Tricolor Downfall Is Rare Straight-to-Chapter 7 for Big Business

The evidence of Tricolor’s high-speed collapse could be seen clearly inside the vehicles its customers entrusted it to repair—children’s backpacks and work laptops.

The personal items locked away in Tricolor’s facilities, as described by an attorney last week in bankruptcy court, highlight the unusual nature of the subprime auto lender’s Chapter 7 bankruptcy liquidation. Operations ceased nearly overnight, prompting a chaotic shutdown that saw more than 1,000 employees terminated and 60 retail locations locked down.

The sudden closures have left a Chapter 7 trustee scrambling to stabilize the situation described by lawyers as a “melting ice cube” and urgently trying to gain control of assets, including about 100,0000 auto loans.

The company’s decision to seek a trustee-run liquidation is uncommon among multibillion-dollar companies that typically prefer Chapter 11, which allows operations to continue and management to retain some control even in a wind-down. The Chapter 7 path indicates a rushed decision-making process behind the scenes that will lead to a difficult path to recovery for large creditors like Barclays and JPMorgan.

“It’s very rare that you see a multibillion-dollar Chapter 7,” said Robert Gayda, a restructuring partner at Seward & Kissel LLP. “It’s not par for the course for sure.”

Tricolor’s downfall comes as the Justice Department pursues two probes into the company and lenders investigate whether their collateral was double-pledged. Add in vendor and lender demands, the administration of the 100,000 auto loans, and the challenges of tracking and maintaining vehicles across six states, and the bankruptcy is already unique.

Now, trustee Anne Burns faces a daunting task: Quickly understanding Tricolor’s operations and marshaling asset liquidation—rather than long-term business management—with an eye toward paying creditors.

That process could take months or even years, said Melanie Cyganowski, a former bankruptcy judge now with Otterbourg PC.

“I assume that the sheer numbers of folks in this situation will bring the process to a halt until the trustee gets a handle (with his or her professionals) as to how to propose a process that untangles this,” Cyganowski said in an email.

Meltdown

Chapter 11 allows existing management to use their knowledge and operational experience to try to maximize creditor value, Gayda said.

By contrast, a Chapter 7 trustee must “turn over every stone to try to find causes of action, including scrutinizing previous management,” he said.

Sidley Austin LLP partner Tom Califano, who briefly represented Tricolor before the bankruptcy, said he began working on a possible debt deal on Aug. 24 and was told there was more time. But as the company’s disclosures continued, banks walked away.

“This is the quickest meltdown that I have ever seen,” Califano said.

Despite challenges, Chapter 7 may still benefit creditors. The trustee can immediately confront potential fraud, and the estate can avoid millions of dollars in legal fees that would otherwise be spent contesting creditor motions, Gayda said.

It’s “a realization and a confrontation of the issues on day one instead of day 30 or day 60,” Gayda said.

Need for Speed

Chapter 7 trustees are required by statute to move fast, unlike Chapter 11, said former Nevada bankruptcy judge Bruce Markell, now a Northwestern Pritzker School of Law professor. That speed can mean selling assets at a discount, potentially reducing creditor recoveries, he said.

“Chapter 7 trustees are very resilient in that way,” Markell said. “But if you’re a creditor, that’s not what you want, right? Because this is chaos.”

A trustee can temporarily operate a business to preserve asset value, Gayda said. But the challenge will be unraveling the multibillion-dollar business and administering a portfolio with thousands of vehicles across 60 locations in six states, 200 service centers, undocumented borrowers, multiple securitizations, and lenders claiming liens on the same cars.

“It’s not produce, but this case won’t do well aging,” Charles R. Gibbs of McDermott Will & Schulte LLP, representing Burns as the trustee, said at its first bankruptcy court hearing on Sept. 18.

The lack of immediate transparency combined with the loss of management control and no clear timeline all suggest a messy path ahead, particularly for creditors, said Douglas Mintz, a restructuring partner at Cadwalader Wickersham & Taft LLP.

Mintz noted that even cryptocurrency exchange FTX, which suffered a high-profile and sudden collapse amid fraud allegations in 2022, opted for Chapter 11.

Before the bankruptcy, Sidley worked on “financing alternatives, governance matters, investigations, regulatory issues, and alternative restructuring negotiations” for Tricolor, according to court papers. The firm is no longer involved in the case.

“We’re not in the business of filing Chapter 7 cases,” Califano said.

What’s Next

At the hearing, attorneys painted a stark picture of the nation’s seventh-largest independent auto dealer, which suddenly lost most of its employees but had thousands of customers, some desperately seeking information about their cars.

Burns, a Cavazos Hendricks Poirot PC shareholder, almost immediately started fielding calls from unhappy customers after she became the trustee on Sept. 10, her attorney said.

It took her six days from her appointment to gain access to Tricolor’s Irving, Texas, headquarters. Once a bustling car title processing hub, it’s gone “dead quiet,” Gibbs said.

Lender TBK Bank, which says it’s owed more than $60 million secured by Tricolor’s vehicles, said in a court filing that it hired security guards to monitor vehicle locations following Tricolor’s furloughs.

Burns now also has authority to sue old management on behalf of the estate for any alleged misconduct or malfeasance, and has full control over business documents and attorney-client privilege, Cyganowski said.

The trustee has already moved to approve Vervent Inc. as Tricolor’s primary loan servicer. She declined to answer questions about the case.

She next expects to seek authority to formally operate the businesses for a limited time and authority to borrow money from some key lenders, Gibbs said.

Nonetheless, Burns’ control of Tricolor’s operations and assets remains tenuous.

“She can’t say that they’re under her control as of yet,” Gibbs said.