The bankruptcy trustee overseeing the liquidation of Pacific Steel Casting filed an “adversary proceeding” in court Monday essentially accusing Speyside Fund, the group that bought the casting company in September 2014, of looting the company and improperly making insider payments — actions that ultimately led the 84-year-old business to file for bankruptcy in 2019.
The Speyside Fund, Speyside Equity, Alcast Company of Illinois, various business partners and managers, “looted” $14.5 million from the West Berkeley company over a four-year period, and justified the siphoning off by “cooking” the books, according to the action filed by Sarah L. Little, the bankruptcy trustee. The complaint, prepared by the Los Angeles-area law firm Brutzkus Gubner, was filed in front of Roger Efremsky, the U.S. Bankruptcy Court judge who oversaw Pacific Steel Casting’s first bankruptcy in 2014. A hearing is scheduled for January.
The entities that acquired Pacific Steel Casting in 2014 never seriously tried to resurrect the company’s business and instead extracted funds from the start, capital that was needed to continue operating, according to the complaint. This was a breach of “fiduciary duty,” according to the complaint.
The defendants “had no intention of keeping New Pacific Steel’s business alive for any significant length of time, despite their contrary representations to the Old Pacific Steel Debtors and this Court,” according to the complaint.
(The complaint distinguishes the original Pacific Steel Casting, owned by the Genger and Delsol family from 1936 until 2014, as “Old Pacific Steel.” The complaint calls the company acquired by Speyside “New Pacific Steel.”)
The complaint asks the bankruptcy court to force the defendants, Speyside Fund, Speyside Equity, Alcast Company, Uhy LLC, Rataxasco LLC and various individuals, including Speyside Fund investors Jeffrey Stone, Kevin Daugherty, Erik Wiklendt, Krishnan Venkatesan, Brian Holt, Steve Wessels, and Jerry Johnson, among others, to return payouts and past salary to the company so its creditors can be repaid. The complaint contends that the defendants, through a “series of illegal dividends, fraudulent conveyances and improper insider payments, looted funds that resulted in $40 million in damages.”
“It certainly looks like the lawyers for the Bankruptcy Trustee believe that Pacific Steel Casting, Speyside and their officers and employees looted the company and made a killing for themselves while leaving workers high and dry,” said Conchita Lozano-Batista, an attorney with Weinberg, Roger & Rosenfeld, which represents the fund that oversees the health and pension benefits of former Pacific Steel workers. “We look forward to seeing justice done for the workers when this goes to trial.”
Stone, a Speyside partner, did not return a request for comment from Berkeleyside. No one from Speyside’s corporate office has ever agreed to talk to Berkeleyside, although Stone did once leave a comment on a Berkeleyside story.
Speyside’s short, turbulent ownership of Pacific Steel Casting
Pacific Steel Casting, which made customized metal parts for industry, started operations in Berkeley in 1934. By 2014, the company comprised three casting plants operating on an 8.3-acre area around Second and Gilman streets in West Berkeley: a green sand plant, a shell mold plant and an air set plant. Pacific Steel Casting made custom steel castings for a variety of companies. The oil drilling equipment sector made up about 55% of its customers and the heavy-duty truck manufacturing sector made up about 33% of its customers, according to the complaint.
A series of setbacks promoted the family that owned the company, the Delsols, to file for Chapter 11 bankruptcy in March 2014. An immigration audit had revealed that many of the company’s 400 workers did not have social security numbers, prompting the company to layoff 200 people in 2011. A group of workers also won a class-action lawsuit that contended the company did not offer or pay for mandated breaks. Pacific Steel Casting was ordered to pay $5.4 million to 1,300 past and current workers in January 2014.
Speyside Fund acquired Pacific Steel Casting for $11.3 million in September 2014 and rolled all the assets into a Delaware-based company called Pacific Steel Casting Acquisition LLC. At the time, the company had around 365 workers, 47 managers and produced $100 million in revenue annually.
A leveraged buyout in 2014
The investors only put in $2.5 million of their own money and borrowed the other $8.5 million, according to testimony Johnson, the company’s former vice president of finance, gave at a creditors’ hearing in March. This kind of transaction is a leveraged buyout, according to the complaint.
In the first half of 2015, Pacific Steel Casting paid about $10.7 million in dividends to the original investors, Johnson said at the hearing. Johnson said that the 2014 purchase price was less than the value of the old company, so the purchase generated a tax gain, known as a “bargain purchase gain.” The distributions were made in part to pay off taxes, he said.
But the complaint filed by Little challenges that explanation. The $10.7 million in payments were made before any audited financials were done of the company’s books, according to the complaint. Accounting leaps were made to justify the distributions, including “wildly inflating” the value of Pacific Steel’s equipment and “understating cost of goods sold,” according to the complaint. (The complaint notes that the investors made a 436% return on their $2.5 million direct investment in just a few weeks, although the complaint says the increase was “illusory.”)
