Wednesday, December 28, 2022, 6:08 pm
News Flash Archive
One of the most puzzling aspects of the Express Grain collapse is the $40+ million EG owes seven so-called "NMTC Lender" companies.
But now, those seven NMTC Lenders have asked the bankruptcy court to "settle and compromise" their claims for pennies on the dollar. In other words, they have no hope of collecting the piles of money that they loaned to EG.
And this afternoon, the bankruptcy court approved the settlement agreement.
In all, these seven NMTC Lenders made the following loans to EG between 2015 and 2020:
$5,880,000.00 -- Rustic Ventures, LLC
$9,200,130.00 -- AMCREF Fund 34, LLC
$6,930,000.00 -- MuniStrategies Sub-CDE#26, LLC
$5,000,000.00 -- AMCREF FUND 47, LLC
$8,133,333.00 -- New Markets Investment 126, LLC
$8,637,200.00 -- AMCREF Fund 50, LLC
$5,000,000.00 -- Heartland Renaissance Fund Sub 32, LLC
Of the $48.8 million loaned to EG, claims were filed for $39.6 million by six of these seven NMTC Lenders. There is no explanation in the filings why the remaining lender did not file a claim.
Express Grain consists of several related companies, including Express Grain Terminals ("EGT"), Express Biodiesel (owned 100% by EGT), and Express Processing, all three of which filed for bankruptcy on September 29, 2021.
Key to this elaborate funding scheme was another company, EGT Leverage Lender, LLC. EGT Leverage Lender has no assets, and did not file for bankruptcy. EGT Leverage Lender is 95% owned by Express Processing.
All seven of the above named lenders were so-called "New Market Tax Credit" lenders. The NMTC financing scheme was created by Congress in 2000 to encourage investors to lend money to businesses in "economically disadvantaged areas."
The incentive provides massive income tax credits of 39% given by the federal government to the investors.
But a 39% tax credit may not be enough to induce investors to make risky loans that are likely to default.
Therefore, EG utilized a "leveraged lender" loan method, in which the investor's contribution is augmented by a large amount of additional lending -- typically two times the investor's contribution -- added to the investor's money.
The trick is, that the investor gets ALL of the tax credit, while the leverage lender has to take its chances that its part will be repaid.
In EG's case, the "leveraged lender" was in fact EGT Leverage Lender and Dr. Michael Coleman, who is designated on the explanatory flow charts as the "sponsor" of all three sets of loans.
In all, EG and Dr. Coleman, through their pass-through EGT Leverage Lender company, provided $30,493,948 of their own money to "prime the pump."
The Investing Banks were:
$5,216,118 -- U.S. Bancorp Community Development Corporation (2015 loans)
$3,931,200 -- Suntrust Community Capital, LLC (2018 loans)
$5,450,291 -- U.S. Bancorp Community Development Corporation (2020 loans)
Therefore, the Investor Banks provided $14.6 million and received all the federal tax credits, while EG and Dr. Coleman provided $30.5 million.
The process ran as follows:
1. According to the flow charts, Dr. Coleman would provide tens of millions of dollars to "prime the pump."
2. EG would transfer that money to EGT Leverage Lender, which would package it up, sometimes bundling it with much smaller amounts from side investors.
3. EGT Leverage Lender would then loan the money to an "Investment Fund," in each case an LLC owned by the Investing Bank.
4. The Investing Bank, USBCDC or SunTrust, would add its contribution to the "Investment Fund" which it owned.
5. The "Investment Fund" would then loan the money to two or more of the "NMTC Lenders."
6. The NMTC Lenders would then loan the money to Express Grain or one of its subsidiaries.
7. From those loan proceeds, according to the flow charts, EG would then reimburse Dr. Coleman for the money he put up to "prime the pump."
As can be seen, the money used to "prime the pump" was roughly twice the money actually invested by the Investing Banks.
The Investing Banks received all the federal tax credits. Ironically, in spite of their descriptive name, the seven "NMTC Lenders" do not appear to receive any federal tax credits.
The three sets of loans each grew more and more complex, with dozens and dozens of entities being added to the mix, with hundreds of thousands of dollars in fees, interest, taxes, and other amounts being shaved off the money as it passed from entity to entity in the fiendishly complex financing scheme.
