, there are also the policies that favor the avoidance of fraudulent transfers, protection of creditors though imposition of successor liability, and de facto merger principles so that a transaction that my appear to be a bank sale under a security agreement is not part of a larger plan to give the owners or officers of the company value that belongs to the creditors.
The Compass complaint presents the tension between validating the transfer under a properly conducted foreclosure sale and the need to protect creditors from fraudulent transfers or to allow successor liability and is a case worth following.

Legal Articles Additional Disclaimer

Lawyer.com is not a law firm and does not offer legal advice. Content posted on Lawyer.com is the sole responsibility of the person from whom such content originated and is not reviewed or commented on by Lawyer.com. The application of law to any set of facts is a highly specialized skill, practiced by lawyers and often dependent on jurisdiction. Content on the site of a legal nature may or may not be accurate for a particular state or jurisdiction and may largely depend on specific circumstances surrounding individual cases, which may or may not be consistent with your circumstances or may no longer be up-to-date to the extent that laws have changed since posting. Legal articles therefore are for review as general research and for use in helping to gauge a lawyer's expertise on a matter. If you are seeking specific legal advice, Lawyer.com recommends that you contact a lawyer to review your specific issues. See Lawyer.com's full Terms of Use for more information.