USA Springs creditors launch financing probe

With U.S. Bankruptcy Court approval, unsecured creditors of USA Springs have launched a detailed investigation into the $8.4 million mortgage granted the company, apparently to see if it is legitimate.

A filing last month is the latest twist in the decade-long saga of the company that wants to build a controversial water bottling plant in Nottingham.

USA Springs and various trusts controlled by its president, Francesco Rotondo, bought the property in 1998, with the idea of pumping some 300,000 gallons a day of spring water. But many residents and environmental groups have opposed the plan every step of the way, saying that it would suck their wells dry.

The company finally got its permit and closed on an $8.4 million loan from Roswell Commercial Mortgage LLC, a Pennsylvania firm, in March 2007 to finance it. But with the project half finished, Roswell started foreclosures proceedings.

On June 27, 2008, the USA Springs company filed for Chapter 11 bankruptcy reorganization, with less than $1,000 in the bank and nearly $14 million in debt. The filing said that the permitted business was worth $100 million and the property was worth $27 million, though those figures have been questioned in court.

Rotondo said that he just needed time to obtain refinancing to continue to build the plant, but he kept on missing various filing deadlines. He also blamed the economy, but promised that a deal was only weeks away.

The creditors eventually lost patience. At a hearing, which nobody from USA Springs attended, the creditors convinced the court to convert the case to Chapter 7 liquidation, which it did on April 1. USA Springs looked like it was finished.

But within weeks, USA Springs was back, with new counsel, blaming its old counsel and asking for reconsideration. And on May 21, the case was reconverted to Chapter 11, with a stipulation to adhere to strict deadlines to present a reorganization plan or face foreclosure without bankruptcy protection.

‘Increasingly common’

Last month, the company said that it was still engaging in “productive dialogues with potential investors, acquirers and/or other interested parties” and asked that the bar date – the date after which creditors claims will be barred – be moved up from October to July 31.

But unsecured creditors weren’t taking any chances. Last in line if the company goes under, a court-approved committee representing unsecured creditors are investigating whether Roswell really did secure the debt (now up to $9 million) with the property.

Creditors want to see the terms and conditions of the loan, along with information related to the negotiations, any analysis performed on behalf of Roswell on USA Springs’ ability to repay and any appraisals and information about internal decision-making.

Finally, it wanted to know what Roswell knew about what USA Springs planned to do with the money.

The creditors want to depose a Roswell official and request all sorts of documents, including e-mails, books and records, canceled checks, voice mail, appointment books, diaries, inter-office communications and notes.

It’s doubtful that much of this will become public, since the creditors earlier filed a motion to keep the debtor’s information secret, despite a new federal law requiring transparency, since debtors are more likely to cooperate when confidentiality is ensured.

Attorneys involved in the case would either not comment or return phone calls.

But investigations into secured creditors, while not routine, are “becoming increasingly common,” said Daniel W. Sklar a Manchester bankruptcy attorney with the firm of Nixon Peabody who’s not connected with the case. “Usually it is to see if the loan is really a loan, and not an equity investment.”

If it is the latter, Roswell would no longer be at the front of the line, meaning those unsecured creditors might get more.

“It’s usually a fishing expedition, which might mean the difference of getting 50 cents on the dollar as opposed to 20 cents on the dollar,” said Sklar.

Bob Sanders can be reached at bsanders@nhbr.com.