Jon Lender: State-subsidized firm bounces 97 checks — as it’s supposed to be recovering from bankruptcy

Jun. 27--A Chapter 11 bankruptcy petition in January 2018 was supposed to be a momentary "bump in the road" on a quick return trip to profitability for Windsor Marketing Group (WMG) of Suffield, the recipient of $3.5 million in state taxpayer-funded economic development loans since 2009.

Company owner Kevin Armata predicted a short-term cash crunch would soon end, and WMG would reorganize and refinance its way out of Chapter 11 protection from creditors by last fall.

But fall became winter, then spring, and now a grim summer has arrived with the revelation in U.S. Bankruptcy Court last Friday that Windsor Marketing had bounced 97 checks in the past 12 weeks. One of them -- for $49,000 to Anthem for employees' health insurance -- bounced twice, first on April 3 and again on April 8.

This was viewed as a bad, bad sign for the survival of the company and the livelihoods of 100-plus employees. It also cast doubt on the wisdom and effectiveness of the Department of Economic and Community Development lending state funds, on generous terms, to expand WMG's headquarters.

"I have to say in the 40 years that I practiced law, I don't think I've ever seen a Chapter 11 [case] where there's 97 bounced checks in the post-petition period," Judge James J. Tancredi said Friday at the latest hearing in an 18-month string of proceedings in the Hartford federal courthouse.

"I want to understand something," Tancredi said to WMG's lawyer, Matthew Beatman. "How does anybody, in good conscience, write 97 checks that bounce, given the civil and the criminal consequences of doing so?"

"Your Honor, I think only my client, who's here in the courtroom, could answer that question," Beatman replied. He said he only learned in recent days "of the Anthem check bouncing, [and] I was not aware of the sheer volume" of the bounced checks. "I did advise my client that that was not conduct that was appropriate," he said. "My understanding is it was done with the expectation of receipts coming in."

'I will not tolerate one more'

Beatman's client, Armata, was never called on to speak. Tancredi had already heard enough about the deepening woes of WMG, which bills itself as an "innovative in-store marketing company" that prints signs and creates product displays for stores including Stop & Shop.

"I will not tolerate one more bounced check," Tancredi said.

If he sees another one, Tancredi said he'll "immediately" issue an order to:

-- dismiss the Chapter 11 reorganization petition;

-- or convert it to a Chapter 7 liquidation in which WMG's assets would be gathered and sold to pay debts;

-- or grant a formal request from WMG's main creditor, People's United Bank, to be released from some Chapter 11 restrictions. That would let People's take steps to protect its collateral on WMG's multimillion-dollar debt, in the form of machinery, equipment and inventory at the company's Suffield headquarters, along with business records and accounts receivable. (People's has said WMG originally owed it $6 million. Estimates are that about $3.5 million is the most that the bank could ultimately realize on WMG's assets.)

The judge said he already had "good and sufficient cause" to take any of those three actions, based on what he'd heard in the courtroom. But he granted a one-week time extension for WMG to prepare for a key hearing, this coming Friday, June 28.

The hearing will focus on matters including the company's latest plan for getting out of bankruptcy, and, more ominously, People's Bank's June 19 "emergency motion for limited and provisional relief" from the Chapter 11 "stay" that prevents it from setting the stage for legal efforts to collect on WMG's debt.

In the June 19 motion, People's said WMG "is insolvent" and anticipated that the company would "be unable to continue its business operations" after last week's hearing -- at which the bank intended to oppose WMG's further use of cash it takes in from sales. (That cash revenue is legally considered to be collateral on what WMG owes People's.)

But Tancredi put off those critical issues for a week by granting the continuance to this coming Friday.

It's impossible to say whether this will be a make-or-break hearing. There have already been a number of hearings up to now that looked in advance like they could determine WMG's fate, but each time, Tancredi has shown patience and continued to grant extensions to give the company every opportunity to recover.

In this patient approach, he's had the support of a committee of scores of "unsecured creditors" who see the company's survival as the only way to see even partial repayment in installments over a period of years. "I think we'd rather have a shot at payment later than a guarantee that we're getting nothing now," one of them said during last week's hearing.

WMG so far has not assembled a viable plan -- a plan worthy of a favorable vote by creditors and then approval by Tancredi, that is -- to refinance its debts and move forward with an ability to meet its payroll, pay its materials suppliers and fill orders for its products while paying creditors some of what it owes them. WMG says it has a lending institution lined up to refinance its debts and replace People's -- which would walk away with little more than half its money. But the refinancing deal hasn't come together yet.

