A Coralville company that received state and city incentives to build its factory in Iowa is in a feud with a local bank and its main lender.
Zero Energy Systems, a company that makes insulated concrete walls at a plant on Westcor Drive, filed for bankruptcy March 25. The bankruptcy came after Iowa City-based MidWestOne Bank sued the company, claiming Zero Energy defaulted on its loans and owes the bank more than $16 million.
Scott Long, Zero Energy’s co-founder and CEO, said the bankruptcy was filed to help the company fend off MidWestOne. The bank’s suit, Long said, came while Zero Energy sought to raise money from outside investors.
When a bankruptcy is filed, it comes with an automatic stay that stops ongoing litigation from moving forward.
“We specifically filed for bankruptcy protection to block the bank’s lawsuit of which was filed mid-process of a voluntary reorganization,” said Long, who co-owns a majority of Zero Energy with Manoj Krishan of Texas.
MidWestOne’s suit, filed March 5, includes a request to a judge to appoint a receiver who would take over operations of the company.
“There are immediate and grave concerns regarding Zero Energy’s ability to pay vendors and the Lender’s ability to recover any of the Outstanding Amount from Zero Energy unless a receiver is appointed to take control of the business and liquidate it in an orderly fashion ...,” MidWestOne argued in its court filings.
MidWestOne also claims Zero Energy leaders said in emails on Feb. 20 and March 5 that they planned to shut down the company and therefore couldn’t make their loan payments.
“Long and the Zero Energy management team have demonstrated an inability to effectively run Zero Energy’s business operations as evidenced by the material losses generated by business operations and despite over $16 million in financing,” MidWestOne Senior Vice President Vance Haesemeyer said in an affidavit.
Long denied Monday his company is about to stop production, but acknowledged some production delays.
“There has been continued disruption of production in the plant because of an absence of working capital or project (financing) as we have contracts in hand. That has created delays in the process and delays in getting projects out the door to our customers. So we have, yes, absolutely had disruptions in production,” Long said.
“In no way did we communicate that we were shutting down the plant’s operation in its entirety. In fact, we are in full scale production as of today.”
He said Zero Energy has 62 employees and is on track to reach $10 million in revenue this year, a break-even point for the business.
OTHER LAWSUITS
Zero Energy’s bankruptcy comes as it also faces six other lawsuits from suppliers and vendors who say the company has fallen behind on its payments. All but one of those suits were filed this year.
One suit, filed by Iowa Motor Truck Transport of Garner, claims Zero Energy owes $72,150 to pay for 32 loads Iowa Motor delivered for the company.
Another, filed by Heins Trucking of Center Point, claims Zero Energy owes $5,000 “due to unpaid charges for services performed.”
Long acknowledged this week that Zero Energy has had trouble paying some vendors. That’s one reason he said the company had pursued outside money.
“We had a solution on all of these that we were working through until (MidWestOne) decided to get impatient and do this,” he said.
There’s also an ongoing lawsuit between Long and a former investor in Synergy Walls, a precursor company to Zero Energy.
While Zero Energy still wants to seek venture investment, Long said MidWestOne’s lawsuit has complicated fundraising efforts.
“In the middle of any fundraise, a bank becoming aggressive and suing to take possession of your company, disrupts the ability to raise capital, and they have clearly done so in the middle of an otherwise successful campaign that we’ve been working nationally since last summer,” Long said.
STATE AND CITY INCENTIVES
Zero Energy makes its insulated concrete walls in a 45,000-square-foot plant in Coralville. Both the state of Iowa and the city of Coralville awarded Zero Energy with financial assistance in 2011 to help build the facility.
The state’s award included a $250,000 royalty-based loan Zero Energy would have been required to pay back and $418,250 in tax credits and refunds.
Kirkwood Community College also agreed to provide a job training grant valued at $160,850. Coralville provided a $600,000 forgivable loan to Zero Energy.
All three are listed among the 144 creditors in Zero Energy’s bankruptcy filing. MidWestOne has the largest claim, which is secured, meaning it’s likely the bank would be among the first paid.
To receive the loan from Coralville, Zero Energy had to guarantee to create 17 jobs and a minimum assessed property value of about $3.5 million. Coralville City Attorney Kevin Olson said that while Zero Energy is technically in default of its agreement with the city due to the bankruptcy, the city is unlikely to take action as Zero Energy has created more jobs and assessed value than it needed to.
In addition, the city is guaranteed property tax payments from Zero Energy’s property — about $146,000 last year — no matter what, Olson said.
It was not clear this week how the bankruptcy would affect the state incentives provided to Zero Energy. The maintenance date for Zero Energy’s contract with the state was August 2016, meaning the company only had to maintain its obligations up to that point to receive the incentives.
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