Last week, Sports Executive Weekly (SEW_0512)reported that Fab-Knit Ltd., which is doing business as Reebok Team Uniforms, had shut its doors despite receiving approval for DIP financing in its Chapter 11 bankruptcy case (SEW_0512). According to more recently filed court documents, it now appears that the case will convert to Chapter 7 after actions by the company’s DIP banker, Well Fargo, which reportedly limited Fab-Knit’s ability to operate an ongoing business.

Fab-Knit last week filed a motion to vacate Debtor-In-Possession financing. Fab-Knit claims that they “repeatedly told Wells Fargo that the post-petition financing would not be adequate,” estimating that it would run out of money in “about a month.” The bank encouraged Fab-Knit to go forward with the financing because “any financing was better than none.”

Fab-Knit alleges that Wells Fargo classified certain receivables as ineligible for consideration as a borrowing base and that as a result, Fab-Knit would be unable to receive any new funding. Therefore, Fab-Knit feels that only the funds which they received immediately after the agreement to post-petition financing was finalized should be subject to a post-petition lien, while Wells Fargo ought to lose “the other protections generally accorded to post-petition lenders,” particularly noting that should Wells Fargo have a deficiency claim, that claim should be subordinated beneath unpaid wages and trade vendor claims that have accrued since the post-petition financing event.

The Court did grant a motion that gives administrative expense priority to Royal Park Uniforms, Adele Knits, and Hyman Brickle & Sons for goods shipped to Fab-Knit between January 14 and January 24, 2005.

To add a personal note to the story, the Waco Tribune-Herald spoke with Fab-Knit CEO Bob Landon about the proceedings. Landon sympathized with his employees, some of whom “didn’t get paid for half a month” of work, but concluded by saying it was the $1.2 million payment demanded by an “out-of-city” lender that finally “broke [their] back.”