Mocksville Tobacco Companies

An U.S. Bankruptcy Court judge has established the bidding procedures for the assets of three bankrupt Mocksville tobacco companies.

At stake is the attempt by CB Holdings LLC of Raleigh to buy Renegade Holdings Inc., Renegade Tobacco Co. and Alternative Brands Inc. for $15.6 million. An auction will take place Oct. 4. A final hearing on the sale of the companies will take place Oct. 12.

The deal, announced July 11, was projected to close Oct. 30. The Davie manufacturers have a combined 100 employees.

On Aug. 3, the National Association of Attorneys General filed an objection to stop the sale of all the assets. The association is involved because the 16 state attorneys general represent the largest unsecured creditor group.

It also has opposed a reorganization plan for the companies, citing a criminal investigation in Mississippi — at least 3 years old — involving Calvin Phelps, the owner of the companies, and accusations of "unlawful trafficking in cigarettes and other related crimes."

The association said the proceeds from selling the companies could be higher if the bankruptcy trustee, Peter Tourtellot, allowed for the escrow rights of Alternative to be sold separately.

After the landmark 1998 Master Settlement Agreement between 46 attorneys general and major U.S. manufacturers, smaller cigarette-makers emerged, grabbing significant market share because they could sell cheap cigarettes for less.

The states have passed laws aimed at reducing the smaller manufacturers' competitive advantage by forcing them to put money into escrow in case they are sued by the states.

The auction notice said Alternative's escrow rights are valued at between $40 million and $50 million in principal.

"The settling states' knowledge of sales of nonparticipating manufacturers' escrow rights owned (by others) indicated there is a market for such assets," the association said.

Prospective buyers for the escrow rights "are unlikely to have an interest in buying the other sale assets," the association said.

What makes the escrow rights valuable is that the holder can receive the interest on the principal, and would receive whatever money remains in the Alternative fund after 25 years.

Judge William Stocks set a $250,000 break-up fee, to be paid by the three companies, if another bidder trumps CB Holdings' offer.

Charles Fuller, president and chief executive of CB Holdings, has said the operations would remain in Davie with no changes except for the Renegade and Alternative Brands names.

CB Holdings owns Firebird Manufacturing LLC, a manufacturing company in South Boston, Va., and Cherokee Brands LLC, a sales and distribution company recently renamed from Cherokee Tobacco Co.

The three manufacturers filed for Chapter 11 bankruptcy protection Jan. 29, 2009, and exited bankruptcy June 1, 2010.

They were put back into bankruptcy July 19, 2010, when the reorganization plan was vacated, in large part because of the criminal investigation.

Phelps also is facing a lawsuit alleging he made a fraudulent transfer of $8.1 million in assets from the three companies and used it to help buy six parcels of land, as well as Chinqua-Penn Plantation, two corporate jets, cigar-manufacturing equipment and a 2008 Maserati Quattroporte.