Callidus Suits Shine Light on World of Distressed Lendingby
Canadian lender sues clients; says they breached loan terms
Borrowers seek $224 million in combined damages from Callidus
Callidus Capital Corp., the distressed debt lender run by billionaire Newton Glassman, is battling with three of its borrowers who say the Canadian firm pushed them to breach loan terms to get control of assets ranging from coal mines to a ship recycler.
The case offers a glimpse into the combative world of distressed lending, with Callidus suing its former clients for breaking loan agreements, alleging that funds were diverted in one case, and claiming theft in another. The borrowers fired back with counterclaims seeking more than C$300 million ($224 million) in combined damages. They say Callidus changed the terms of the loans, required personal guarantees that weren’t part of the original discussions, withheld funds, and ultimately caused them to default or go into receivership.
Callidus is a “predatory lender which lends money with the objective to obtain ownership or control of the assets of the borrower,” Opes Resources Inc., parent of Fortress Resources LLC, stated in a counterclaim against Callidus filed July 13. The claim in an Ontario court seeks damages of $155 million.
The three lawsuits are tied to Callidus loans to Bentley, Alberta-based well specialist Alken Basin Drilling Ltd.; Texas-based ship recycler Esco Marine Inc.; and Kentucky-based coal company Fortress Resources. The cases are being heard in Alberta, Ontario, and Texas.
“In situations where companies are distressed and require capital, Callidus Capital is a lender of last resort,” Dan Gagnier, a representative for Callidus said by e-mail. “It is our duty to shareholders to ensure that loans are backed by appropriate assets and often times with personal guarantees. Those guarantees are a binding contract entered into with full transparency and these recent claims are frivolous and without merit.”
Callidus, a subsidiary of Catalyst Capital Group Inc., Canada’s second-largest private equity firm, has built up a C$1.2 billion loan book specializing in companies that can’t access traditional lending. Both Toronto-based firms are run by Glassman, who’s participated in some of the biggest debt restructurings in Canada, including at IMAX Corp., the movie projector company, and Hollinger Inc., the former publisher run by Conrad Black. Glassman declined to comment beyond the statement from Gagnier.
Gagnier points to two recent summary judgments in Callidus’s favor tied to another case involving Fortress’s former chief executive officer, and Morrisville, North Carolina-based Xchange Technology Group LLC. In both cases, the courts in Kentucky and Ontario issued decisions that forced former executives at both companies to pay the personal guarantees tied to the loans.
Representatives for Esco, Fortress and their executives declined to comment.
In the Alken case, Callidus filed suit against Kevin Baumann, founder and 60 percent owner of the oil services company, and his Pekisko Ranch Ltd., in June last year. Callidus, which agreed to extend credit of C$28.5 million, alleges he opened a new bank account for the company, diverting funds around one controlled by the lender. More than C$1.2 million in accounts receivables were deposited into the account and about C$480,000 paid out for the benefit of Baumann personally, Callidus alleges in the suit.
In his updated counterclaim filed Oct. 3, Baumann alleges Callidus revised the terms of their original lending discussions at the 11th hour after Alken had already terminated its previous credit agreement with another lender. The new terms required as much as C$6 million in personal guarantees that Baumann alleges weren’t part of the original discussions. Baumann is seeking C$100 million in damages.
Baumann said in an e-mail he looks forward to the suit being heard before the courts.
“The parties occupied grossly unequal positions of bargaining strength,” the statement of claim reads. “Alken was distressed, had terminated its previous credit facilities in reliance on Callidus’s representations, and required immediate access to working capital to meet its suppliers’, customers’, and payroll demands.”
Alken was put into receivership, with Callidus named as one of its secured creditors and its assets were sold in May.
Callidus filed suit against Esco Marine in December 2014, saying that property rightfully belonging to the lender was “stolen” after the company defaulted on its loan. Esco responded with a counterclaim on March 18, 2016, alleging Callidus promised to provide funds within four to six weeks for a loan up to $34 million. Ten weeks later, the funds still weren’t available, leaving it "struggling to maintain operations." It’s seeking unspecified damages.
Callidus won an auction for Esco Marine’s assets and said in December it had also signed a new partnership to effectively acquire, restart and operate the ship recycler itself with its partners.
Fortress also filed for bankruptcy protection in Kentucky. Callidus alleges in that case the company defaulted on its loans, which were personally guaranteed by several directors and shareholders, according to a January statement of claim. It says the borrowers owe it about $20 million.
In its counterclaim, Fortress defendants allege Callidus was slow to issue a credit revolver and changed the terms of the agreement to require personal guarantees before the funds were issued under the new terms. Its subsequent failure to provide the finances in a timely manner led to the default, Fortress alleges.
Callidus said on Monday it had hired Goldman Sachs Group Inc. to lead a previously announced potential privatization of the company. The company’s shares have almost doubled this year to a market value of about C$850 million after it implemented a share buyback program, raised its dividend, and announced the privatization plan.