Kal Freight bankruptcy staying under Chapter 11, allaying fears of chaotic exit

Kal Freight’s closure in the coming weeks will not be under a Chapter 7 bankruptcy action, as had been feared by some of the company’s creditors, but will be a wind-down through the existing Chapter 11 proceedings.

That’s one of the main takeaways from the binding settlement term sheet agreed to Wednesday in the U.S. Bankruptcy Court for the Southern District of Texas. All the key creditors of the truckload carrier have signed on to the pact, and Bankruptcy Court Judge Christopher Lopez approved it.

Approval of the term sheet is not the final step. Lopez must approve a “plan confirmation,” expected to occur in April. 

While numerous attorneys contacted by FreightWaves either declined comment or did not respond to emails or phone messages, the term sheet spells out several aspects of the process to settle Kal Freight’s millions of dollars in debts in an orderly manner.

But it will be done under Chapter 11, not Chapter 7. The latter is designed to result in liquidation of the company.

Role of a buyer is not clear

The Chapter 11 process does have a buyer for Kal Freight. But it isn’t clear what Noor Leasing, the buyer listed in an earlier bankruptcy document, will be buying once the process is complete to meet the demands of the truckload company’s creditors after its equipment is sold off.

The number of assets listed in the term sheet total just over 1,500, mostly tractors and trailers. But the document authorizing the sale to Noor also has a list of 679 individual rolling stock assets in the sale and 56 “unencumbered trailers.”

In the meantime, before the plan confirmation, according to the sheet, various creditors will provide funding to Kal Freight  to help bring about an “orderly and commercially reasonable manner” for the ultimate “surrender” of the assets to help fulfill the debt obligations.

The surrender of assets is to be completed by April 18. 

There also will be funding from Triumph Capital to Kal Freight of $1.25 million in five weekly payments. 

The actual delivery of rolling assets for resale will be to Ritchie Brothers, one of the dominant players in the resale of assets.

‘Catastrophic’ fears raised if chapter 7 pursued

There had been a push among some creditors to convert the bankruptcy case to a Chapter 7 proceeding, which can result in a more rapid liquidation. Advocacy for that option came in part from the committee of unsecured creditors.

But as Triumph and Daimler Truck Financial Services said in a filing with the court, “an immediate conversion, or ‘crash landing,’ will be catastrophic for all parties-in-interest.” The companies raised the prospect of trailers abandoned on the highway and drivers stuck there too, carrying fuel cards from Kal that had been cut off.

That Triumph/Daimler document said that as of Feb. 20, Kal Freight had more than 800 loads still on the road.

The unsecured creditors will be paid by the transfer of “unencumbered assets” that the secured creditors do not claim as being part of their collateral. According to the term sheet, those assets will be put into a “liquidating trust” that will be used to pay the unsecured creditors’ claims. 

The Kal Freight bankruptcy always had in the background allegations that first surfaced when the bankruptcy was filed in December that the downfall of the company was the result of “malfeasance,” a word that popped up in court documents many times. 

It does not appear to have been a factor in the settlement of the creditors’ claims, but adjudicating those allegations would not be the work of the bankruptcy court.

More articles by John Kingston

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