Bailey Tool & Mfg. Co. v. Republic Business Credit, LLC reads like a Shakespearean tragedy. The saga is full of allegations of greed, deceit, conspiracy, vindictiveness, intimidation, and financial ruin. On the surface, the case sounds like a successful workout situation. Republic Business Credit was providing bridge financing to Bailey Tool & Manufacturing in 2015 through an inventory line of credit and factoring agreement. Republic quickly became over-advanced. Bailey Tool defaulted twice so Republic began a workout with Bailey Tool to pay down the outstanding obligations. The workout was successful, and Republic collected out.  So how did Republic Business Credit end up with judgments against it for more than $18 million?

The Story[i]

The case starts simply. Bailey Tool & Manufacturing Co. was a Dallas-area tool and equipment company. It was still recovering from the recession of 2008, when its existing lender, Comerica Bank, approached it in 2014 and asked it to move its business to a new lender. Regions Bank agreed to take over the financing but recommended that Bailey Tool use Republic Business Credit for a few months as bridge financing between the two banks while some outstanding issues were cleaned up.

Pre-signing Negotiations

Bailey Tool through its primary owner and president—John Buttles—started discussing financing with Republic. Bailey Tool, however, had three problems. First, the company had failed to pay its property taxes for the previous year, so it was set up on a monthly payment plan with the taxing authorities. Second, Bailey Tool’s trade payables were stretched out and overdue. Third, the company had large contracts with the US Defense Department that were paid based on milestone billings which concerned Republic.

February 2015

Despite this, Republic entered into both a revolving inventory loan and line of credit as well as a factoring agreement with Bailey Tool. Republic represented to Bailey Tool that it would advance at 90% which the court noted was a key negotiation issue. Republic presented a borrowing base certificate to Bailey Tool that appeared to show that Bailey Tool would have plenty of borrowing availability even after taking out the Comerica loan and that only $17,000 of Bailey Tool’s existing accounts would be ineligible for purchase. According to the court, Bailey Tool relied on these representations in signing the agreements.

March 2015

In March, Bailey Tool made a request for a draw and learned for the first time that there was no funding available because Republic considered itself over-advanced and had decided to make the Defense Department accounts ineligible for purchase.

April 2015

In April, Republic reduced the advance rate to 70% on the receivables that Bailey Tool presented instead of the 90% that Bailey Tool expected. The lower-than-anticipated advance rate coupled with Republic classifying the Department of Defense receivables as ineligible for purchase caused Bailey Tool to be in a serious cash position. The Comerica revolving line of credit was already terminated so Bailey Tool decided that it had no choice but to keep moving forward with Republic.

May 2015

By May 2015, Bailey Tool could only make a partial payment of its delinquent property taxes and by June it did not have the cash to pay anything on the taxes. According to the court, Republic not only knew about these delinquent taxes at the time the parties signed the agreements, but also noted that Republic had agreed internally to pay the delinquent taxes from collections on accounts receivable.

June 2015

On June 29, Comerica, which remained one of Bailey Tool’s lenders because of an ongoing term loan, sent a notice of default when Bailey Tool could not make its property tax payment.

July 2015

After July 2, Republic never advanced funds directly to the company again. On July 7, Republic transferred $76,473 of collections from the lockbox to pay down the outstanding inventory loan instead of making the funds available to Bailey Tool even though at that time, only interest payments were due on the loan.

Republic claimed it paid down the inventory line because it had an inventory valuation report from Hilco that resulted in Republic feeling “insecurity.” The court, however, found that Republic neither mentioned the report nor the transfer of funds from the lockbox to Bailey Tool despite extensive correspondence with Bailey Tool personnel during this time. Republic also never entered the report into evidence at the trial.