So far as can be seen, the entire process is legal, and appears to be typical of leveraged NMTC lending arrangements.
EG made relatively small payments of interest and fees all along the way, but none of the loans actually finished out their seven year "compliance periods." Very little of the actual loan principal appears to have been paid for any of the loans.
The bad news for the Investing Banks is that, because the loans didn't complete the seven year compliance period, the Federal Government will "claw back" all of the 39% income tax credits from those banks.
The amazing thing is that, even though EG only netted the $14.6 million contributed by the Investing Banks, it ended up owing $40+ million in principal and interest to the seven NMTC Lenders when it declared bankruptcy.
The reason for this is that EGT Leverage Lender loaned approximately $36.5 million to the various "Investment Funds," which in turn loaned the money to the seven NMTC Lenders, who are now owed the $40+ million by EG.
But all the parties have agreed that EGT Leverage Lender cannot collect the $36.5 million it loaned the "Investment Funds" (that is, the "pump priming money"), because those entities were merely "pass throughs" that have no assets. They have no assets, because they loaned all the money to the seven NMTC Lenders, and when EG never repaid those seven lenders, naturally, they in turn didn't repay the "Investment Funds."
So when the music stopped playing, EG owed around 2.5 times as much as it netted from the Investing Banks.
That is why the seven NMTC Lenders have all decided to throw in the towel and write off the $40+ million they are owed by EG.
What little money is left is locked up in Bank Account Pledges, which is money set aside in escrow for some of the NMTC Lenders, but held in special accounts controlled by EG. The total escrow amount held by EG that the NMTC Lenders can obtain is $1,312,767.41. The bankruptcy court has already ordered that these moneys be turned over to their respective NMTC Lender owners.
The NMTC Lenders had liens against EG's assets as collateral for the loans, but they were all subordinate to the prior collateral interests filed by UMB Bank. Therefore, when UMB Bank obtained all the physical assets of EG at the bankruptcy auction, there was nothing left to back the loans made by the seven NMTC Lenders to EG.
The relevant terms of the proposed settlement are:
1. The leverage loans ($36.5 million) made by EGT Leverage Lender to the "Investment Funds" are uncollectable, so they will be cancelled and released by EGT Leverage Lender.
2. The NMTC Lenders will collect the small amount described above from the escrow accounts, and will cancel and disclaim the balance of their $40+ million in claims against EG.
3. EG will provide releases to the NMTC Lenders against any possible claw back claims that EG might file against them. This would be for the relatively small amounts of money that EG paid to the seven NMTC Lenders during the 90 days just before EG filed for bankruptcy.
Several reasons are provided by the parties as to why this settlement is "fair and equitable" under the bankruptcy code. These include the complexity and expense of litigation that would be required to force the repayment of EGT Leverage Lender's loans by the "Investment Funds," which apparently have no assets, which makes success highly unlikely.
But the most interesting reason for settling the whole mess now is to avoid the expense, delays, and possible appeals of:
litigation over whether the Business Debtors [EG] submitted inaccurate or fraudulent financial documents to any of the NMTC Lenders, as it has been determined were submitted to the Mississippi Dept. of Agriculture and Commerce....
According to the settlement proposal, all the paperwork filed by EG to carry out these complex financing schemes was signed by John Coleman himself.
Additionally, withdrawal of the NMTC Lenders' claims for $40+ million, for which there are no significant assets to collect from, will help spread the pitiful remains of the estate to other creditors.
To view the entire proposed settlement motion, see here: Motion to Approve Compromise and Settlement of NMTC Loans
Note: the motion has a typographical error at paragraph 19(a), where the figure $45,441,776.00 should read $5,441,776.00. The error was corrected in a supplemental filing.
To study the very complex flow charts depicting and explaining the three sets of loans, see here: Flow Chart Exhibits to Settlement Agreement
Today's bankruptcy court's order approving this settlement may be seen here: Order Approving NMTC Loan Settlement
To read all our coverage of the Express Grain bankruptcy case, see here: Index of Express Grain articles
John Pittman Hey
The Taxpayers Channel
News Flash Archive