TUCSON — The Arizona Bankruptcy Court tasked with overseeing the reorganization of the four Tate’s automotive companies has ordered all four cases to be liquidated instead of reorganized.

Judge Brenda Moody Whinery’s July 11 order takes the companies out of Chapter 11 of Title 11 of United States Code which gives companies debt relief and protection from creditors while it reorganizes.

Chapter 7 of Title 11 governs the total liquidation of a debtor’s non-exempt assets, and the Tate’s cases have been converted to a Chapter 7, including Tate’s Auto Center of Gallup, Inc.; Tate’s Automotive, Inc.; Tate’s Auto Center of Winslow, Inc. and Tate’s Ford-Lincoln-Mercury, Inc.

How bankruptcy works

Capitalist economies encourage debt and risk-taking because such activities create wealth. But because of a number of reasons, including poor management or simply bad luck, not every risk-taker succeeds. When they don’t, bankruptcy relief allows the risk taker to wipe the slate clean, and get second chance to live another day in the dog-eat-dog economic system that has historically produced prosperous and wealthy societies.

There are basically two kinds of bankruptcy. The most common and typically used by consumers is Chapter 7. In that case, the one who files (the debtor) gets to keep most of what they need to start over including a residence, vehicle, furnishings, clothing, retirement fund, and unique to Arizona, a shotgun, bible and burial plot. Bankruptcy is a federal law but allows the states to come up with their own list of “exempt” property — that is, property exempt from the reach of creditors. Under that chapter, unsecured debt — debt for which the debtor didn’t put up collateral is “discharged.” Most of it anyway, besides funds owed to government, of course, like taxes, criminal or civil fines and most student loans. Most everything else is discharged, if there was no fraud involved. It’s strong medicine and it works, although it wrecks a debtor’s credit rating for a number of years.

A Chapter 11 reorganization is typically used by business entities to reorganize its debt to become profitable again. For example, a company could have millions of dollars in assets like land, buildings, machinery and accounts receivable. Companies can have a lot of debt, too, and may have aggressive creditors suing or preparing to sue for missed payments.

The law says that a Chapter 11 case can be “converted” to a Chapter 7 if, among other things, there is a continuing loss to the company and “no reasonable likelihood of rehabilitation,” and failing to provide required information or file disclosures in a timely manner. In a Chapter 11, the company’s owner typically continues to manage the company and in Tate’s case, the person who serves as the “debtor in possession,” as it is called, is co-owner Richard Berry.

Too little, too late

Judge Whinery held a hearing on June 20. An attorney for Tate’s shared some good news at that time, telling the court that she just received a letter of intent to purchase the companies from a concern in Colorado. Creditors’ lawyers noted that the hearing was the third time the parties had met with the judge to move the case forward and the letter of intent (which the creditors had not seen) was basically too little too late.

Not only that, but there were still troubling issues like chronic lack of transparency about records, missing funds, the lack of access to the properties and records and a new issue about whether Berry tried to, or did, cash out a $200,000 life insurance policy, an alleged asset of the companies.

The judge noted that she had seen “anything but transparency,” from the debtors, and noted that there was “no leadership at the helm,” that Berry did not testify at previous hearings, not even to invoke a Fifth Amendment right. She observed, that she did not have “any faith that Mr. Berry” could negotiate effectively with potential buyers. She therefore replaced him with an independent trustee to look into the mess and to review the offer from Colorado.

What that trustee found is not yet known, but at his request, (merely a week after his appointment) the judge converted the case to a Chapter 7. Now the trustee will marshall the assets of the estate, (there’s no land or buildings) allow creditors who have taken liens on assets to take them back, sell any other assets (if there are any) and distribute that money (if any) to unsecured creditors, with a priority to any employees owed wages.

Reach the reporter at rlynch@wmicentral.com

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