News of the bankruptcy of Republic Metals Corp., a large Florida precious metals refinery, and its affiliate, has rocked the precious metals industry. Read Pease & Curren’s initial analysis of the bankruptcy here. Since that first post, a number of our colleagues and customers have been trying to understand what this means for them and have been asking us lots of questions. Here are our answers to some of the most frequent ones:
I SENT SCRAP TO REPUBLIC JUST BEFORE THE BANKRUPTCY. WHAT ARE MY OPTIONS?
If you have scrap that is currently with Republic, you should consider hiring an attorney. Under 11 U.S.C. section 546(c) a vendor selling goods to a customer who subsequently files for bankruptcy may be able to demand those goods back. The demand must be made within 45 days of sending the goods, and within 20 days from the filing of the bankruptcy. However, once Republic melts your scrap and commingles it with its own material, reclamation will be much more difficult, if not impossible. If your scrap was sent before the bankruptcy filing, then another complex legal issue is whether your material was sent after Republic became insolvent. Reclamation is important because you may not receive anything for those metals later in the bankruptcy. If you do get your metals back, be sure to send them to a financially stable refiner!
WILL REPUBLIC’S BANKRUPTCY EFFECT OTHER REFINERS?
Yes. However, the scope of the impact on the refining industry remains to be seen.
In its initial bankruptcy petition, Republic was required to list its thirty largest unsecured creditors and the amounts that they are owed. Many of these creditors include other businesses that hold themselves out as refiners. Some refiners are owed lots of money that they may not see for years, if at all. Given that precious metals refining is a low-margin industry, it may be hard for some players to sustain such large losses. It is quite possible that Republic’s bankruptcy may cause a ripple effect leaving other refiners who have done business with them also insolvent and causing additional bankruptcies.
These refiners include:
Geib (owed $3.5 mil)
Midwest Refineries (owed $ 3.5 mil)
So Accurate (owed $2.1 mil)
Mid-States ($1.8 mil)
Horizon Metals ($1.4 mil)
General Refining (owed $600,000+)
QML (owed $508,896+)
(Other creditors that did not make the top thirty list may also be owed less money).
One of these refiners, So Accurate, has already closed its main office in Long Island City and relocated to a former branch location in Woodside, New York. Industry rumor has it that another nearby Florida refiner, Premium Precious Metals, has closed its doors and issued stop payments on checks.
Update (12/11/2018): So Accurate got in touch with us and maintains that the closing of their Long Island City location was unrelated to the Republic bankruptcy. Click here to find out more.
MY REFINERY IS ON THE UNSECURED CREDITORS LIST. WHAT DOES THIS MEAN?
It only means that Republic owes money to your other refiner. How this came to be is a matter of speculation. One possibility is that the “refiner” that you have been sending to is not a true refiner, but merely aggregates metals and sends them to a true refiner, such as Republic, for the actual processing to be done. Another possibility is that your refinery does some of the work to process your metals, such as melting them, but then sends some or all of the materials to Republic for further processing. The refiner may have metals that were being refined, and had not been paid at the time of the bankruptcy, or it may have left its metals in a consignment account with Republic.
WHAT IS CHAPTER 11?
The law has different ways of conducting a bankruptcy, depending on the bankrupt party’s situation. In a Chapter 11, the party declaring bankruptcy (known as “the debtor”) seeks the Bankruptcy Court’s assistance in restructuring its debts in an effort to stay in business. The Court can reduce the amounts of some debts or even say that certain debts are not owed at all. The Court can also renegotiate the debtor’s contracts or release the debtor for its obligations under those contracts. It can supervise the sale of a debtor business. The Court’s goal is to maximize what can be paid to the creditors (the people the debtor owes money to).
Another kind of bankruptcy is a liquidation, in which the debtor business does not continue operating as a business. In this kind of bankruptcy, the debtor’s property, such as its machinery, vehicles, real estate, customer lists, technology, etc. is sold off separately in order to pay off the creditors as much as possible.
Republic filed a Chapter 11 bankruptcy. However, if the company is not able to be create value to creditors as an ongoing business, it could still be liquidated.
REPUBLIC OWES ME MONEY. I WANT TO SEND THEM AN ANGRY LETTER DEMANDING PAYMENT. IS THIS WISE?
Be careful. When a debtor files for bankruptcy it is protected by the automatic stay. This means that creditors cannot take any actions to collect for a certain period of time without the permission of the bankruptcy court. This is often why insolvent individuals go through the process of filing a bankruptcy. If you wind up violating the automatic stay, Republic could end up suing you! You need to consult an attorney and find out how to lodge your claim properly with the bankruptcy court.
REPUBLIC OWES ME MONEY. WILL I EVER GET PAID?
That depends on a number of factors, including the kind of debt you are owed and how much money Republic has to pay its creditors. The picture does not look good.
According to its bankruptcy petition, Republic has $174.77 million in assets and $265.101 million in liabilities. Right off the bat, therefore, we know that not everyone can get paid everything they are owed.
