U.S. Bankruptcy Judge James Schneider placed First Marine Manufacturing Inc., the operator of the Fort McHenry Shipyard, under the control of a federal trustee yesterday.
The ruling issued at a hearing in Baltimore effectively takes controlof the beleaguered shipyard away from Dannie B. Hudson, First Marine's president and sole stockholder.
In late July, First Marine filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code, which allows a company to continue to operate while it attempts to reorganize.
Yesterday's hearing was scheduled in response to a motion by the U.S. Trustee's office in Baltimore that the First Marine case be converted from a Chapter 11 to a Chapter 7 bankruptcy. That would have required liquidation of the company's assests to pay off what court records indicate are $2 million in debts.
The motion to liquidate was prompted by fears that First Marine could not hope to emerge from bankruptcy and might be running up additional debts it could not repay. Yesterday, Edward Goldberg, an attorney representing the U.S. Trustee, told Judge Schneider that after a meeting with creditors on Wednesday, his office decided that the company should be allowed to keep operating to give the trustee achance to judge the viability of the business.
"We want to give the opportunity for the case to be examined," Mr. Goldberg said. "We want someone in there as a manager."
J. Stephen Simms, a lawyer representing the unsecured creditors, also urged the judge to select a trustee rather than to order the company's liquidation. "It can make money if it's run well," Mr. Simms told the judge.
In agreeing to assign a trustee, Judge Schneider said, "I think we all hope this will work."
Mr. Hudson refused to comment on the decision.
Mr. Goldberg said he hoped a trustee could be assigned by the end of the day.
What role, if any, Mr. Hudson will now have at First Marine will be up to the trustee, Mr. Simms said.
Mr. Simms said the trustee will also have the power to investigate how First Marine handled its funds. "If there's been misuse of funds, the trustee can bring suit to have them returned," Mr. Simms said.
First Marine and Mr. Hudson have had a very turbulent history in the 10 months of operations at Fort McHenry Shipyard. Records of the creditors show that in April and May, First Marine wrote bad checks to suppliers totaling over $82,000.
First Marine also is in a dispute with its main customer, the U.S. Maritime Administration, which had awarded the yard repair contracts on ships in the government's ready reserve fleet. One of those ships, the Cape Domingo, sustained damages to the hydraulic system of its stern ramp while it was at the Fort McHenry yard.
Bobara Liles, a U.S. Justice Department attorney representing the Maritime Administration, attended yesterday's hearing. She said afterward that the government estimates the damage done to the Cape Domingo at about $1 million. Unless First's Marine's insurance reimburses the government for the damage, the Maritime Administration will refuse to pay the $328,000 it calculates is still due to First Marine on its repair contracts, she said.