Bankruptcy Will Solve Uncle Nearest's Problems

Uncle Nearest Inc. is headed for bankruptcy court.

To be sure, Phillip Young, the court-appointed receiver who is running the company, hasn't filed the papers to start the process – yet. But he has said the company still can't pay its bills, and the company owes more than $208 million with more than $121 of the amount owed to Farm Credit Mid-America, which has sued, saying Uncle Nearest and its founders defaulted on $108 million in loans and accrued interest. About $87 million is owed to other creditors and vendors.

A whole host of lenders and vendors, including some in France, have said they will sue the company the moment the receivership is ended. The company owes an undetermined amount of federal and state income taxes.

Young says he has an investor group that is willing to buy Uncle Nearest Distillery and associated companies.

Do you really think any sane buyer will be willing to acquire Uncle Nearest when it faces undetermined liabilities in the form of debts and taxes? Of course not.

The obvious solution is to put all the Uncle Nearest entities into bankruptcy, and have the receiver negotiate down whatever tax obligations that can't be discharged in bankruptcy to the lowest possible level.

Young has already said he is considering putting the company into bankruptcy. The result of that would be that the buyer would acquire a company with no debts other than, perhaps, taxes. But we'll bet that will be taken care of through an Offer in Compromise.

The result will be that whoever buys Uncle Nearest will acquire a company with no debts, other than, perhaps, some taxes. The judge overseeing the receivership is certain not to approve the sale unless the buyer puts enough capital into the company to ensure it can operate successfully. Uncle Nearest will be the best capitalized alcoholic beverage company in the world.

Any bankruptcy is a tragedy. Lots of people and businesses lose, which is why a receivership is always better for a troubled business. In this case, the biggest loser will be Fawn Weaver.

Weaver was in Singapore when she saw a picture in the New York Times that showed a Black man sitting to the immediate right of Jack Daniel. That right-hand man was George Green, the son of Nathan "Nearest" Green, who was enslaved when he met the young Jack Daniel. As time went on, he taught Jack Daniel how to make whiskey. Later, the relationshhip developed into a business with Nearest Green as the master distilled and Jack Daniel the man who sold the product and in other ways ran the business.

Fawn Weaver's curiosity was aroused; she did some investigation, discovered that she was related to him and resolved to honor Nearest Green by building a distillery to tell his story. In this, she succeeded spectacularly well. The brand quickly got distribution in 50 states.

That may have been helped by a book she wrote telling the story of Unle Nearest. It also helped that the liquid was excellent; since its debut in 2017, it won over 1,100 awards and accolades and was the most awarded American whiskey or bourbon brand for multiple successive years.

That alone should be enough to secure her a place in the business hall of fame. But then the distillery she founded was sued by a creditor which alleged it was owed more than $108 million, and asked that a receiver be appointed to hopefully rehabilitate the business.

The receiver, Phillip G. Young, was appointed, and as he began to look into things, a number of disturbing facts emerged: The distillery hadn't filed federal or state tax returns for years, computerized accounting records more than than three years old were missing, there's evidence that someone embezzled money from the company. And the lender had never verified the barrels of whiskey, which were the collateral for its loan, actually existed. Which they didn't.

As all of this came out, she and her husband, who had the title of CEO, acted as if they were running the company. But they weren't. When the court appointed the receiver, he gave the receiver total control and power over the company.

So what did she do? She tried to put the company into bankruptcy, apparently with the hope of ousting the receiver and regaining control of the distillery. Meanwhile, the receiver filed documentation with the court that the firm was essentially bankrupt. Federal and state investigations are underway.

No one has said what those investigations include, but here's a good guess: why there are no accounting records beyond the most recent three years, failure to file tax returns, including Federal Excise Tax returns with Alcohol & Tobacco Tax & Trade Bureau, failure to pay taxes, as well failure to maintain proper books and records and bank fraud. And that's probably just the beginning.

She blames all the financial problems on Uncle Nearest's former CFO, Michael Senzaki, and has filed a civil lawsuit against him, saying he orchestrated a years-long fraud. Court filings allege that Senzaki admitted to falsifying reports, manipulating finances, and forging Founder/CEO Fawn Weaver’s signature to conceal millions in liabilities and artificially inflate their credit line.

But Weaver's hands aren't so clean, either. She obtained a $20 million loan from MarcyPen, a venture capital firm owned in part by Jay-Z, the music mogul. Instead of depositing the proceeds into Uncle Nearest accounts, she deposited them in the accounts of a separate company through which she and her husband maintained their controlling interest in Uncle Nearest Inc.

In February, she acknowledged in a court appearance she had initially hidden the loan from the company's creditors, a potential violation of Federal banking laws.

The receiver disclosed in a second-quarter status report that he has turned over documents to both the Securities and Exchange Commission and the U.S. Attorney's Office for the Southern District of New York, which often investigates banking fraud.

In most companies, that would be enough to result in her dismissal, and that's exactly what happened effective June 1. I'm surprised Young waited that long, especially since she had filed one motion after another interfering with the receiver's work. The dismissal "has resulted in significantly less confusion among employees and vendors and has made business operations significantly smoother," the receiver told the court.

I think there's no question that Fawn Weaver is a marketing genius. She was responsible for the growth of Uncle Nearest from a story to a major distillery, one that produced a whiskey that won major awards for several consecutive years.

But I think there is no question that neither she nor her husband, who had the title of CEO, did the blocking and tackling required to operate a business on a day-to-day basis. At the very least, they should have known tax returns weren't being filed.

The triumph of Fawn Weaver has turned into a tragedy. In his most recent filing, the receiver wrote that as the company's court-appointed director, he “likely has viable causes of action against a number of parties, including Mike Senzaki, Fawn Weaver, Keith Weaver, and/or entities controlled by these former officers and directors,” He didn't offer specifics, but stand by for a blizzard of lawsuits.

In fact, that blizzard has started. On July 7, the receiver sued Farm Credit Mid-America, alleging gross negligence for overlooking repeated misconduct by Sendaki, the CFO whom Weaver has also sued.

The receiver also said dozens of creditors and vendors, including some in France where the Weaver had purchased a vineyard for the distillery, are planning to sue Uncle Nearest Inc. when the receivership ends

He also said the company continues to operate at a loss, although he has laid off 430% of the staff. He is exploring filing a Chapter 11 bankruptcy petition. That would wipe out Uncle Nearest's debts, as well as the stakes owned by its investors, including the Weavers, who own a majority of its shares.

The result of putting the company into bankruptcy will be that the buyer will acquire a company with no debts, except perhaps some taxes, substantial equity – and the judge will require the buyer to put substantial cash in. It will be the best capitalized alcoholic beverage supplier in the world.