After getting the majority of its creditors to agree on a plan to reorganize the company, Mercedes Homes has asked U.S. Bankruptcy Court judge Paul G. Hyman Jr. of the Southern District of Florida to conditionally approve the plan during a July 21 meeting and send it out for creditors to vote.
 
If approved by the judge and the creditors, the judge could make a final decision on the plan as early as Aug. 31.
 
Last week, Mercedes announced that it hopes to pull the company out of Chapter 11 as a going concern--a rare occurrence. Furthermore, the company said it wants to do it by Sept. 30, roughly eight months after it filed for bankruptcy in January.  

The downside to the plan: It means turning over all the stock in the employee-owned company to one of its primary creditors, a company with the generic name Real Estate Investment Ventures, which is actually controlled by the founding family, the Bueschers, who established it for tax reasons. The old stock, which is held by employees and the Bueschers (who own about 44% of the existing company stock), would likely disappear.

Management of the company, however, will remain the same, Mercedes said Monday in an e-mail response to questions. It also said that for now, the employee stock options plan (ESOP) stock remains in a trust, but that, upon confirmation of the plan, it will likely dissolve, leaving the Bueschers and the company’s employee stockholders with nothing.
 
In bankruptcy, employee stockholders in ESOP companies are treated the same as stockholders in public companies, which means they are last on the list of creditors, according to Rocky Fiore, a vice president of Prairie Capital Advisors. (Prairie Capital advises companies on ESOPs.)
 
“When those kinds of things happen, you are at the mercy of your creditors,” said Fiore. “The ESOP is a shareholder just like any kind of shareholder. This [bankruptcy] might have been the only viable alternative to keep them employed.”
 
Unlike other home builders with newer ESOP plans that are still burdened with the debt usually required to start such a program, Mercedes has been an employee-owed company since 1982 and had no debt related to its plan, the company said.
 
Under the proposed reorganization plan, the company’s other primary creditor--banks that issued the company a revolving line of credit--would restructure the Mercedes' debt, issuing loans to cover 90% of the $140 million that the builder owes. Mercedes said Monday it is still finalizing the new bank terms sheet, but that the debt will have maturities of as long as four years.
 
In addition to the depressed home building market, problems with that line of credit contributed significantly to the the builder's Chapter 11 bankruptcy filing in January, according to Mercedes' bankruptcy documents. While Mercedes was current on its payments on the debt, the company was not in compliance with other covenants on the loan. Mercedes negotiated forbearance on those violations, but the forbearance expired Jan. 29. 

Access to cash and capital also proved to be a problem for Mercedes in late 2008, according to court documents. One of the banks behind the company’s revolving line of credit, Franklin Bank, was taken over by the Federal Deposit Insurance Corp. (FDIC) last December, and the FDIC refused to honor a draw request by Mercedes even though other lenders in the revolver consortium agreed to fund their share of the draw.
 
Other details of the proposed reorganization plan call for the $1-million-plus of taxes the company owes and priority unsecured claims of $765,646 to also be paid in full. General unsecured claimants would get between 12% and 15% of the $40 million to $50 million they are owed.

Mercedes' Space Coast Truss, which is in debt for $567,000, would be sold and the proceeds given to its lien holders.

Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.

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