There are many sharks in the water – so many, in fact, that even public exposure in courts of law doesn’t guarantee that the most predatory of attacks will necessarily garner public attention. Well, here’s one that should, assuming two related court actions by the bankrupt oil drilling equipment holding company Gulfco Holding Corp. against Prospect Capital Corp has real merit.
It’s a dilly, a true watermark of an intrinsically tainted business culture. In Gulfco Holding Corp. v. Prospect Capital Corp. (U.S. Bankruptcy Court for the District of Delaware) – and in a separate lawsuit filed May, 2014 in Jefferson County District Court in Texas – Gulfco claims that it is in Chapter 11because Prospect, a secured creditor, has literally stolen its operating affiliate, Gulf Coast Machine & Supply Co. It was a company that Prospect coveted and unsuccessfully tried to buy (bidding too low), a fact which Gulfco learned only too late.
According to the plaintiff, Prospect’s strategy was then to use Gulfco as essentially a surrogate buyer (gutting it in the process) by loaning Gulfco $42 million in 2012 in order to acquire Gulf Coast for $72 million. Fortuitously for Prospect, the drilling industry went into a year-long downturn, leaving the debtors exposed for the amount raised to finance the acquisition.
So, in May 2013, Prospect asserted a default clause in the loan agreement and started charging exorbitant interest fees, including an extra $69,000 per month. There was another lender involved, PNC Bank, which also issued a default notice. But, significantly, PNC did not charge extra interest. Why should it? PNC had no ulterior motive. It was a good-faith lender willing to work with the debtor to tough out an industry downturn.
A month later Gulfco meets with Prospect and, for the first time, learns of the lender’s earlier effort to acquire Gulf Coast. It’s a fateful meeting indeed. Now, according to the plaintiff, Gulfco realizes that Prospect doesn’t want to work out the debt and is looking instead to wrest control of Gulf Coast. While PNC is willing to reset the terms of the loan, Prospect pressures Gulfco to invest $6 million in Gulf Coast even though Gulf Coast had sufficient liquidity at the time. PNC’s hand is now forced as it must impose a $1 million credit block simply to ensure that its own money won’t, perforce, go directly to Prospect.
Meanwhile, Gulf Coast is fully recovered and breaking sales records, so Gulfco tries again to renegotiate with Prospect. It’s an exercise in futility. Prospect now makes its allegedly long-planned move to enforce debatable but practicable rights to Gulf Coast equity. They vote in a new board, leaving Gulfco with only a 0.1 percent ownership interest. Prospect then takes another bite of the pie, according to the plaintiffs, by providing confidential Gulf Coast information to a competing company. You guessed it: Prospect allegedly owns the competing company as well!
By November 2013, Gulfco is done in and files for Chapter 11, reducing workforce and other overhead but also getting an automatic stay of the takeover. In its lawsuit, Gulfco wants the court to undo the acquisition by declaring it a fraudulent transfer. While I don’t also see the phrase “predatory lending” in the filing, I reckon there’s a certain merchant from Venice who’s been watching these proceedings with admiration.
Gulfco wants Gulf Coast back and may well get it. That’s why we have courts and legal remedies. But what’s troubling is that I’m not sure there are any best business practices or fine points of due diligence that could have spared Gulfco this ordeal in the first place.
I’m also wondering why this scheme, if real as alleged, might not entail criminal fraud charges. If this kind of business practice isn’t criminal, what is?