CHARLOTTE, N.C. -- BK Racing is now in the hands of a trustee appointed by the bankruptcy court.
What does that mean? It means that team owner Ron Devine has no financial or managerial control of the team. It is in the hands of Matthew Smith, who works for a company (The Finley Group) that specializes in financial consulting, debt reorganization and, if needed, liquidation of distressed companies.
Devine filed a Chapter 11 bankruptcy, which gives the debtor time to reorganize the business in order to pay back creditors, just hours before a Feb. 15 hearing in state court in which Union Bank & Trust had asked for a receiver to be appointed. Because Devine has not filed all the documents and has not followed some of the accounting procedures required in a bankruptcy of this type, the judge could have dismissed the case or forced a liquidation Thursday.
Claims by creditors are not due until April 26 -- and the judge made a public plea in court that all BK Racing employees and creditors who feel they are owed money file their claims with the court. As of Thursday, there were claims of $18,502,976, with the largest from the bank ($9.47 million in unpaid loans) and the Internal Revenue Service ($2,893,499 primarily for unpaid payroll taxes, penalties and interest). There is also an expected $2,247,611 claim from Race Engines Plus. Among the other creditors are seven employees claiming unpaid wages (and, in many cases, bounced checks).
Here's a primer of what happened in court over the past week, with the answers from testimony.
Why did the judge appoint a trustee?
Judge J. Craig Whitley explained his decision in court Wednesday: "I have sympathy for you Mr. Devine. ... I am hopeful that this is a business that you have made enough changes, that with some good accounting backup and a little more structure how operations are done, that the business might be viable and these good people will get paid and you will retain your equity interest in the company." Whitley signed the official order to appoint the trustee Friday.
Who is the trustee?
Smith has helped turn around and, if need be, liquidate companies. He testified that he helped an IMSA team reorganize to help meet its obligations to a bank. He has served as a non-industry member of the North Carolina Motorsports Advisory Council. He arranged for the Sea Trail Corp., a 54-hole golf course resort in North Carolina, to get out of bankruptcy via sale to a Chinese corporation. His bio is here.
What does a trustee do?
Jessica Steinhagen, who is a distressed debt legal analyst at Reorg Research, a company that analyzes distressed companies for potential investors, explained to ESPN:
"The trustee basically has the same obligations as the debtor, including running the business and filing a plan of reorganization. The trustee takes over day-to-day control of the business and displaces management. ... It's hard to say how long it will take for the trustee to get its hands around the business. It will depend on the state of the business and its finances. The case could linger in Chapter 11 for a while as the trustee determines whether it makes sense to keep the business operating, or there could be a request to convert the case to Chapter 7 [liquidation] fairly quickly if it's warranted."
How can a trustee run a team when he has no experience running a race team?
Smith, in testimony before being appointed: "I've intentionally not reached out to employees or others to figure out a game plan on how I would run this on Day 1 because I think it's premature to do that. It would have been meddling. ... If appointed as trustee, I'm going to be the fiduciary. The responsibility is going to rest with me. But I'm not going to do it all on my own and can't do all of it on my own. It's a team. There is an organization. There are employees. ... I believe they know what needs to be done. I'm going to work with them to get that done."
So what is the approach of the trustee?
Smith: "The first thing I would do is to figure out how much cash I have and how much cash I need to spend. And if there are not ways to reduce the expenses, then we'll need to determine if additional capital is available ... with court approval. If the cash flow of the business is cash flow negative, we'll understand exactly what is the hole, how negative is it, where is it coming from, can the hole be filled, can we get back to cash-flow neutral. Then if it can't, are there sources of capital that can provide liquidity to the business."
What do the creditors think?
• Bank attorney David Schilli: "You have before the court a debtor whose management refuses to play by the rules before and after this case. Mr. Devine had the audacity to call these proceedings 'nonsense,' but I think his actions actually speak louder than the words. He has ignored the court's orders, he has ignored the bankruptcy code and he's ignored, we believe, his fiduciary duties. ... I would dare say that this, for Mr. Devine, is more of a hobby, an expensive one at that, as opposed to a business operation."
• IRS lawyer James Sullivan: "We find the accounting practices of BK Racing to be extremely problematic and not helpful. ... BK Racing's profitability is highly questionable."
• U.S. Bankruptcy administrator Shelley Abel: "We're in support of [a trustee]. We certainly don't think that continuing with the status quo would be appropriate."
