Following the company’s abrupt June 1, 2021, shutdown and June 6, 2021, Chapter 11 bankruptcy filing, Katerra, Inc. is looking to enter private agreements to sell its renovation services business and its Atlanta-based Lord Aeck Sargent architecture, design, and planning firm — sales which may get some Katerra-contracted work restarted in the coming weeks. The company’s motion requesting to sell the businesses came as former employees organized a class-action lawsuit alleging violations of the Worker Adjustment and Retraining Notification (WARN) Act.
As the company’s private sale filings note, the company is hoping to sell the two businesses as quickly as possible. Katerra specifies that it currently has 6,400 employees, claiming that the expedient sale of its businesses is paramount to saving jobs, as well as “[minimizing] customer disruption” and “significantly [reducing] potential secured claims exposure.”
According to its June 15, 2021, filing specifies, TNC Property Holdings IV, LLC and ONX, Inc. have proposed to purchase Katerra’s renovation business for $1 million in cash. If approved, TNC Property Holdings and ONX would receive “all backlog, assets, and [intellectual properties]” alongside its assuming the renovation business’ liabilities.
Katerra’s filing for the sale of its renovation operations notes that it is attempting to get its contracted work back on track as quickly as possible.
“The Renovation Business currently has numerous ongoing projects on very tight contractual timelines…Failure to timely perform could result in customers seeking compensation under applicable bonds, likely exposing the Debtors to additional liability,” the filing states.
The terms of the TNC Property Holdings/ ONX sale note that there are seven contracted jobs on which Katerra and TNC Property Holdings/ ONX would split collateral. As part of the sale, the buyers also assume responsibility for at least 642 contracts which have not been rejected.
Katerra continues by saying that it cannot afford to keep all of its operations running amidst its responsibilities to its contracts, saying that “if [Katerra] had chosen to continue to operate the Renovation Business during these chapter 11 cases without a buyer, completing all existing projects on their own would cost the estates approximately $7 million…without accounting for further disruption.”
As the filing adds, the quick sale of the business is of the essence: “Selling the Renovation Business expeditiously is the only way to minimize [the risk of further liability], and the Debtors do not believe there will be a business to sell if the sale were subject to a prolonged auction process.”
An entity of former employees, managers, and owners of the original Lord Aeck Sargent business (which Katerra acquired in 2018) has proposed to purchase the business for $1,655,862 under the name Lord Aeck Sargent Planning & Design, Inc. — gaining full control of the business’ assets as well as its liabilities.
Katerra claims that the sale’s “terms…will allow [Katerra] to access liquidity in the near-term, preserve approximately 115 jobs, cap administrative costs, shed operational liabilities, and do right by [Lord Aeck Sargent’s] vendors, suppliers, and customers.”
Katerra also claims that the situation offers unique stability and value: “no other party can match the significant value proposition unlocked by the participation in the business of the [Lord Aeck Sargent] managers.”
Former employees allege WARN Act violation in class-action lawsuit
This move comes as three former employees of Katerra organized a class-action lawsuit on June 15, 2021, against the company which states that approximately 730 employees who were terminated as a result of the company’s shutdown were not given the appropriate 60 days advance notice — a violation of the WARN Act.
As per the US Department of Labor, the WARN Act “protects workers, their families, and communities by requiring employers with 100 or more employees…to provide at least 60 calendar days advance written notice of a plant closing and mass layoff affecting 50 or more employees at a single site of employment.”
The lawsuit claims that “an estimated 730 other employees of [Katerra] who worked at, reported to, or received assignments from [Katerra facilities] in Tracy, California and Tacoma, Washington, and offices in Jersey City, New Jersey, Scottsdale, Arizona and Seattle, Washington, as well as other sites in those and other states, including Texas…were terminated on or about June 4, 2021, without 60 days’ advance written notice.”
It’s unclear whether the details of Katerra’s sudden, publicly-unexpected shutdown will influence the lawsuit, as the WARN Act “makes certain exceptions to the requirements when layoffs occur due to unforeseeable business circumstances, faltering companies, and natural disasters.”
The lawsuit requests a judgement that will reward each affected employee “unpaid wages, salaries, commissions, bonuses, accrued holiday pay, accrued vacation pay, pension and 401(k) contribution…for up to 60 days, that would have been covered and paid under the then applicable employee benefit plans had that coverage continued.”
Additionally, the plaintiffs are requesting a judgement awarding each terminated employee “An allowed wage priority claim for up to $13,650.”
Though the lawsuit’s plaintiffs note that although the precise number of the terminated employees eligible to join the WARN Act complaint is unknown and is “so numerous that joinder of all members is impracticable,” it estimates that the number is “at about 700 individuals” — a number that could possibly push the costs of any settlement far past Katerra’s current level of liquidity.
As Katerra notes in its filings requesting permission to sell its businesses, there is not significant liquidity available for the company.
A hypothetical explanation of available funds suggests that the company has less than $7 million currently available in the next six months — a number which could be significantly impacted by the financial ramifications of any settlement.
The result of the lawsuit could have significant ramifications for Katerra — and may put additional pressure on the company to continue the sale of its assets and affiliated businesses.