A $6.2 million breach-of-contract lawsuit forced cash-strapped Celadon Group Inc. to file for bankruptcy protection, according to recently unsealed court documents.
Celadon and three of its subsidiaries allegedly collected and spent millions of dollars in receivables belonging to TA Dispatch LLC of Ensley, Alabama, to stay afloat, according to a lawsuit filed on Dec. 2 in state court in Delaware.
Six days later, Celadon and its 25 subsidiaries filed for Chapter 11 bankruptcy protection in the U.S. District Bankruptcy Court for the District of Delaware.
The adversary suit was unsealed on Jan. 17 after Celadon attorneys had the case moved to federal bankruptcy court. Also named in the lawsuit were Celadon Trucking, Celadon Logistics Services Inc. and Canadian subsidiary Hyndman Transport.
TA attorney Brian M. Rostocki of Reed Smith LLP told FreightWaves he was not authorized to discuss the lawsuit.
Celadon sold its logistics and brokerage arm for $60 million to TA Services Inc. of Mansfield, Texas, which owns TA Dispatch. TA’s parent company is PS Logistics, headquartered in Birmingham, Alabama.
As part of the purchase agreement, TA would have access to Celadon’s logistics platform to “continue to serve customers’ needs on a revenue-sharing basis,” according to a press release about the sale. Celadon also agreed to share its IT network.
The purchase agreement states that certain freight loads tendered by a customer to Celadon would be transferred to TA Dispatch to “either fulfill itself or broker to a third-party carrier,” according to the suit.
The contract also stipulated that certain loads would be billed and paid to TA, while other load requests would be billed and paid to Celadon, which would then forward on the receivable within 50 days.
Celadon’s trucking and logistics divisions were appointed as billing agents to invoice customers on behalf of TA to ensure a “smooth transition of purchased assets.”
The lawsuit claims Celadon owes approximately $4.4 million in accounts receivable it collected but failed to pass on to TA.
Some third-party companies inadvertently remitted approximately $1.8 million in accounts receivables to Celadon, which the company failed to forward to TA within five business days, according to the complaint.
Scott Schell, chief executive of TA Services, did not respond to FreightWaves’ request for comment.
Timeline of events leading up to bankruptcy filing
Celadon CEO Paul Svindland allegedly told TA executives during a Nov. 13 meeting that its annual revenues had dwindled from $1.18 billion to $500 million, according to the court filing. At that meeting, the complaint claims Svindland notified TA that Celadon had depleted $21.5 million in cash reserves in the previous 90 days and was unable to meet its debt obligations.
The complaint states Celadon was scheduled to remit the amount due to TA by Nov. 15 but later changed the dates to Nov. 22 and 29.
During a Nov. 26 meeting, TA claims Svindland said Celadon was insolvent and could not return the money it owed. Court documents claim Svindland then asked TA and/or its affiliates to lend Celadon money to continue operating, which it refused until the money was remitted.
Svindland did not respond to FreightWaves’ request for comment.
TA attorneys sent a letter to Celadon on Nov. 27 demanding all funds be surrendered by Nov. 29, but no payment was received. The following day, Celadon referred “any further correspondence” to its bankruptcy attorneys and terminated TA’s access to its IT services which were critical to its business operation, the lawsuit states. TA said Celadon later reactivated its access, pending “unidentified legal issues.”
TA claims Celadon’s own admission that it was insolvent, fear that future access to the shared IT system would again be blocked and the failure to remit millions of dollars in accounts receivables forced the company to file its complaint.
Celadon rocked by financial scandal
Two former Celadon executives were indicted in an alleged complex securities and accounting fraud scheme that cost the truckload and logistics company’s shareholders more than $60 million prior to the bankruptcy filing.
Federal officials also ordered Celadon to pay shareholders $44.2 million in restitution in April 2019 after the company’s stock plummeted as a result of the financial scandal.
Rumors swirled on social media that the carrier was in financial straits after FreightWaves broke the news on Dec. 6 that the company planned to file for bankruptcy. Some former employees said there was little communication among company executives, employees and drivers about what to do when deactivated fuel cards left truckers stranded thousands of miles from home.