CoServ Halts $1.3-Bil Foreclosure With Chapter 11

Lender National Rural Utilities Cooperative Finance Corp. of Washington, DC filed for foreclosure and tossed the holdings onto the Feb. 5 auction block. Everything from generating stations to its two-year-old headquarters was on the roster. The Chapter 11 filing pulls all property under the court's protection. That includes CoServ Realty's recently acquired 286-room Westin Beechwood and the championship golf course, Creeks at Beechwood, holdings that the self-made rural utility got through a foreclosure in early December 2001.

Joe Forman, CoServ senior vice president, tells GlobeSt.com that talks broke down in recent days, forcing the company's hand. "We sort of ran out of time and took it to an (Chapter) 11 to protest the assets," he said. "Hopefully with the court's protection we can get some resolution."

Forman says the reorganization plan is still being gamed out. He expects that it will take several more months before it's ready to present to the court. The 65-year-old CoServ currently is negotiating for debtor-in-possession financing to ensure payment obligations to vendors will be met during the restructuring.

CoServ's Bill McGinnis, president and CEO, said the lender "was trying to use its financial leverage to force us into agreeing to terms that are not in the best interests of the cooperative. CFC (the lender) has left us with no alternative."

McGinnis assured CoServ Electric's 64,000 customers that service will continue without interruption "while we resolve these issues and implement a reorganization plan." No staff reductions are expected to result from the Chapter 11 filing.

The move comes with a CoServ lawsuit against its lender claiming lender liability and fraudulent conveyance. CoServ alleges CFC encouraged it to expand and supported its service offerings yet subsequently refused to meet legitimate funding requests under established financing agreements. It also alleges that the lender "made a series of unreasonable demands on CoServ...that have resulted in damages of hundreds of millions of dollars," according to the press release.

The Chapter 11 filing comes three months after CoServ took the same action for its telephone and cable companies. Today's action rolls in CoServ Electric, CoServ Investments LP, CoServ Utility Holdings LP and CoServ Realty Holdings LP. The natural gas, security and Internet services divisions for CoServ are not part of the Chapter 11 petition.