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June 16, 2021 – U-Haul Co. of West Virginia (“UHWV” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of West Virginia, lead case number 21-20140 (Judge Mignault). The Debtor, which operates as part of a national system of do-it-yourself one-way and local equipment rentals and self-storage facilities under the U-Haul brand, is represented by James W. Lane of Flaherty Sensabaugh Bonasso LLP. Further board-authorized engagements include Brown Edwards as financial advisors.
The Debtor's lead petition notes between 200 and 1000 creditors; estimated assets of $1.1mn; and estimated liabilities of $118.4mn ($118.1mn of which reflects intercompany loans with U-Haul International, Inc. ("UHI"). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) West Virginia State Tax Department Tax Account ($138k sales tax claim), (ii) Victory Packaging ($36k trade claim) and (iii) Gas Equipment Co Inc ($13k trade claim).
The Debtor's sole member is UHI.
In a press release announcing the filing, the Debtor advised that: “The Company…has faced numerous challenges in recent years including management turnover, a lack of sufficient self-storage locations, and burdensome litigation costs resulting in declining cash flow and liquidity.
The Chapter 11 filing and anticipated restructuring transaction are the final steps in the Company's internal restructuring that began in 2020 with a renewed commitment to expanding Company locations in West Virginia, and the appointment of Mark Arnold as president to lead the Company into the future. Earlier attempts to implement a business and financial reorganization were interrupted by the unprecedented COVID-19 global pandemic that hit early in 2020.
The Company and U-Haul International, Inc. ('UHI') are negotiating the terms of a plan of reorganization that is expected to include a substantial 'new value' capital infusion by UHI.”
Goals of the Chapter 11 Filings
The Hertler Declaration (defined below) provides: "The Debtor currently is considering a number of potential restructuring options, including a sale of the assets or equity of the debtor."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Hertzler Declaration”), Charles Hertzler, a Debtor Board member and the Debtor's recently appointed "Responsible Person" (37 years in U-Haul system and currently serving as Executive Vice President of U-Haul Business Consultants), detailed the events leading to UHWV's Chapter 11 filing. The Hertzler Declaration very much reflects Mr. Hertzler's employment by parent UHI and, although noting the deeply unsustainable nature of the Debtor's capital structure thanks to an almost $9.0mn annual interest tab in respect of intercompany loans from UHI (revenue of $5.2mn for the the same period), leaves several answered questions as to the nature of that debt.
Mr. Hertzler provides: “For several years, the Debtor’s business struggled from poor management and from a lack of sufficient rental centers, self-storage facilities and independent dealers. The Debtor suffered annual operational losses of ($346,303), ($575,088), and ($382,800) for each of the three fiscal years ending March 31, 2021, 2020, and 2019, respectively.
The global pandemic hit just when I thought the Debtor’s business would turn around [although see below as to increased revenue during the pandemic].
The Debtor operates on a March 31 fiscal year end accounting cycle. For the fiscal year ended March 31, 2021, the Debtor had total revenues of $5,942,660 against expenses from operations of $6,288,963. For the fiscal year ended March 31, 2020, the Debtor had total revenues of $5,184,614 against expenses from operations of $5,759,702. For the fiscal year ended March 31, 2019, the Debtor had total revenues of $5,072,894 against expenses from operations of $5,455,694.13. As of March 31, 2021, 2020, and 2019, the Debtor had total assets of $1,223,932, $1,068,460, and $1,010,267, respectively, and had total liabilities (excluding related party liabilities) of $1,126,508, $793,143, and $544,198, respectively.
The numbers above do not include the Debtor’s single largest liability, an obligation owed to UHI. For years, the Debtor has struggled under the weight of a multi-million liability owed to UHI and the accompanying interest expense. Debtor reserves the right to examine the amount of UHI’s claim and therefore Debtor has listed the claim as “disputed” on its schedules. As of the Petition Date, UHI’s claim on Debtor’s books totaled $118,131,303.00.
Again, subject to the same reservation, the annual UHI claim amount and corresponding interest expense for the past three fiscal years were as follows…FYE March 31, 2021 – $118,108,258 with an annual interest expense of $8,729,507…"
Presumably that intercompany debt related to build-out of the Debtor's network of 12 rental centers, 10 of which have storage facilities (although Hertzler notes that "The rental equipment and self-storage facilities operated by the Debtor are owned by affiliates of UHI"), but the Hertzler Declaration does not provide details on where that money was spent, what the interest rate is (looks to be about 8%) and how much of the outstanding amount reflects PIK-ed interest.
NB: The litigation referred to in the press release, although possibly burdensome in the context of a business with $5.0-$6.0mn of revenue a year, has not had a particularly meaningful impact on the Debtor; with the more significant of the two, a class action lawsuit relating to $645k of allegedly miscollected environmental fees, resulting in $1.0mn of attorney's fees across 10 years. The lawsuit, which comes with $millions in potential liability, has been "languishing" and Hertzler makes no suggestion that the Debtor is seeking bankruptcy protection to avoid that liability; rather "[t]he professional fees and expenses incurred by the Debtor defending these lawsuits has further strained the Debtor’s resources at the same time it is struggling to turnaround its business operations…"
About the Debtors
The Hertzler Declaration provides: "The Debtor was incorporated in the State of West Virginia in 1970 and has operated continuously in the State since that date. U-Haul International, Inc. (“UHI”) is the sole shareholder of the Debtor.
The Debtor operates as part of a national system of do-it-yourself one-way and local equipment rentals and self-storage facilities under the U-Haul brand. The Debtor is an independent management, marketing and merchandising company that operates twelve (12) U-Haul rentals centers throughout the State of West Virginia and contracts with one hundred twenty-three (123) independent U-Haul dealers. Ten of the twelve rental centers also have self-storage facilities.
The Debtor operates under an Amended and Restated U-Haul Rental Company Contract with UHI (the “Rental Company Contract”). The rental equipment and self-storage facilities operated by the Debtor are owned by affiliates of UHI. Under its contract with UHI, among other things, the Debtor is responsible for the management and operation of all rental and self-storage centers, and the merchandising and supervision of the maintenance and repair of all U-Haul rental equipment in its territory. The Debtor’s territory includes West Virginia and small portions of Virginia, Kentucky and Ohio.
Under the terms of the Rental Company Contract, UHI provides various system-wide services to the Debtor, including complete accounting, cash management, payroll and benefits, procurement, inventory balancing, fleet management and insurance programs.
The Debtor currently employs 107 employees in West Virginia; engages with numerous local and regional vendors for supplies, materials and other goods necessary for its operations; occupies office, self-storage and equipment rental locations, and contracts with independent dealers in the Debtor’s territory who rent U-Haul equipment as a supplement to their primary business operations."
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