PORTLAND — A U.S. Bankruptcy Court judge on Tuesday ordered appointment of a Chapter 11 trustee to run M.W. Sewall & Co., the Bath fuel company that filed for bankruptcy protection in March.
Meanwhile, the family owned company has filed a plan of reorganization which, if approved by Judge James Haines, could bring the Chapter 11 case to a close, according to company attorney George Marcus.
The trustee will have general supervisory authority over Sewall and its day-to-day operations.
“The company will continue operating and taking care of its customers, but there will be a court official watching over it,” Marcus said on Tuesday. He said the trusteeship would be in place until a plan of reorganization for Sewall is confirmed.
“We had argued for other alternatives to appointment of a trustee,” Marcus said. “We recognized the need to sort out all of these issues, but we thought that there was a less burdensome, less costly way of doing it. But the court thought otherwise.”
The Office of the United States Trustee, a component of the U.S. Department of Justice, asked the bankruptcy court to order the appointment of the independent trustee on behalf of Sewall’s unsecured creditors.
While Marcus said there are “a lot of historical issues among the owners of the company, and the court felt that it wanted somebody who was neutral and didn’t have a stake in those issues one way or the other,” Assistant U.S. Trustee Stephen G. Morrell, in his motion to appoint the trustee, suggested the issues are more troublesome than a family feud.
Morrell’s document describes M.W. Sewall as a business plagued not only by internal disputes, but by spiraling financial losses, management conflicts of interest and questionable business judgments.
Philip Sewall is the company president; his brother, Mark Sewall, serves on the board of directors and is not employed by the company. Their brother, Ned Sewall, is a former president of the company. In November 2005, according to the court document, the three brothers agreed to bring the business interests of Philip and Mark under the “corporate umbrella” of M.W. Sewall.
Mark and Philip “own controlling interests in business entities that either do business or did business with Sewall,” the document states. “It is undisputed that, historically, the conduct of that business has been to (M.W. Sewall’s) disadvantage. … They control tenants who do not pay rent to (Sewall). They control enterprises whose losses have been funded by (Sewall) and which remain unreimbursed. Putting aside the contested issues of motive, intent, or damages; these situations have two characteristics in common – benefits flowing to a shareholder at the expense of the estate and inadequate disclosure of those benefits.”
M.W. Sewall lost more than $563,000 in 2007 and preliminary numbers show a net loss of nearly $1.8 million for 2008, according to the U.S. trustee’s office. The company has no credit line and owes approximately $2 million in administrative expenses.
The motion says it is doubtful that the company’s situation can be handled appropriately by “conflicted managers” with a majority interest, hence the need for scrutiny by a Chapter 11 trustee.
“Mark and Philip undoubtedly regard the current financial crises of M.W. Sewall as so intertwined with their personal situations that they regard what is good for themselves as good for the Debtor,” the document continues. “They have a substantial incentive to see the Debtor succeed, but they may not have the objectivity to appreciate the extent to which their other interests interfere with that success.”
The motion adds that “managers of a corporation who are stakeholders in businesses that do business with the corporation are not entitled to the presumptions in favor of their informed decisions … Any presumption in favor of current management in maintaining control of the affairs of debtor-in-possession, in like circumstances, should yield to the interests of creditors.”
While the Office of the U.S. Trustee has no reason to support a decision to close the business, its filing goes on to cast doubt on whether Philip and Mark Sewall should continue to be M.W. Sewall’s managers.
“It may or may not be necessary to remove current management from all involvement in on-going operations,” Morrell told the court.
Marcus, on the other hand, compared the Chapter 11 trustee’s role to that of a chairman of a board, who “generally is the ultimate authority in the company.”
He said “everybody goes down a notch” with the trustee in place – including Philip Sewall and Chief Financial Officer Catherine Saltz.
Sewall has served Mid-Coast communities since 1887 and also runs the Clipper Mart chain of convenience stores. The company in March cited the existing economic climate as the reason it sought protection from its creditors.
Filing for Chapter 11, Marcus said at the time, froze past-due debt and allowed Sewall to continue operating by paying its current expenses while having the time to restructure its finances.
Since the filing, the company has not closed any of its stores or laid off any of its employees, Marcus said.
The company’s two principal owners, Philip and Mark Sewall, control about 70 percent of Sewall, Marcus said, while the remainder is owned by a variety of trusts for individuals who descend from the original founders.
The plan of reorganization filed for the company on Oct. 22, Marcus said, proposes to pay all of Sewall’s creditors in full over a period of time: mortgage financing in 10 years and unsecured debt in five years.
According to the plan, the company “will, after satisfaction of its obligations to its creditors in the manner described in this Plan, retain all of its remaining assets and will continue to operate such assets in the ordinary course of business; however, (Sewall) may, in its sole and exclusive discretion, at any time, elect to sell any portion of its assets to a third party.”
If the court approves the document, the Chapter 11 case can come to an end, Marcus said. He added that the plan would likely go before the judge late this year or early next year.
Alex Lear can be reached at 373-9060 ext. 113 or firstname.lastname@example.org.