Secured Creditor Horizon Technology Finance Corp. Objects to Cereplast’s DIP Financing Motion

On Monday, Horizon Technology Finance Corp. objected to the motion filed by debtor Cereplast, Inc. seeking bankruptcy court approval of a debtor-in-possession financing facility and the use of Horizon’s cash collateral.  As has been previously chronicled on this site, Cereplast voluntarily filed for bankruptcy protection in early February.  The bankruptcy filing was quickly followed by Horizon requesting that the case be converted to a chapter 7 case or provide Horizon with alternative relief.  Those Horizon motions remain pending.

Late last week, Cereplast responded by objecting to Horizon’s conversion motion and filing two motions of its own – one seeking the ability to pay claims of employees and the second seeking approval of a debtor-in-possession financing facility and the use of Horizon’s cash collateral.  Horizon on Monday objected to both of Cereplast’s motions (you can find information regarding Horizon’s employee wages objection here).

Also on Monday, Cereplast filed its Schedules of Assets & Liabilities.  Therein, Cereplast asserted that Horizon’s secured claims were oversecured (details of the schedules can be found here).

A copy of Horizon’s objection to the DIP financing motion is embedded below.  In the objection, Horizon asserts, among other things, the following:

  • “The Debtor’s budget shows it will operate at a substantial loss throughout the proposed 13-week budget period.”
  • “Horizon’s cash collateral will be depleted and there is no provision for adequate protection payments or replacement collateral.”
  • “The proposed borrowing and use of cash collateral serves no bankruptcy purpose.”
  • “The budget reflects borrowings of $750,000 against sales of only $335,187 over a 13-week period. Ending cash is approximately $87,000.  In other words, the Debtor burns through $1,000,000 during the 13-week budget period.”
  • “The bulk of the expenses paid during the period are used to cover senior management salaries and benefits, professional fees, and compliance costs. Amounts utilized to pay salaries and wages for the six workers who are not senior management and to pay production and material costs are minimal.”
  • “Projected sales fail to cover even payroll and direct operating costs. There is no discernible means for the Debtor to repay the money it borrows.”
  • “The Debtor’s motion, if granted, would give ProCap Funding (“ProCap”) substantial control over any asset sale or plan.”
  • “Although the fact was not disclosed in the Debtor’s motion, ProCap is managed or controlled by Alexandre Scheer –the son of Fredrick Scheer, President and CEO of the Debtor.”
  • “Under the DIP Motion ProCap is granted these rights and powers: . . . A $250,000 “repayment fee” is earned upon closing of the DIP Loan which must be paid unless the DIP Loan is paid in a sale of the Debtor to the DIP Lender (i.e., an acquisition by credit bid). Put another way, a $250,000 fee  must be paid if for any reason ProCap is not a successful bidder for the Debtor’s assets.”
  • “Under the DIP Motion ProCap is granted these rights and powers: . . . A security interest in avoidance actions is granted (which would include claims against insiders). In other words, ProCap, a company controlled by Frederick Scheer’s son, is granted de facto control over estate causes of action, if any, against Frederick Scheer.”

Links to our other blog posts regarding the Cereplast bankruptcy: