Will Throwing John Siegel a $20 Million Lifeline Buy Utah a California Coal Terminal?
Today, a coalition of Utah environmental and public interest organizations called on the Utah Legislature to turn down an urgent $20 million bailout request from the bankrupt developer of the embattled coal export terminal project in Oakland, Calif. They are circulating a petition urging the Legislature to invest the money in “the well-being of Utah communities” instead.
“Our public funds are not insurance for rich developers who make bad decisions,” said Lauren Simpson of Alliance for a Better Utah. “Now more than ever, Utahns are anxious for leadership they can trust. Utah leaders should earn that trust by choosing to be done with the failed coal port once and for all.”
Insight Terminal Solutions (“Insight”), the terminal’s would-be operator, filed for bankruptcy last August and has now accrued over $23 million in debts. Under a proposed reorganization plan filed in June, Insight CEO John Siegel will use a $20 million bailout from the State of Utah to pay off creditors and escape from bankruptcy. [1]
The developer’s plan to seek a rescue package from the State of Utah was first reported by the Salt Lake Tribune in early July. Initially, the plan called for the funds to be obtained through an application to Utah’s Community Impact Fund Board (“CIB”), an agency that distributes rebates from federal mineral leases to communities impacted by extractive industries like coal mining. State and federal law prohibit the use of the funds for the benefit of private businesses. Typically, CIB funds are awarded to enable rural communities to build critical local infrastructure such as fire stations, waterworks, and community centers.
When the CIB showed signs that it might engage in serious review of an application for funds to get a private developer out of bankruptcy, Insight turned to its friends in the Utah Legislature with the idea that the Legislature might pass special legislation to move the money quickly into Insight’s hands. A lawyer for Insight told the bankruptcy court that he believes the Legislature will convene a special legislative session on or about August 20 to consider and vote on the proposal.
Environmental and public interest groups cry foul
“Utah law prohibits the use of public funds for private use,” said Earthjustice attorney Heidi McIntosh, who has filed a brief on behalf of the Sierra Club in the Insight bankruptcy proceedings. “The $20 million isn’t even going to the project. It’s going to straight to … creditors.”
Infographic deriding plan to send $20 million in public funds to bail out a Kentucky developer from bankruptcy to build a coal port in Oakland. Credit: Lindsay Beebe, Sierra Club
The latter problem may prove to be the biggest stumbling block for legislators who might otherwise be happy to fund a coal export terminal. They are likely to want to know whether Utah’s $20 million will be enough to get the stalled project back on track or whether it will just pay off debts of project proponents whose prospects of building a viable coal export facility project face numerous legal, economic, and political hurdles.
The answer is unlikely to satisfy Utah legislators concerned about a state budget severely squeezed by the Covid-19 pandemic and recession.
Insight’s liabilities are already greater than Utah’s proposed $20 million bailout. Insight reported debts of $18.9 million when it filed for bankruptcy and has accrued another $4.5 million since. Insight has no significant assets other than a sublease that is buried deep in litigation. A disclosure statement Insight filed in support of its reorganization plan does not describe any other investors ready to finance the project after bankruptcy.
If Insight pays off its creditors with Utah’s money, the bailout could leave Insight with no working capital—a corporate zombie in immediate need of another handout.
Insight Has Burned Through Millions of Dollars and Built Nothing
When it sought protection under Chapter 11 last August, Insight filed a required set of schedules itemizing the company’s assets and liabilities. According to the documents, the total value of Insight’s property at that time was a mere $14,224.50 plus the “unknown value” of a sublease from Oakland Bulk and Oversized Terminal LLC (“OBOT”). The sublease grants Insight the right to develop a bulk export terminal on 19 acres of the West Gateway property in Oakland, California.
The sublease is of no value, however, if OBOT’s lease is invalid. The City of Oakland is currently suing OBOT for a declaration that the lease terminated in 2018 after OBOT failed to meet its obligations under the lease. A ruling in the City’s favor would render Insight’s sublease worthless.
