by Who is steering the ship at what was Franchise Group?
A group of former Buddy’s Home Furnishings franchise operators has filed a motion in Delaware bankruptcy court seeking to recover the last payment they say is owed them from escrowed funds. They claim the money belongs to them as part of a settlement to a franchise dispute that predates Franchise Group’s bankruptcy filed in November last year.
The Gazzo Parties, which include Joe Gazzo, MMS Group, Bi-Rite Holdings, Buddy’s Rollco and two Louisiana furniture companies, filed a sealed motion last week asking the court to authorize the release of the last payment from a settlement agreed to in May 2024. At issue in that dispute was essentially the same complaint subsequently lodged by no fewer than five other Buddy’s franchise groups.
The complaints, which dispute the terms of the franchise agreements that govern them, are still pending, and they complicate plans by the newly reorganized Franchise Group to unload Buddy’s. Any buyer, and there can’t be too many out there eager to get into the RTO sector, would likely be very reluctant to acquire a chain marked by such dissatisfaction among its franchisees.
FRG’s first lien lenders, which are led by Octagon Investors, Garnett Station, HPS Investment and Arena Capital, likely have little interest in keeping Buddy’s, and they are rumored to have had at least one legitimate offer for what’s left, provided the cure claims made by the franchisee groups are settled.
Efforts to get comment from Octagon were not successful. Efforts to reach the lone member of the new FRG board with experience in the furniture industry, Tim Johnson, also were not successful.
Pushing paper
At the center of the Gazzo Parties filing is what seems to be essentially a clerical request that the court direct the new FRG holding company to authorize release of the last payment of the negotiated settlement. (Amounts for both the settlement and the payments have been redacted in the sealed filing.) The questions before the court appear to be simple: Who in the reorganized group is the person to make this authorization? And, as escrowed funds, does the money belong to the debtors or not? The sealed filing asserts that as escrow, the funds are not the property of the estate, or holdco.
The candidates to authorize the release of the funds would seem to be either Johnson as chair of the new board or Andrew Laurence as CEO of the new holdco.
The arbitrator in May 2024 was John Barkett, who also is, or was, the escrow agent. He previously indicated that the funds can, in fact, be released, according to the filing. The settlement required the franchise operators to close or convert their locations and agree to one-year noncompete restrictions in exchange for FRG agreeing to pay out. This negotiated amount was to be disbursed in a series of payments, which put about a quarter of the settlement amount in escrow.
Under the settlement terms, half of the escrowed funds were to be released once the Gazzo Parties provided proof of required store closures, which occurred in July 2024. The remaining half was to be held until the expiration of the noncompete period, which occurred on May 10 this year. That second payment remains in escrow, however.
The Gazzo Parties argue they have fully complied with all settlement terms, including the noncompete restrictions.
Big picture
The legal dispute reflects the complex intersection of pre-bankruptcy contractual obligations and bankruptcy estate property rights. The former franchisees contend that under Florida law governing the escrow agreement, the funds were deposited for their benefit and never became property of the bankruptcy estate. They cite precedent establishing that “funds that are deposited into an escrow account by a debtor, for the benefit of others, cannot be characterized as property of the estate,” according to the filing.
The franchise relationships represented in the filing date back to 2012, when various Gazzo-led entities began operating eight Buddy’s store locations. The relationship soured over territorial rights disputes, leading to arbitration claims in 2022 and 2023. The parties accused each other of franchise agreement violations, territorial encroachment and breach of post-termination covenants.
FRG’s bankruptcy is one of the largest retail bankruptcies in recent years, involving dozens of subsidiary companies across multiple retail brands, including American Freight, Vitamin Shoppe and Pet Supplies Plus. American Freight and Vitamin Shoppe have been sold to different buyers, and the company’s reorganization plan was confirmed in June.
The next FRB hearing was set for this morning, but all parties agreed to adjourn this matter to Aug. 19.
The filing has implications for the cure claims filed by, among others, Buddy Mac Holdings (82 franchises), Greene and Greene (78 franchises), Pentex RTO (73 franchises), BB BHF (62 franchises), A-Team Leasing (10 franchises) and Reddi Rents Iowa (five franchises). Like the Gazzo Parties, these franchisees claim violations of their franchise agreements specific to the noncompete language in those agreements.
Frustrated vendors
As reported earlier, because of the FRG bankruptcy, these BHF groups now have to prepay for their inventory. These challenges are in addition to the fundamentals challenging all of furniture retail, which include tariffs and trade wars, inflation and sluggish housing starts. Reddi Rents already succumbed, filing bankruptcy in April 2024.
The trust between Buddy’s franchisees and BHF executive management has been deeply strained for years, according to Gazzo, who was president of Buddy’s Home Furnishings from 2003 to 2015.
A big reason for this is the restrictive noncompete clauses of the franchise agreements, which according to the cure claims, are used to threaten the franchisees even while FRG-owned stores seemed to violate the very same clauses. The dispute has radiated out into vendor relationships, as well, Gazzo said.
“Franchise Group caused the loss of many jobs with the destruction of Badcock, Conns and American Freight,” he said. “It is time to bring back some normalcy to retailers and manufacturers. With the end of FRG we have a chance at a clean slate with which to rebuild the future of the industry.”
Among the many things that remain unclear even after the bankruptcy ended last month is why the cure claims are being allowed to drag on. The only direction from the court has been to say that these claims “will be dealt with soon.” And we have heard nothing from either Laurence or Michael Bennett, who might or might not still be CEO at Buddy’s. With whom would a potential buyer even negotiate? From whom would this buyer get the necessary financials, including sales figures and run rates? As far as I can tell, Buddy’s has not had a CFO since 2016.
