CR 94-93 Ion Electronics Bankruptcy Agreement
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. Ma y 10, 1994 'l "" Council Report 94-93
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ION ELECTRONICS BANKRUPTCY STIPULATION AGREEMENT
ProDosed Action.
staff recommends approval of the following action: Authorize the
City Attorney to execute a stipulation Agreement in conjunction
with the Ion Electronics bankruptcy case.
Overview
In 1985 the City of Hopkins loaned Ion Electronics $159,000 to
assist in the start-up of their company. These funds were
received by the City as a result of a grant from the state of
Minnesota for the purpose of loaning it to Ion.
Ion Electronics, in accordance with the loan agreement, made
interest-only payments until two years ago. At that time they
experienced financial problems as a result of a law suit and
stopped making payments. Even though they have been found
innocent of any wrong doing in conjunction with this legal
. action, from a financial perspective it has forced them into a
bankruptcy reorganization situation.
Community Development staff is now asking the city Council to
approve execution of a stipulation agreement with Ion Electronics
and the designated representative of the Creditors Committee in
the bankruptcy case. This stipulation will specify a negotiated
am~unt for the balance of the debt owed to the City within the
bankruptcy settlement agreement. This negotiated amount is
$125,000 which is approximately $61,000 less than the $186,487
actually due as of the date of instigation of bankruptcy
proceedings (November 1994).
primary Issues to Consider
0 What are the specifics of the action as requested?
0 What is the impact of the action being requested by staff?
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James D. Kerrigan
. Director of Plapning & Economic Development
CR94-93
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~ primary Issues to Consider
o What are the specifics of the action as requested?
Earlier this year as a part of the Ion bankruptcy filing,
all creditors were to be provided written notification
concerning the specific amount of debt owed each creditor by
Ion. All creditors then had until March 9, 1994 to provide
written notice contesting any amount shown in the schedules
filed by Ion in U.s. Bankruptcy Court.
The problem that occurred for the city of Hopkins as relates
to this matter is as follows:
- Ion mistakenly listed the amount owed the City of
Hopkins as $53,000.
- The city of Hopkins apparently did not receive the
notice as provided to the creditors and therefore did
not object to the erroneous amount as detailed within
the required period for contesting such action.
Jerry steiner has filed a motion in u.s. Bankruptcy Court to
have the city's claim increased to $186,487. This motion is
to be heard by the court on March 19. At this time there
4It are two courses of action available to the City:
1. Proceed with the hearing in Bankruptcy Court on March
19 seeking court approval to file the city's claim late
and increase the amount to $186,487. There are several
potential disadvantages of this course of action.
First, if Ion and the Creditors Committee object to the
increase in the city's claim, it is possible the court
will deny the city's request to file late and increase
its claim. Second, proceeding to the hearing on a
contested basis will be costly for the City in terms of
legal fees and staff time expended. Third, the City
may not recover the amounts expended in establishing
the claim even if the Bankruptcy Court rules in the
city's favor because of the questionable status of
Ion's future ability to pay its unsecured creditors.
2. Approve the stipulation as negotiated by the City
Attorney and staff. This would significantly reduce
the expenditure for legal expenses and staff time for
the city, and also enable the city to potentially
recover 85% of the amount it would have recovered had
the amount of the City loan been correctly listed on
the Ion bankruptcy filing.
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CR94-93
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. 0 What is the impact of the action beinq requested by staff?
with execution of this agreement the bankruptcy statement
will be revised to reflect that Ion owes the City of Hopkins
$125,000 instead of the $53,000 shown.
In accordance with the bankruptcy plan of reorganization,
unsecured creditors, such as the city of Hopkins, will
receive approximately 40-50 cents for each dollar owed.
This means the City would receive approximately $62,500 of
the $125,000 of debt owed by Ion. Payment is proposed to
start in May of 1996 and be spread over a five year period.
The difference between the $125,000 amount in the
stipulation agreement and the $186,000 actually owed the
City would be placed into subordinated class of unsecured
lenders. The City would also receive approximately 20 cents
on the dollar for the $61,000 balance of the debt allocated
to this group if funds were available after paying the other
secured and unsecured debtors.
In conclusion, the Council needs to be aware that the City
will only receive repayment of funds under the bankruptcy
reorganization plan if the following occurs:
e - Ion is able to survive the financial problems they have
been experiencing and stay in business
- Ion generates a profit sufficient to pay creditors in
accordance with the reorganization plan.
Alternatives
The HRA has the following alternatives regarding this issue:
0 Approve the action as recommended by staff. This will
allow for the reorganization plan to be revised in
accordance the details as outlined above.
0 Instruct staff and the City Attorney to proceed with
the Bankruptcy Court hearing seeking court approval to
file the city's claim late and increase the amount of
the claim to $186,487.
0 Do nothing. This action would keep the repayment plan
in its present form which identifies an outstanding
balance owed the City of Hopkins of $53,000.
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