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Dissecting The IPS Worldwide Bankruptcy

Dissecting The IPS Worldwide Bankruptcy

Last month when IPS Worldwide, an Ormond Beach, Florida-based freight audit and payment services provider, filed a petition for Chapter 11 bankruptcy protection, details were somewhat scanty. A payments company with assets worth less than $50,000 had managed to accrue liabilities of between $100 million and $500 million, according to the filing.

IPS Worldwide had gross revenues of approximately $9 million in 2018, according to a court document filed by the company, and about 32 employees.

"The Chapter 11 filing was necessitated by accumulated trade debt, leading to customer frustrations, and the resulting desire by IPS to address customer concerns, reorganize the business and continue operations, while fairly treating pre-petition creditors," wrote Scott Spradley, the bankruptcy attorney representing IPS Worldwide, in a February 4 filing.

In its initial January 25 petition, IPS listed 20 creditors and the debts they were owed, but provided no financial statements or explanation as to how its business was so grossly mismanaged. The creditor with the largest outstanding liability was Stanley Black and Decker (NYSE: SWK), whom IPS said it owed $41.6 million. On Tuesday, Stanley Black and Decker decided it would not be able to recover any of that money and more, and said it would book a charge of $50 million related to the IPS bankruptcy on its 2018 earnings.

Alcoa Corporation (NYSE: AA), the world's eighth-largest producer of aluminum, used IPS to process its freight payments. In its initial Chapter 11 filing, IPS said it owed Alcoa $28.7 million; so far Alcoa has not written down the debt.

One of the questions that remains to be answered is why large publicly traded enterprises would entrust a large freight spend with a small, opaque payments services company rather than with a regulated financial institution with deep pockets of its own. Five years ago, two freight audit and payment service providers, Trendset Information Systems and TransVantage Solutions Inc., also went belly up.

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Like IPS, those companies were accused by their customers of diverting and misappropriating millions of dollars of funds, although the scale was different. TransVantage posted $71.2 million in assets and $41 million in liabilities while Trendset was sold off to a Shreveport, Louisiana-based brokerage for the bargain basement price of $1.1 million.

IPS Worldwide's collapse dwarfs the previous round of failures in the unregulated freight bill audit and payment industry; IPS' initial estimates of its liabilities total $119 million and, at least according to its creditors, are likely larger. The two earlier audit and payment collapses restructured about $100 million combined.

The creditors are scheduled to meet with the trustee Monday, February 25.

YRC Freight (NASDAQ: YRCW) was also named in the list of IPS creditors; IPS said it owed the less-than-truckload carrier $4.7 million. However, in a more recent filing, YRC said that number could be much more. During its fourth quarter earnings call, YRC estimated that the bankruptcy would have an impact of less than $10 million on the company's operating income.

"IPS has listed YRC in its initial petition as being a creditor of up to $4.7 million," YRC wrote on February 6. "However, because of the continuing inability to receive accurate and consistent information from IPS regarding what carriers have been paid and the status of the funds in the YRC segregated account, YRC cannot currently estimate the level of loss it has sustained."

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YRC and IPS entered into a business arrangement in October 2016. In late 2018, YRC said that it discovered that IPS was several weeks behind in processing invoices for payment.

"Carriers complained they were not receiving responses to their inquiries from IPS and demanded payments from YRC. Some carriers filed claims against YRC's broker bond. Others threatened to contact YRC's customers directly," YRC wrote.

When YRC confronted IPS, the payments company hid behind a litany of excuses ranging from printer issues preventing checks from being issued to computer problems making electronic payments impossible, YRC alleged.

"Later, IPS claimed that the departure of a key employee was responsible for the delay in making payments, and alleged that although it still had the ability to invoice YRC and accept funds from YRC to satisfy the invoices, no one remaining at IPS had the ability to remit those funds to YRC's carriers. At the same time, IPS was falsely telling carriers that the delays were being caused by an unexpected influx in the amount of YRC carriers submitting invoices," YRC alleged.

In the previous freight bill audit and payment failures, the companies had co-mingled their customers' funds rather than keeping them separate and skimmed from the top. When cash flows tightened, the companies paid shipper A's carriers with shipper B's money, slowly devolving into a Ponzi scheme.

It's still not clear where the money went in IPS Worldwide – the company itself professes not to know.

"An explanation will come," said Scott Spradley, the attorney representing IPS.

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