On a July 9 telephone call, Republic also informed Bailey Tool that it would not be advancing any funds for the upcoming payroll since Republic was over-advanced and Bailey had no funding available. An internal email that same day by Republic, however, contradicted this. The email reads, “we are in the best position we have been in right now with around $100k in availability on A/R.” That same day, because of the default declared by Comerica, Republic also declared a default by Bailey Tool.

On July 10, Bailey Tool was unable to fund its payroll, the employees walked out, and the plant was shut down. This triggered another default notice from Republic. Republic then swept more money from the lockbox and paid the inventory line down by another $173,000. Republic even went so far as to charge Bailey Tool a $20,339 prepayment penalty when Republic paid down the line, which seemed to surprise the court. The court found that all of this occurred even though the company had funding available under the agreements. The court found that If Republic had not paid the inventory line down, the company would have had approximately $130,000 available. The court cites Republic’s internal communications showing that Bailey Tool’s true funding availability later in the month had grown to $159,000.

Republic claims that Bailey Tool had access to an online portal showing all of the transactions and charges, so it was not hiding anything. The court reviewed information from the portal and found the information “incomprehensible.”

During this same month, Republic claimed that Buttles voluntarily offered a lien against his homestead as collateral for Bailey Tool. The court, however, found that Republic told Buttles that it required a lien against his homestead to cover the over-advance before it would provide any additional funding to Bailey Tool. When Republic was having a hard time convincing Buttles to provide a lien, Republic sent an email essentially calling Buttles a “dummy” which the court repeatedly referenced and found to be “shockingly rude and unprofessional.”

Buttles eventually delivered a mortgage lien to Republic. Buttles testified that he felt he had no choice but to quickly sell his house and remit a portion of the proceeds to Republic to obtain more funding for the company. As a result, Buttles placed his home for sale at a lower-than-market value price so it would sell quickly.

The plant was reopened after the temporary shutdown. Republic, however, took over payments for the company. Republic paid vendors, payroll, and other third parties directly instead of through Bailey Tool. According to the court, Republic took complete control of Bailey Tool’s collections and disbursements and ceased acting as a factor. The agreements, however, were never amended to give Republic the power to do this.

When Republic was deciding which disbursements to make, Republic refused to pay any payable that did not generate a receivable. According to Republic’s emails, Republic would only pay employees who, in Republic’s opinion, were “actively employed AND critical employees” and not those who were “non-engaged.” The court found that this payment policy disrupted normal operations and caused Bailey Tool to lose customers. During this time, Republic was internally emailing that Bailey Tool had funding available while at the same time it was representing to Buttles that Bailey Tool was in default and had no availability.

Republic also started trying to change Bailey Tool’s management. Republic started having extensive private conversations with a consultant working with the company about him replacing Buttles. Republic reportedly told its preferred preplacement for Buttles that it was tired of Buttles and so it “shut [Bailey] down.”

August 2015

In August, Republic went so far as to draft proposed changes to the corporate governance documents and to draft an employment agreement for the new manager to consider. Republic also hired armed guards to patrol the premises at Bailey Tool’s expense. Based on emails and testimony, the court believed the presence of armed guards was an unnecessary intimidation tactic. The court concluded that all of this caused “catastrophic harm” to Bailey Tool. The court also believed that this was really an “unannounced liquidation” by Republic.

On August 26, Republic told Buttles that it would be willing to open additional availability on the financing if he would send Republic the realtor listing agreement on the house and would assure Republic that the house was for sale.

September 2015

After September 11, there were no more payments made by Republic on behalf of Bailey Tool. Republic, however, continued to collect almost $1 million of receivables from September 12, 2015 through November 5, 2015 from Bailey Tool’s outstanding accounts receivable.

Buttles’s homestead was set to be sold on September 16, but the sale failed to close because of Republic’s lien which was invalid under Texas law. The title company convinced Republic to release the lien. Bailey Tool, Buttles, and Republic, however, continued to have discussions about resolving their outstanding issues and permitting Bailey Tool to operate without interference or further demand from Republic. On September 30, Republic sent an email saying settlement terms were acceptable and agreed to resolve certain issues with Bailey Tool for $225,000.

