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Bankruptcy judge lets Freedom borrow $3 million

Charleston Daily Mail photo by Craig Cunningham Freedom Industries President Gary Southern leaves the company's bankruptcy hearing in Charleston, W.Va., Tuesday, Jan. 21, 2014. Southern testified about the company following the chemical spill into the Elk River. The company reached a bankruptcy court deal Tuesday for up to $4 million in credit from a lender to help continue operations, a company attorney said.
Charleston Daily Mail photo by Craig Cunningham
Freedom Industries President Gary Southern leaves the company’s bankruptcy hearing in Charleston, W.Va., Tuesday, Jan. 21, 2014. Southern testified about the company following the chemical spill into the Elk River. The company reached a bankruptcy court deal Tuesday for up to $4 million in credit from a lender to help continue operations, a company attorney said.

By Andrea Lannom

Charleston Daily Mail

CHARLESTON, W.Va. — The company at the heart of the Elk River chemical spill will get some of the temporary financial relief it requested and be allowed to carry on business.

Freedom Industries appeared before U.S. Bankruptcy Judge Ronald Pearson Tuesday in a 6-hour-long hearing on several first-day motions in the case, which Pearson described as one of the “the most unusual Chapter 11 cases” he has seen.

Freedom sought approval for what’s known as debtor-in-possession financing while it reorganizes under Chapter 11 bankruptcy code. This type of financing allows a lender to inject new money into a company and get priority among other creditors when the company emerges from bankruptcy.

Freedom will get less money than it requested in its initial financing proposal, and its lender, Mountaineer Funding, will not receive top priority among creditors.

Freedom initially asked the judge to allow Mountaineer Funding to lend it $5 million to continue operating. Mountaineer would then be first in line — ahead of anyone else with a claim against the company — to recoup its funding.

Mountaineer Funding is owned by J. Clifford Forrest, who also owns Chemstream Holdings, Freedom’s parent company. Mountaineer Funding was incorporated Friday, the same day Freedom filed for Chapter 11 bankruptcy protection.

Attorneys in the case called it “insider lending.”

West Virginia American Water Co. previously filed an objection to Freedom’s proposal, saying the financial agreement was not negotiated at “arms-length” because the same person owns the lender and the company’s parent.

The water company also argued the terms of Freedom’s financing proposal would give the Mountaineer a lien on Freedom’s assets, a “super priority” claim and the ability to foreclose selectively on assets, taking away the most valuable assets from Freedom’s estate, “leaving behind only the toxic facilities and huge damage claims caused by the Freedom spill.”

However, attorneys said this had been resolved in the resolution reached in Tuesday’s hearing.

Under that resolution, Freedom will instead get a $3 million cash infusion from Mountaineer with the potential for an extra $1 million later. Freedom also agreed there would be no liens on the assets to support the loan.

Attorneys said this now creates an “arms-length” negotiation.

The next step is a meeting next month where creditors can ask questions of Freedom.

Gary Southern, Freedom’s president, testified the company is in a “death spiral.” He said employees have been talking to competitors and suppliers don’t want to supply to him…

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