It also depends on how they came to owe you money. If you are a secured creditor you have a much higher chance of getting paid than an unsecured creditor. Republic may also owe money that it did not list as a liability on its books.
WHAT IS A SECURED CREDITOR OR AN UNSECURED CREDITOR?
This is a complex question, but generally, a secured creditor is someone with a right to take certain collateral if the debtor does not pay up what is owed. One example of a secured creditor would be a mortgage lender, who has the right to foreclose on certain property (known as collateral) if it is not paid back. An unsecured creditor is someone who the debtor owes money to but has not pledged specific collateral. People who never transacted business with the debtor, but could file a lawsuit against the debtor are also generally considered unsecured creditors.
In the bankruptcy process, secured creditors are paid in full (up to the value of their collateral) before unsecured creditors are paid anything. Bankruptcy-related costs, such as the legal bills for the debtor’s bankruptcy lawyers, generally take precedence over secured and unsecured creditors. In a complex corporate bankruptcy such as Republic’s, these can be quite significant.
Republic had more secured debt than assets. This suggests that one possibility is that unsecured creditors could walk away with nothing or a very small percentage of what they are owed.
WHY DID REPUBLIC GO BANKRUPT?
We cannot be certain. Republic’s bankruptcy petition states that it discovered “a significant discrepancy in its inventory accounting as part of its preparation of 2017 year end financials”. Whether this came about because of theft or some other problem remains to be seen but will likely come out as the bankruptcy case unfolds.
I HEARD THAT ANOTHER REFINER, VALCAMBI SA, WAS GOING TO BUY REPUBLIC. WHAT HAPPENED TO THAT?
Republic’s bankruptcy petition states that it attempted to sell itself to an unnamed “Potential Buyer” prior to filing bankruptcy. However, negotiations broke down. Valcambi likely did not want to put itself in a position to have to pay back all of Republic’s many debts. It may turn out that Valcambi or another buyer will purchase Republic in a Bankruptcy Court supervised process. In this case, it may not take on the obligation to pay back all of Republic’s debts. Another possibility is that Republic is liquidated and its equipment, customer list, and other assets are sold piecemeal to other refiners, including Valcambi.
I DID BUSINESS WITH REPUBLIC BUT GOT AN ADVANCE/ GOT PAID FOR MY MATERIALS/CASHED OUT MY CONSIGNMENT ACCOUNT BEFORE THE BANKRUPTCY. I AM ALL SET, RIGHT?
Maybe. Bankruptcy law at 11 U.S.C. section 547 allows for the possibility that payments made by a debtor just before the bankruptcy, while the debtor was insolvent, can be undone under certain circumstances. This is known as a clawback. The bankruptcy trustee (an official appointed by the court to assist with the bankruptcy) may use this law to ask you for some or all of the money back, even if you were entitled to be paid at the time you received it and did nothing wrong. You can defend against a clawback by arguing that you provided new value to Republic or that you obtained the payment in the ordinary course of business. Whether these defenses apply to money received as refining settlements or consignment account cash-outs remains to be seen. However, you will need to hire an attorney if you receive process (court papers) angling to claw payments back from you.
When you are choosing a refiner it is important to do your due diligence and ask whether or not they are financially stable. How long have they been in business? Do they own their own facility or are all of their assets heavily mortgaged? Does your “refiner” refine materials in-house or ship them elsewhere? These are not rude questions and you should be reluctant to do business with anyone who is reluctant to answer them. The best way to avoid losing money to a corporate bankruptcy or clawback is to do your best to make sure that you are doing business with longstanding, established refiners.
Update (11/26/2018): MY REFINER IS ON THE LIST OF UNSECURED CREDITORS AND IS OWED A LOT OF MONEY FROM REPUBLIC. MY REFINER TELLS ME NOT TO WORRY “BECAUSE [IT] HAS INSURANCE”. IS IT SAFE TO SHIP TO THEM?
You need more information and you should do your due diligence before shipping. There are many different kinds of insurance, but this kind of loss to a bankrupt refiner tends to be uninsurable. Insurance covering this kind of loss would be extremely exotic, and you cannot be certain that it exists unless you are shown proof. Ask to see the declarations page for their insurance. This is the insurance company’s statement showing what kind of insurance your refiner has purchased. The refiner should be able to point out to you where it says they are insured against a loss due to a bankruptcy. The whole point of these declarations pages are so that insured parties can prove to others that they have insurance. You are well within your rights to ask for this and should not feel like you are being nosy or inconveniencing your refiner. You are just doing business in a responsible way. The risk of not asking is that this loss to Republic drives your refiner into bankruptcy and then you in turn do not get paid for your metals.
If they do show you the declarations page, make sure to see that the policy limit is high enough to match (or come close to matching) the amount your refiner stands to lose to Republic (you can find this on the list of unsecured creditors above). $100,000 in insurance coverage is not going to save your refiner from a $2 million loss!
Before joining Pease and Curren, Frank Curren attended Georgetown Law in Washington D.C. and practiced with a Boston-area non-profit, focusing on litigation between debtors, creditors, and debt-collectors.