Sale procedures of BK Racing approved, but questions remain

CHARLOTTE, N.C. — There are two big battles about to be waged for BK Racing.

The first will be the sale of the race team. The next will be how the money is distributed.

A few hours Tuesday and Thursday in U.S. Bankruptcy Court shed light on how the sale could play out.

There are many questions regarding the sale, but here is the main thing to know: The charter for the No. 23 team could be in the hands of someone other than Ron Devine going into the Labor Day weekend race at Darlington.

Why is BK Racing being sold?

Although filed as a Chapter 11 reorganization, there appears no way to figure out a plan to repay creditors and for the team to emerge out of bankruptcy with Devine reassuming control.

Union Bank and Trust claims $9.475 million on defaulted loans to the team. The Internal Revenue Service has a $2.87 million claim over unpaid payroll taxes and penalties. More than 40 claims for unpaid debts of more than $28.5 million have been filed. The deadline to file claims is Aug. 14.

Matthew Smith, the trustee who is in charge of BK Racing’s operations as part of the bankruptcy process and approves every cent currently spent by the team, estimated total claims possibly of $37.7 million, including a potential $15 million claim from Devine for money he personally put into the team so it could continue operations before bankruptcy.

“One of the reasons this team is in trouble is it had the wrong owner,” Smith said in his testimony. “I believe the right owner, a transition of ownership, is the best thing for this team.”

He said figuring out a plan for reorganization was not practical. The team is running off its purse money, sponsorship and leasing a hauler. It is behind on its NASCAR entry fees.

“I am not asking the court to approve to sell the team because I have to, am about to run out of money,” Smith said in court testimony. “Cash is tight. Don’t get me wrong. But I know what I’m doing in managing cash.

“We have fixed some of that with sponsorship, which has helped us. I want to make sure that this team, that I can run this team and we can get it to a smooth transition for the right buyer.”

When will the sale take place?

Bids are due to the trustee by Aug. 13. If there is a dispute on whether a person is qualified to bid on the team, there would be a hearing Aug. 14. The trustee will get all the bidders together, privately, in an auction-style sale Aug. 20.

The judge in the case, J. Craig Whitley, then must determine if the sale is the best that can be done in an effort to repay creditors — and Whitley’s demeanor in court indicated this wouldn’t be just a rubber-stamp process.

The judge could give that approval at a hearing Aug. 21, but if anyone objects to the winning bid and whether it is the best deal possible from the creditors’ perspective, a hearing will be held Aug. 23.

If a sale is approved, the closing would likely come in the next three to 10 days. NASCAR’s race at Darlington is Sept. 2.

What bids have been made?

Smith said he talked to 29 potential buyers of the team. Longtime NASCAR crew chief and current GMS Racing president Mike Beam’s bid of $1.8 million for the charter and fixed assets (cars, furniture, etc.) is considered the “stalking horse” as the minimum bid. Any additional bid must be $1.95 million (down from $2.1 million in the initial sale process proposal).

Beam can increase his bid, as can all the bidders, during the sale Aug. 20. Beam would own the team as an affiliate of GMS Racing. Spencer Gallagher, son of GMS Racing owner Maurice Gallagher, was at the hearing Thursday.

If Beam is not successful, he will get a $75,000 termination fee for costs involved in getting the initial bid prepared. It probably won’t cover a cell phone bill of drivers calling Beam who are interested in a Cup ride, as Beam has now become everyone’s best friend in the garage.

What is actually being purchased?

Smith wanted to sell the team, including its charter and equipment, as a whole. But after several objections to that plan, Smith will now take bids that cover four “buckets” — the charter, titled vehicles, intellectual property assets and the remaining hard assets. This will allow someone who is just interested in the charter to work with someone else interested in purchasing the other items. It also likely would end an attempt by Obaika Racing to purchase some of the old race cars and other items.

So how much will it go for?

Probably more than $1.8 million.

Devine sold a charter to Front Row Motorsports for $2 million after the 2016 season. In addition to the charter, the team has assets valued at approximately $1.57 million (equipment, race cars, furniture, transporters), but there likely will be disputes over ownership of some of the equipment — including disputes from Devine that he owns certain non-racing vehicles in the team’s possession.

“I’m expecting we’re going to have a competitive sale process,” Smith said. “I’m hoping the price goes up and we get a better recovery out of the sale.”

Also, any sponsorship sold before the sale but for races that are run after the sale would have that money go to the trustee to distribute to creditors.

What does Devine think of all this?

Not much.

“This is all about Union Bank driving this bus to try to get rid of this charter and try to liquidate it,” Devine told the court. “I don’t think there is any way to have a lower value of a charter than to do it in the season. You can certainly do the transaction, but that has to be effective at the end of the season. That brings many more parties to the table. That will get the highest value for it.”

Devine, when done asking questions in court, told the judge, “Your honor, the wrong owner that built this thing has no more questions.”

Devine will be allowed to bid for the team, but because he is the debtor, he will face increased scrutiny. All bids must be in cash; none can have financing.

Devine also must be approved by NASCAR to own the team again. NASCAR has not commented on whether Devine would be a “prohibited person” under NASCAR rules concerning the owner of the charter.

If NASCAR or the trustee dispute whether Devine is a qualified bidder, that would be one of the issues heard Aug. 14.

What happens to the proceeds of the sale?

That is the big “to be determined” in all of this that the sides couldn’t agree on when trying to determine the process of the sale. The initial proposal was that $350,000 of the sale price would go toward the $350,000 in claims of unpaid wages prior to February from current and former employees.

The bank and the IRS believe bankruptcy law does not allow for such a provision, that the law specifies their claims come before those of the employees. The trustee argued that without the employees the charter would have no value, because if the team missed a race NASCAR could have revoked the charter. Judge J. Craig Whitley indicated he could rule that this case go into foreclosure — if the attorneys wanted a strict interpretation of bankruptcy law — and so the sides might want to try to find some common ground.

In the end, it was determined there would be no provision for claims for unpaid wages — Devine told the court that he believes the accurate amount is lower than $350,000 — and that distribution to employees would be determined after the sale, along with all of the distributions.

The fight over the sale proceeds could ultimately be tougher than trying to get a car through NASCAR’s inspection system.