Flexible Funding, Ltd. Liability Co. – Court Confirms Former Payroll Funding Specialist’s Liquidation Plan

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June 28, 2022 – The Court hearing the Flexible Funding cases confirmed the Debtors’ Amended Plan of Liquidation, with the confirmation order subsequently issued on July 13th at Docket No. 435. The delay in the order reflects a late resolution of an objection filed by Medalist Partners Opportunity Master Fund II-A, L.P. ("Medalist") [Dkt. No. 420]. Medalist is the sole member Class 4 holding the Class 4 Subordinated Secured Claim and had voted against the Plan. Medalist and the Debtors eventually reached an agreement resolving the objection as set forth in Paragraph 2 of the confirmation order (see further below), With the agreement, the objection is deemed withdrawn by Medalist which has now voted in favor of the Plan.

On September 19, 2021, Flexible Funding, Ltd. Liability Co. and one affiliated debtor (“Flexible Funding” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of Texas, lead case number 21-42215 (Judge Mullin). At filing, the Debtors, a Texas-based "staffing" lender which describes itself as the "go-to payroll-financing choice for staffing agencies-from startups to established companies with over $1,000,000 per week in sales," noted estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $100.0mn and $500.0mn. In a subsequently filed Schedule A/B, the lead Debtor noted $105.7mn of assets and $109.2mn of liabilities [Docket No. 185].

Plan Overview

As detailed further in "Asset Sales," below, the central feature of these cases was the sale of substantially all of the Debtors' assets in a pair of sales involving the same purchaser, eCapital Corp., with those sales closing in November 2021. The proceeds from the sales allowed the Debtors to retire the senior secured indebtedness owed to Umpqua Bank in full. The remaining sale proceeds provide the primary source of funding for Distributions under the Plan.

The Disclosure Statement [Docket No. 383] states, “…the Plan proposes a simple liquidation of the Debtors’ assets and distribution of Cash to the holders of Allowed Claims…

Both before and after the commencement of these chapter 11 cases, the Debtors engaged in good-faith and arm’s-length negotiations for the sale of their assets. On October 15, 2021, the Bankruptcy Court entered an order approving notice and bidding procedures for a potential sale of substantially all the assets of Flexible. [Dkt. No. 110] On October 18, 2021, the Bankruptcy Court entered a similar order with respect to Instapay. [Dkt. No. 120] Ultimately, the highest and best offers for the Debtors’ assets were received from affiliates of eCapital Corp. In November 2021, transactions were closed for the sale of substantially all of the Debtors’ assets. The proceeds from the sales allowed the Debtors to retire the senior secured indebtedness owed to Umpqua Bank in full. The remaining sale proceeds provide the primary source of funding for Distributions under the Plan.

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; see also the Liquidation Analysis below):

  • Class 1 (“Priority Non-Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. 
  • Class 2 (“Secured Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3 (“Subordinated Secured Claim – Bison”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $2.0mn and the estimated recovery is 100%. Each Holder will be paid from Distributable Cash until paid in full before Class 5 receives any Distribution.
  • Class 4 (“Subordinated Secured Claim – Medalist”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $15.7mn and the estimated recovery is 100%. Each Holder will be paid from Distributable Cash until paid in full before Class 5 receives any Distribution. Bison and Medalist dispute the priority of payment as between them. Accordingly, the priority of payment as between Class 3 and Class 4 will be subject to the decision of the Bankruptcy Court or by agreement of the two parties.
  • Class 5 (“Other Secured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $120k and the estimated recovery is TBD. Each Holder will be paid in full to the extent of remaining Distributable Cash after Classes 1 through 4 have been paid in full, or have its collateral returned.
  • Class 6 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $21.9mn and the estimated recovery is TBD. Each Holder will be paid a Pro Rata Share of Distributable Cash on hand after full payment of Classes 1 through 5.
  • Class 7 (“Interests”) is impaired and entitled to vote on the Plan. On and after the Effective Date, holders of Interests will have no ability to direct or control the affairs of the Liquidating Debtors. Holders of Interests will be paid a Pro Rata Share of Distributable Cash on hand after full payment of Classes 1 through 6.

Voting Results

On June 28, 2022, the Debtors' claims agent notified the Court of amended Plan voting results [Docket No. 428], which were as follows:

  • Class 3 (“Subordinated Secured Claim – Bison”): 1 claim holder, representing $2,115,000 in amount and 100% in number, accepted the Plan.
  • Class 4 (“Subordinated Secured Claim – Medalist”): 1 claim holder, representing $15,700,000 in amount and 100% in number, rejected the Plan. [This rejection now an acceptance]
  • Class 5 (“Other Secured Claims”): 1 claim holder, representing $120,036.79 in amount and 100% in number, accepted the Plan.
  • Class 6 (“General Unsecured Claims”): 12 claim holders, representing $8,259,633.54 in amount and 100% in number, accepted the Plan.
  • Class 7 (“Interests”): 2 interest holders, representing 100% of interests, accepted the Plan.

