Propex files lawsuit against BNP Paribas, claims lenders schemed to force bankruptcy and to gain control

By Caroline Salls

Pittsburgh, Sept. 23 - Propex Inc.'s official committee of unsecured creditors filed a lawsuit Tuesday against credit agreement administrative agent BNP Paribas, according to a filing with the U.S. Bankruptcy Court for the Eastern District of Tennessee.

According to the adversary proceeding, in January 2007, at a time when the company was in financial straits as a result of declining market conditions, "the lenders engaged in a scheme designed to deplete the debtors' resources and ultimately force a bankruptcy proceeding in which the lenders could wrest control of the debtors from each of the debtors' other constituencies."

Specifically, the committee said the lenders forced the company to enter into a second amended credit agreement and limited waiver, which provided relief in the form of a waiver and temporary relaxation of financial covenants.

However, the committee said the amendment parties knew that the amendment and waiver had no value because the company was likely to default on the relaxed covenants.

In exchange for the amendment and waiver, the committee said the lenders demanded a $20 million cash pre-payment of principal, fees and expenses, as well as a higher interest rate.

"These additional burdens not only made compliance with the reduced financial covenants more improbable, they also left the debtors undercapitalized and further entrenched in insolvency," the committee said in the filing.

In addition, the committee said the lenders created a "false expectation" that they would agree to another credit agreement amendment or outright financing that never materialized.

"With no prospects of alternative financing, the debtors were forced to file for Chapter 11 protection, just as the lenders had intended when they negotiated the second amendment," the committee said in the lawsuit.

"Further, as a result of the undercapitalization caused by the second amendment, the debtors were in a far weaker state and, as such, had no viable alternative but to accept the DIP financing underwritten by the lenders."

As a result, the committee said the lenders' "ill-gotten gains" should be avoided and their claims equitably subordinated.

Requested court rulings

Through the lawsuit, the committee said it is also looking to void and recover some allegedly fraudulently conveyed liens on the company's collateral, avoid a lien related to Propex Inc.'s property in Berrien County, Ga., because the lenders allegedly failed to perfect that lien after Propex Inc. had its name changed and avoid the lenders' liens on Propex's environmental permits because the regulations that govern the permits provide that the permits do not convey a property interest that can be pledged as collateral.

Also, the committee is asking the court to declare that the lenders' pendency interest should be calculated at the non-default rate set forth in the credit agreement, that Propex is entitled to choose between the adjusted Libor rate or Base rate and that the adequate protection payments made thus far in the company's Chapter 11 case are improper and are recoverable.

In addition, the committee is asking the court to declare that the lenders do not have any security interest in the capital stock of Propex's Hungarian subsidiaries because no registered or valid pledge agreements in connection with purported security interests existed before the Chapter 11 case was filed.

Finally, the committee said it wants the court to declare that the lenders' adequate protection liens and section 507(b) super-priority claim are limited exclusively to the extent that there has been a diminution in the value of the lenders' collateral during the Chapter 11 proceedings and that there has been no diminution in value demonstrated by the lenders to date.

Propex is a Chattanooga, Tenn., producer of primary and secondary carpet backing. It filed for bankruptcy on Jan. 18, 2008, and its Chapter 11 case number is 08-10249.

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