Tancredi has expressed hope of preserving employees' jobs, if possible, and of providing at least minimal repayment to the smaller creditors.

But there's a breaking point, and Tancredi indicated it may arrive soon.

"The signals are staring right at us that there are significant cracks in the dam and it's starting to leak," he told Beatman. He said WMG owes $1 million in legal and professional fees for the protracted bankruptcy, and, "I believe there's more than a million dollars of unpaid expenses and some accruals that go beyond 90 days."

The judge added: "If you don't have the financial resources to operate the business and to satisfy administrative claims, and you've lost the confidence of your bank ... aren't we at the end of the game?"

"I can't disagree that there are issues and there are cracks in the dam," Beatman said. But he said his client hoped for "a very limited window" of time to get a viable plan together to exit Chapter 11.

"I think I opened the window about four or five times already for continued ... hearings, where we had the promise and the prospect of repairing the dam," Tancredi said. "And again, I'm looking at a report that suggests that we're getting deeper and deeper in a hole.

"And now I hear about bounced checks."

'This is a ship headed for the rocks'

Those bounced checks were disclosed at the hearing by the attorney for People's Bank, Scott Rosen, as he delivered a bleak assessment of WMG's chances of survival. As WMG's bank, People's has access to the company's check-writing activity.

Rosen said: "Starting March 28, the debtor has bounced 97 checks. ... In many instances checks were deposited twice, a week apart, and bounced both times. So, for example, Anthem was paid a check of $49,000 on April 3 that bounced; on April 8 that check bounced again. ADP [the payroll services company] was paid a check that bounced on April 11. That check bounced again on April 16. ... Anthem was again paid checks that bounced on April 17, April 22, May 7, May 17, May 22, June 7 and June 12.

"I don't see how in good faith I can stand here in front of your honor knowing what we know about the debtor's cash situation, and say we agree to a budget [proposed by WMG to get out of bankruptcy] that, by all accounts, the debtor can't make." Rosen said that as of June 17, sales for the month totaled $311,000 even though "they had budgeted to get over $1 million. .... So they're way behind in sales for the month of June, which suggests that their cash will be even tighter in the month of July.

"We've run the numbers on the refinance based on the commitment letter [from the prospective new lender] that the debtor has." Based on that, Rosen said WMG "would be about about $630,000 short of coming up with enough money to take out People's. ... That total amount [from the refinancing] is supposed to be $2,653,000. They would be $638,000 short.

"So I guess I would say our view is this is a ship headed for the rocks. There's no avoiding it. And right now you have a courtroom of professionals, and nobody wants to have their hand on the wheel when it hits. And that's our view of where we are."

Next in line as a secured creditor to collect its money is the state DECD, which holds a lien as security for $1.1 million in connection with a 2009 loan -- the first of two, with the second in 2015. DECD sometimes talks of legal remedies by which it can penalize companies that don't live up to terms for repaying loans or maintaining job levels -- but, in this case, DECD has made big financial concessions aimed at keeping the company alive and preserving the jobs.

"We're obviously interested in this debtor remaining in business in Connecticut, and hence the concessions that we agreed to make," Irve Goldman, the bankruptcy attorney whom the DECD has retained to represent it, said in April. Last Friday, he said, "Your honor, I'll just say on behalf of DECD, we obviously have interests that are other than financially related here, although we certainly have an interest in being repaid. ... I can't communicate an official position for the [DECD] because I think they need to know the facts that have recently developed. I wasn't aware of the bounced check situation. I wasn't aware of the analysis that's been communicated [by Rosen, about the refinancing projection] ... coming up $600,000 short."

Tancredi also told Beatman that he needs to plan for the worst if WMG can't come up with a viable plan to move forward. "I ... need you to confer with Mr. Rosen and other constituents, if necessary, about what happens if you can't get to the goal line. That obviously has significant consequences for a lot of people, the people that are employed there, the people that own the company, the people that do business with the company. ... You can't keep expecting, and your client can't keep expecting, that we're going to continue to roll this matter [with continuances] in the face of either newly identified problems, or new barriers to bringing this case to some reasonable conclusion.

"There will be a conclusion, in the event that the parameters of your plan don't materialize. And I'm not going to let it be chaotic."

Jon Lender is a reporter on The Courant's investigative desk, with a focus on government and politics. Contact him at jlender@courant.com, 860-241-6524, or c/o The Hartford Courant, 285 Broad St., Hartford, CT 06115 and find him on Twitter@jonlender.

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