Medalist Settlement

The confirmation order provides: "The third full paragraph of Section 4.03 and the third full paragraph of Section 4.04 of the Plan shall be deleted and each replaced by the following:
No later than fourteen (14) days after the Effective Date, the Plan Administrator shall make a distribution, in an amount to be determined by the Plan Administrator, on a pro rata basis, to Bison and Medalist (the “Initial Bison/Medalist Distribution”). The Initial Bison/Medalist Distribution shall be applied by Bison and Medalist to the outstanding principal amount owed by the Debtors to each lender. Additionally, concurrently with making the Initial Bison/Medalist Distribution, the Plan Administrator shall establish a reserve (the “Bison/Medalist Reserve”) in an amount representing the difference between $2,000,000 and the amount distributed to Bison from the Initial Bison/Medalist Distribution. The Bison/Medalist Reserve shall accrue no interest under Bankruptcy Code section 506(c), to the extent such section is applicable. Interest on the remaining unpaid principal owed to Bison and Medalist, other than the amount held in the Bison/Medalist Reserve, may continue to accrue interest under section 506(c), to the extent such section is applicable. The Liquidating Debtors reserve the right to challenge Bison’s and Medalist’s right to receive interest under section 506(c), including, but not limited to, the right to seek disgorgement of interest paid to Bison and Medalist. After the Initial Bison/Medalist Distribution, all subsequent distributions to Bison and Medalist shall be made on a pro-rata basis, with a dollar-for-dollar reduction in the Bison/Medalist Reserve to account for distributions made to Bison.

Key Documents

The Amended Plan attaches the following exhibit:

  • Exhibit A: Preservation of Estate Claims, Estate Defenses

Asset Sales

Flexible Funding Assets 

On November 9, 2021, further to its October 15th bidding procedures order [Docket No. 110] and an auction conducted on November 5th, the Court hearing the Flexible Funding cases issued an order approving the sale of the Debtors’ Flexible Funding assets (the “Sale” and the “Flexible Funding Assets,” respectively) to eCapital Factoring (Holding) Corp (“eCapital”) [Docket No. 198]. The eCapital APA, governing what the Debtors estimate is a $51.4mn sale, is attached to the sale order as Exhibit A. The Court order also approved Encore Funding II, LLC as the back-up bidder.

In a press release announcing the sale, eCapital stated, "eCapital Corp. ('eCapital' or 'the Company'), a leading capital solutions provider for small and medium-sized businesses in North America and the United Kingdom, today announced that they have acquired the assets of Flexible Funding, a payroll funding company for staffing agencies across multiple industries, along with its freight factoring subsidiary, InstaPay."

eCapital CEO Marius Silvasan commented, "The acquisitions of Flexible Funding and InstaPay supports our commitment to providing industry-leading financing solutions to staffing and transportation businesses. Establishing a foothold in Dallas/Fort Worth will allow us to better serve our clients in the region and ensure we are well-positioned for further growth."

eCapital said it "plans to keep a presence in Fort Worth, including Flexible Funding and InstaPay staff to support the existing client base."

Paul DeLuca, managing member of Flexible Funding, commented, "Joining the eCapital family is the right next step for Flexible Funding, and our team looks forward to continuing to provide excellent service to the staffing and transportation industries under the eCapital umbrella."

This is the 10th acquisition for eCapital in the last four years.

InstaPay Assets 

On October 5, 2021, the Debtors filed a motion requesting each of a bidding procedures order and a sale order [Docket No. 57]. The bidding procedures order would (i) approve bidding procedures for the sale of substantially all of the assets of Debtor InstaPay (the "Sale" and the "InstaPay Assets," respectively) and (ii) approve a timetable culminating in an October 29, 2021 auction and TBD sale hearing. The sale order would authorize the Sale.

On October 15, 2021, the Debtors filed an amended bidding procedures motion for the sale of InstaPay Assets [Docket No. 107]. The amended motion was filed to substitute eCapital Freight Factoring Corp. (“eCapital”) as the Stalking Horse Bidder. The sale to eCapital Freight Factoring was approved on November 2, 2021 [Docket No. 167], with Encore Funding II, LLC designated as the back-up bidder.

According to the APA attached to the sale order as Exhibit A, the purchase price for the InstaPay assets will be comprised of (a) the aggregate of the (i) net funds employed with respect to approved A/R Assets and (ii) the outstanding principal amount of approved ABL Assets as per the "Data Tapes" generated by the seller's factoring software, less any bad debts, less any term loans and less any special reserves, in each case as of the closing date (the "Client Portfolio Amount") plus (be) the Premium (an amount equal to 15% of the Client Portfolio Amount).

Petition Date Perspective

In a motion requesting authority to access cash collateral [Docket No. 5], the Debtors note that they "operate as asset-based lenders and factors for approximately 400 active borrower accounts, primarily in the staffing and transportation industries" with these accounts comprising "a total portfolio of about $110 million in loans and factored receivables." The Debtors claimed to have an equity cushion, noting: "the Debtors estimate that the total of their secured obligations to the Lenders as of the Petition Date is approximately $95,904,000, and that the amount recoverable on their loan portfolio is approximately $108,774,813. The Debtors anticipate that their loan portfolio will retain is value during the bankruptcy case through continued operations."  

The Debtors, who otherwise claim longstanding San Francisco ties on their website, moved their business to Fort Worth four weeks before the Petition date, noting at the time that "We are thrilled to announce our relocation of our corporate headquarters to Fort Worth to support our growth and the dynamic needs of our entire business…Flexible Funding is also expanding their team, with the recent hire of Steve Sala as CFO and Doug Gregory as CCO. The expansion of their team and of offices in the US market puts Flexible Funding in a position to continue its fast-paced growth while continuing to provide best-in-class solutions to their clients."

Liquidation Analysis (see Exhibit 2 to Disclosure Statement for notes)

About the Prepetition Debtors

According to the Debtors: “Flexible Funding has been providing payroll funding for staffing agencies nationally since 1992.  Over the past 5 years, Flexible expanded its portfolio into other areas of the industry, including oil & gas, transportation, manufacturing and distribution. Flexible Funding has partnered with a broad range of companies, from startups, to established companies with over $1,000,000 per week in sales. Flexible Funding was ‘Fintech’ long before the term was coined, and is proud of its technological development in delivering superior collateral management in a fraction of the time it takes traditional Asset Based Lenders.”

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