Last week, in a filing with the bankruptcy court, Oakland accused Insight of bad faith in proposing its reorganization plan. “They are fully aware that the validity of the Sub-Ground Lease is in dispute but disingenuously gloss over that fact in their Plan,” wrote the City. [2]
Insight has burned through millions of dollars but failed to make any progress towards building the terminal. Insight’s lawyers have sought to convince the Kentucky bankruptcy court that the State of Utah will soon provide cash to pay off all of Insight’s debts including those to companies he controls such as his private airline, Oasis Aviation.
The schedules submitted in August 2019 list claims by Insight’s pre-bankruptcy creditors totaling $18.9 million. The biggest chunk of the pre-petition claims is owed to the hedge fund investors of Autumn Wind Lending. Autumn Wind holds a $7.1 million secured claim and another $3.55 million unsecured claim. Autumn Wind has presented the bankruptcy court with a competing reorganization plan that would wipe out this debt and replace John Siegel with an Autumn Wind executive.
Insight’s second largest creditor is Cecelia Financial Management LLC. Cecelia has a claim for $5.7 million. Utahns might want to take a close look at Cecelia before paying off its claim. The company shares offices with Insight in Louisville, Kentucky and is managed by John Siegel’s son. Autumn Wind alleges that Cecelia is an “insider” owned by John Siegel’s wife and should be recharacterized as an equity interest that should be wiped out in the bankruptcy.
Insight’s pre-petition debts also list claims by OBOT’s parent company, law firms, lobbyists, and the Alameda County recorder. [3]
Insight’s Debts Continue to Mount
But the bonfire continues. Insight’s May 2020 Monthly Operating Report [4] stated that Insight has incurred a total of $4.5 million in additional “post-petition” liabilities since it filed for bankruptcy.
In a May 1, 2020 filing, [5] Insight reported that OBOT seeks $2,355,000 in back rent and legal fees Insight agreed to share with OBOT for suing the City of Oakland. [6] Bay Bridge Exports LLC has lent Insight $1,345,000 and Cecelia Financial has kicked in another $380,000 to finance court-approved activities during the bankruptcy (so-called “Debtor-in-Possession [DIP] financing”).
These activities include the use of professional services to maintain the value of Insight during its sojourn through bankruptcy. Since filing for bankruptcy in August 2019 through May 2020, Insight has paid or accrued professional expenses of $919,041. This includes $352,464 to its bankruptcy attorneys, $120,000 in legal fees related to the DIP financing, $282,200 to Oakland, California lobbyist Greg McConnell, and $111,435 to an engineering firm. [7]
All of this is small change in relation to Insight’s blue sky plans for a coal terminal in Oakland. If Insight were to emerge from bankruptcy under John Siegel’s plan, Insight would still have to raise the $250 million developers have projected as the cost of building the terminal.
Utah’s $20 million bailout would merely put Insight’s hapless management back at the starting line.
[1] First Amended Disclosure Statement for Debtors’ Chapter 11 Plan of Reorganization, Doc 246 (June 19, 2020). All “Doc” references in these footnotes are to the document numbering assigned in In re Insight Terminal Solutions, LLC, U.S. Bankruptcy Court,Western Dist. of Ky., Case No. 19-32231.jal. [2] City of Oakland’s Objections to Cojmpeting Chapter 11 Plans of Reorgnization and Assumption of Sub-Ground Lease, Doc 276. [3] In addition to the major claims, a claim for $1.8 million is ascribed to Phil Tagami’s California Capital & Investments Group, the parent company of OBOT. Assorted white-shoe law firms such as Hanson Bridges in San Francisco, Manatt LLP in Los Angeles, and Morgan Lewis in New York hold combined claims of over $250,000. Lobbyists in Washington, D.C., and Oakland, California account are seeking $87,500. The Alameda County recorder has an unsecured claim for an unpaid $105,000 transfer tax. [4] May 2020 Monthly Operating Report, Doc 252. [5] Debtors’ Objection to Autumn Wind Lending, LLC’s Disclosure Statement and Plan Procedures Motion, Doc 202 [6] OBOT’s February 10, 2020 Notice of Outstanding Amounts, Doc 189-1. [7] Of the professional expenses incurred through May 2020, approximately $350,000 has not yet been paid.
Graphic (top) Credit: Lindsay Beebe, Sierra Club