The complaint contends that the accounting firm working for Pacific Steel Casting also should be held to account for its misrepresentations of the company’s finances.
“The 2014 financial statement reflected that somehow New Pacific Steel was earning over $1 million per month even though Old Pacific Steel had been losing approximately $1 million per month while in chapter 11. In total, the Debtor reported a 23% gross profit, which was over two times higher than the previous four years on record.”
The financial statement also failed to take into account the $34 million in worker pension obligations the new Pacific Steel Casting had assumed.
To make the $10 million in payments, Venkatesan, then the president of the company as well as an investor, drew on accounts receivable — money that was needed to keep Pacific Steel Casting in good financial stead. Cash reserves dwindled so much that the company could no longer pay its rent on time or make contributions to the workers’ health and pension funds, prompting it to seek concessions from the landlord, Second Street Properties, the group overseeing the pension fund, as well as various vendors, according to the complaint.
The “Defendants … planned all along to pillage the Debtor’s assets, including its accounts receivable and access to loans and concessions from unions and other creditors, for their personal benefit and the benefit of the Owner Defendants,” according to the complaint.
Venkatesan and Pacific Steel Casting publicly blamed the drop in oil prices for the company’s financial stress. More than half of the company’s revenues had traditionally come from making custom parts for oil rigs and oil operations. Venkatesan said those orders vanished as oil prices declined.
The complaint also challenges this narrative. Little points out that by the time Speyside acquired Pacific Steel Casting in September 2014, oil prices had already dropped from $105 a barrel in June to $93 a barrel in September to $59 by December. If the investors had been serious about running the company, it would have made sure to keep cash reserves on hand to weather the financial dips, according to the complaint. Instead, the investors “continued to funnel money from New Pacific Steel to the Owner Defendants,” according to the complaint.
In addition, instead of filling orders which could have pumped funds into the company those running Pacific Steel Casting sent those orders to other foundries owned by the Speyside Fund, including Sawbrook Steel in Ohio, according to the complaint.
In June 2015, Pacific Steel Casting swapped out its original $8.5 million loan for a new loan from Wells Fargo Bank. The investors took that opportunity to make another $1.5 million in distributions to its investors, according to the complaint.
By August 2016, Pacific Steel Casting was in technical default with Wells Fargo. That prompted the investors to “lend” $3.95 million at 10% annual interest to the company to pay off the loan. The complaint contends that this was not a loan but an equity infusion.
In October 2017, Pacific Steel Casting announced it would be shuttering the plant within 60 days. The company managed to limp along for another year, in part, Venkatesan said, because he had been able to drum up a little more business. But at the end of 2018, the company sold off its equipment, garnering about $1.75 million. Pacific Steel Casting then repaid $3.8 million of the $3.95 million loan Speyside and other investors had lent it.
“In other words, New Pacific Steel was kept out of bankruptcy in 2018 despite the fact that it was not paying the vast majority of its bills on a timely basis, solely to enable the Owner Defendants to loot New Pacific Steel to recover, as much as possible, the Capital Contribution made in 2016 and 2017,” according to the complaint.
In January 2019, Pacific Steel Casting filed for bankruptcy. The company stated that it had about $1.9 million in assets but $3.4 million in liabilities. The only secured creditor on its books was Speyside, which was still owed $823,963.
The company owed about $845,000 in severance to its workers, but only managed to pay about $500 each to the 70 or so who remained, for a total of $35,000, according to the complaint. However, it managed to pay more than $615,000 in salaries to Venkatesan and Johnson, its two top executives, before filing for bankruptcy.
The complaint calls into question the timing of the bankruptcy filing. Pacific Steel Casting was basically out of money by 2017. But it couldn’t file for bankruptcy then because it would have triggered a Delaware law with a three-year statute of limitations, according to the complaint. The law states that if an insider gets a distribution that makes a company insolvent, it is an illegal distribution.
“They wanted to keep the business alive just long enough to allow the three-year statute of limitations for illegal distributions to run on the Initial Illegal Distribution, at which time they would place New Pacific Steel into bankruptcy thereby shifting the losses to creditors,” according to the complaint.
The new Pacific Steel Casting leased the plants and properties. The owner of the land, Berkeley Properties, made up of the workers who won the $5.4 million judgment in 2014, members of the De Sol family, and others, are trying to sell the land. Arch and Beam, a firm appointed by the bankruptcy judge in 2014 to administer Second Street, has said it has found a buyer.
Mayor Jesse Arreguín has said that no housing will go on the land. It is currently zoned “M” for manufacturing. The City Council may change the zoning to include “light industrial,” he said.