October 2015

On October 2, 2015, Buttles’s homestead sold for an amount that the court concluded was under-market. At closing and in what Buttles believed was a good faith gesture, he directed the title company to wire Republic $225,000 of the proceeds even though Buttles admitted that he knew a final agreement had not been signed. After the fact, Bailey Tool’s attorney learned of the transfer and requested that Republic hold the $225,000 in trust while the parties finalized the agreement. Instead, Republic responded that it never agreed to hold money in trust and applied the money to the inventory over-advance. Bailey Tool’s attorney testified that she believed Republic’s actions ratified the agreement.

It is a little unclear, but it appears that the court found that the parties had entered into an enforceable forbearance agreement at this time so funding should have begun again once Republic received the proceeds from the sale. Republic, however, never advanced any more funds to Bailey Tool. In fact, on the day of closing, Republic charged a $75,000 termination fee against money collected from Bailey Tool’s accounts but never alerted Bailey Tool that it was doing this. Republic also continued to collect all of Bailey Tool’s receivables through the lockbox.

November 2015

By November 2015, Bailey Tool stopped sending receivables to Republic and apparently determined that it had paid more than enough to pay off its facility. This included Republic collecting on the outstanding receivables due from the Department of Defense which Republic had previously decided were ineligible for purchase.

An internal email by Republic confirmed that Bailey Tool had paid everything to Republic that it owed, and that Republic had collected all fees and could not find any more significant fees to charge. Republic sent an email to Bailey Tool confirming this and withheld $150,000. Republic alerted Bailey Tool that it would turn over the $150,000 to Bailey Tool after Bailey Tool executed a full release of any claims against Republic which it argued was required by the agreement before it could terminate. Bailey Tool, however, declined to release. As a result, Republic took the position that the agreement was not terminated and continued to collect outstanding receivables.

The Bankruptcy Filing

In February 2016, Bailey Tool filed for bankruptcy protection. Even after the filing, Republic continued to take the position that it owned all of Bailey Tool’s accounts receivable. As a result, Republic contacted and even filed suit against some Bailey Tool’s account debtors for turnover of funds, objected to Bailey Tool using cash collateral, and objected to any debtor-in-possession financing all based on its legal position that the agreement had never been terminated so it still owned the accounts. This made the Chapter 11 reorganization unworkable which resulted in the case converting to a Chapter 7 liquidation bankruptcy.

After converting to a Chapter 7 bankruptcy, the Chapter 7 trustee and Buttles sued Republic in bankruptcy court. The trustee alleged that Republic’s improper conduct ultimately destroyed Bailey Tool. Buttles argued that Republic placed an improper lien on his house and coerced him into selling his homestead to pay some of the proceeds to the factoring company. Republic denied liability and claimed it was still owed money. After several trial delays due to judge reassignments and COVID-19 issues, the lawsuit was tried in June 2021 over seven and one-half days. The court received over one thousand exhibits and heard from over 11 witnesses.

What Happened Next?

What did Republic do wrong, and what can we learn from this? Some issues are obvious, but others are more subtle. In an upcoming post, I will discuss the results and some of the key lessons to be learned from this case.

Scot Pierce, Esq. is a trial lawyer and transactional attorney. Click on his picture for his profile page.

Disclaimer: This post contains general opinions and analysis, is solely for educational purposes, and should not be treated as advice for any specific case.

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[i] I am repeating the facts as determined by the court and not making any judgments as to their truth. I expect that if asked, Republic Business Credit would strongly disagree with much of what the court found to be true. Also, I know many of the attorneys and professionals involved with this case and have always found them to be competent and professional. I have also appeared before the judge who wrote this opinion and worked at the same law firm as this judge before she became a federal bankruptcy judge. I have always found her to be competent and hardworking.