Missouri Creditors Pursue Chapter 7 Against Chinese Firm

CHICAGO — The trustee for $39 million of bonds sold by a Missouri city to help finance an artificial sweetener factory has joined with other creditors to pursue an involuntary Chapter 7 bankruptcy filing against the Chinese company that abandoned the project and defaulted on debt payments.

Moberly, Mo., put its appropriation pledge behind the bonds issued through the Moberly Industrial Development Authority, but has chosen not to honor it. UMB Bank NA, along with four other creditors owed money by Mamtek U.S. Inc., filed the petition seeking an involuntary Chapter 7 action against the company late last week.

The group asked the court for an automatic stay that would prevent any dismantling of the project site and its assets. It also requested the appointment of an interim trustee, lawyer Bruce E. Strauss, to work with the creditors and others to preserve the project's value as decisions are made over the future of the half-built plant.

A bankruptcy proceeding "is appropriate and necessary to protect the rights and interests of all parties and to maximize potential recoveries for all creditors," the petition reads.

The trustee wants to move quickly on hiring an investment banker-financial advisor to assist in decisions over whether a buyer could be found to develop the site or whether liquidation is the best option.

"The longer the project sits without any action, the less valuable it will become and the more problems will occur attempting to piece the project back together," the filing reads.

The petition — case number 11-22092-7 in the U.S. District Court for the Western District of Missouri, Central Division — marks the latest development in the saga over the failed project.

UMB filed a federal lawsuit against the Chinese company in early November in the Eastern District of Missouri.

That complaint alleges breach of contract and breach of other terms under the bond documents. It seeks damages of at least $36 million. UMB alleges Mamtek may have wrongfully diverted funds that were paid to the company with the understanding, knowledge and belief that those funds would be paid to creditors.

A week earlier, Moberly had informed UMB that it did not plan to honor its pledge to make the annual appropriation to repay the debt in the wake of Mamtek's abandonment of the project.

The city says it is not legally obligated to appropriate its own funds to cover debt service and that it handed over control of the project site to UMB. The bonds, issued in 2010, are secured by Moberly's financing agreement with Mamtek, a security agreement and first deed of trust.

Mamtek pledged to annually appropriate payments to the trustee, resulting in an A-plus rating from Standard & Poor's. The company defaulted in August on a payment to the city needed for debt service. Moberly declined to appropriate the needed funds and the trustee was forced to dip into reserves for a Sept. 1 debt service payment. The city lost its S&P investment-grade ratings in September for failing to make good on the appropriation pledge.

The undertaking received city help from the project sugar bonds that were issued through the city's Industrial Development Authority, and $17.6 million in state assistance was pledged although it was never awarded. Proceeds were to cover the cost of acquisition, construction and equipping of a sucralose manufacturing and processing plant owned by Mamtek.

Officials believed the project would spur economic development in the struggling central Missouri community and create hundreds of jobs, but construction halted with the plant half-built. Morgan Keegan & Co. was the underwriter.

Missouri Attorney General Chris Koster is jointly investigating the project with local prosecutors and Missouri lawmakers have been holding hearings to review how the project soured.

The trustee reported that the Securities and Exchange Commission issued subpoenas in connection with the deal. In the trustee's new involuntary bankruptcy petition and in a bondholder notice, UMB reports that neither Mamtek U.S. nor its parent, Mamtek International, have responded to its November lawsuit. A default judgment will be sought early next year.

The trustee and its lawyers have met with city and state officials and all are "working cooperatively to analyze the possibility of finding a successor user for the project, either as a sucralose facility or for some other purpose," according to the notice. All records and the books related to the project have been removed for safekeeping and are under review by legal counsel to assess the potential for bondholder claims against various parties involved in the project.

The trustee and other creditors filed the bankruptcy petition in an attempt to secure all remaining assets of the project as various mechanics' liens and lawsuits have been filed and there is a threat that some remaining assets could be liquidated without the input of bondholders or other creditors. Mamtek has handed its corporate governance, based in California, over to a liquidation company and assigned its assets to Development Specialists Inc.

The trustee and other creditors also worry that millions of dollars of valuable equipment at the project site, purchased with bond proceeds, could be removed by vendors as contracts are terminated, threatening the eventual completion of the project. "The appointment of an interim Chapter 7 trustee is needed to provide stability and coordination with the bond trustee, city and governmental authorities, including to control and preserve any assets for the benefit of creditors, including any assets under the control of DSI," the new petition reads.

The trustee also could coordinate a probe into the financial and corporate actions of Mamtek that led to its abandonment of the project and whether bond proceeds were used appropriately.

The filing questions the legality of certain payments made to company-related officials from the bond fund and raises the specter that creditors might target Morgan Keegan over the level of its due diligence on the deal. The petition says the firm acknowledged in its testimony during the recent legislative hearings that it relied on the investigation done by the city.

"Morgan Keegan testified that its counsel expressed no concern regarding Mamtek and its operations. Morgan Keegan claims that it was not notified of the email stating that Mamtek's plant in China had never opened for commercial operation. Rather, the official statement in the bond offering memo recited that Mamtek had a fully functional sucralose plant operating in China at the time of the offering," the petition filing reads.

Morgan Keegan, in a statement responding to the new trustee filing, defended its role, saying it was hired after local and state officials and legal counsel had conducted due diligence and settled on bond terms. Morgan Keegan's work was more focused on reviewing the city's financial condition and the ratings presentation.

The firm did conduct its own review but "because of the start-up nature of Mamtek's project and Mamtek's foreign operations, very limited information about Mamtek or its officers was publicly available," the statement read. "As a result, we reasonably relied on the statements of government officials, including those who originally introduced Mamtek to the city, as well as third-party valuations provided to the city."

City and state officials, along with members of the financial team, came under scrutiny during hearings last month by the Missouri House Interim Committee on Government Oversight and Accountability. Officials defended their actions, while Moberly accused state officials of failing to share concerns it had over Mamtek.

State economic development officials countered that they had shared information with all communities pursuing the project but that the city pursued the company on his own.

Corey Mehaffy, president of the Moberly Area Economic Development Corp., dismissed assertions that the city failed to conduct sufficient due diligence.

"The city, the Missouri Department of Economic Development, the underwriters, and independent valuation and appraisal specialists hired by the city all performed independent and overlapping due diligence on the project, on the sucralose markets and on the value of the project security," Mehaffy said in his testimony.

Additional hearings are expected in both the Missouri Senate and House next year when the Legislature returns, and many expect they will lead to legislation aimed at better protecting taxpayers' interests.

More than $4.3 million remains in bond reserve funds, but that amount does not take into account "significant expenses" for legal and consulting fees and insurance costs already incurred. UMB's counsel is Spencer Fane Britt & Browne LLP.

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