• Creditors lawyer Glenn Thompson, who stated the creditors want a trustee but weren't unanimous: "[They] have lost faith in Mr. Devine. ... They're prepared to help the trustee."
What do employees think?
That remains to be seen. But Jeffrey Lemons, who has 27 years in racing and has worked in the machine shop at BK Racing since 2012, testified Wednesday:
"At this point in time, with what I have experienced and decisions I've seen made, somebody needs to get this under control that has a [unbiased] opinion and a true business opinion and put us in a budget. ... Mismanagement of their finances, mismanagement of the business that we've seen ... I would love for you to appoint a trustee to help have an unbiased opinion straighten this out so it's red and black, yes and no, and let's go racing and be part of a tremendous sport."
Why would employees work when they haven't been paid and, at times, alleged that payroll deductions were made for a short period of time last year for health insurance when they no longer had insurance and then got allegedly inaccurate W-2s?
Lemons was diagnosed with prostate cancer last summer and didn't have insurance after BK Racing stopped offering it. He testified that Devine had pledged to pay his bills but then stopped on Aug. 1. Lemons, who owes $14,100 in medical expenses, said he is owed $9,600 in pay for four two-week pay periods that haven't been paid.
Lemons: "You had a choice -- if you didn't want to work for free, you could go home. But the same time, we were filling out time cards, you were under the assumption from what was being said -- that it was going to be solved maybe next week. Then the next week came, well it was going to be next week. So you were working betting on the income that was going to happen the next week. You got yourself in deep enough, all of a sudden you know we're going to the Daytona 500. ... It's been tough sitting watching Ron get beat up. I understand. I've been there. But at the same point in time, I'm here because I've got to protect myself. We're $22,000 in debt between Ron and I. At 53 years old, health insurance that is a high rate, doctor visits due to my cancer surviving and so forth that's coming up, I'm in a position where I need my money and unfortunately I had to put myself in this position to [testify against him to] try to get it."
Will Gray Gaulding be the driver?
Smith: "I would think the same driver, but [I don't know]."
By the way, Gaulding is not getting paid by BK Racing this year and was getting paid roughly $5,000 a race last year.
Devine: "We are not paying our driver. ... He may have some special services contract with people, but I'm not aware of any of them."
What does Devine have to say?
Devine was on the witness stand for about five hours over two days. He had much to say. He believes the bank's goal is to have the trustee sell his charter, potentially to Premium Motorsports owner Jay Robinson.
On a trustee:
"You're trying to figure out whether to put [in] a trustee? It's a disservice. Not only to me and my 35 million dollars that I've invested but to the people sitting out there trying to get paid. All they want to do is capture my charter and move it to Jay Robinson at Premium Motorsports."
On whether he mismanaged BK Racing, considering the staggering losses (some more than $10 million a year), current debts and the fact he invested a total of $35 million in the team:
"If you look at our investment that was made, it falls way short of the investments that have been made in these major teams and even some of these smaller teams. [That allegation] is just chatter. The reason it is just chatter is because this team that did that qualified for two charters. The only way to do that was to be in full operation three years prior to the [awarding] of those charters. Yes it was expensive. But it was a good investment. And it was a good investment that yielded these charters. ... I believe these charters will develop over time, just like any other sports franchise has in the country, and they will become very valuable. I think you will look at $35 million for a sports franchise not that many years from now as a small number."
On not paying employees:
"We're behind from their winter pay. ... They're a couple of paychecks behind." Devine also said his plan would have sponsor EarthWater give his employees stock in the company, which plans to go public, he said, later this year.
On bouncing payroll checks:
"We've been going back and forth with the [Internal Revenue] Service, and they sweep our account. ... It's hard when you have the funds available and you put the checks on the street and they clear in a few weeks -- and when the cash [in my account] gets levied like that, I have to replenish it. Yes, there's a disconnect on that."
On giving employees W-2 forms that indicate they had been paid for the full year when they had not:
"It was clear to anyone that has a W-2 issue ... all [an employee] has to do is tell them they see irregularities in it, they can adjust his W-2."
On whether he will work with the trustee:
"I don't know what I'll do. It depends on whether the trustee is really trying to operate and run race team or if he's just trying to steal my charter. If all you're trying to do is eliminate BK Racing and liquidate its assets and all this stuff that's been served up, then I don't plan to be particularly involved in that. ... If we can operate it and run it and work together? Maybe. I don't know what I'll do. I don't think [a trustee] is necessary."