by Comprehensive countersuit paints a very different picture, cites “extortion“
The new owners of Franchise Group filed suit in bankruptcy court on Sept. 24 against AF Newco, accusing the buyer of 31 American Freight stores of breach of contract, threats to delete critical corporate records and misleading the court about ties to FRG’s former CEO, Brian Kahn.
AF Newco’s response to that lawsuit came Monday and in denying all of FRG’s claims against it, the company paints a very different picture of what has transpired between the two entities since the acquisition in January.
At the core of the increasingly contentious dispute is a seemingly pedestrian “fact,” which is whether the transition services agreement (TSA) between the two expired on April 30 or was extended by amendment.
Rebuffing claims that it is in breach of contract for refusing to provide data and document storage services under that TSA, AF Newco asserts in its filing that the TSA expired on April 30 and that while an amendment to extend it was discussed, that extension was never signed or otherwise finalized.
FRG claims in its complaint that the TSA was amended by “an oral extension,” leading reasonable people to wonder why FRG’s new owners secured nothing in writing.
In addition to denying the reorganized FRG’s claims against it, AF Newco is countersuing, also for breach of contract, claiming that inventory FRG promised as part of the acquisition under a separate bill of sale is “missing.” AF Newco is seeking about $673,000 as compensation for the goods it claims could not be found.
More could have been saved?
The 31 stores AF Newco acquired are less than 10% of the American Freight network of about 360 stores that operated before FRG filed for Chapter 11 protection last November. More might have been saved, AF Newco claims in its filing, because the company states that it made a bid to be a stalking horse bidder on American Freight for $55 million. FRG opted instead to liquidate.
Led by former executives at Liberty Tax, including Mike Piper and Brent Turner, AF Newco next moved to acquire the 31 stores through an asset purchase agreement finalized in December 2024. The bankruptcy court approved the sale in January of this year.
AF Newco states in its response that it purchased inventory valued at $2.4 million, but that once it gained access to the stores, at least $673,000 worth of the purchased inventory “did not exist and could not be located.”
Another point of contention is a TSA that AF Newco entered into with Educate Inc., an affiliate of FRG, to facilitate the transition of operations. The TSA contemplated various services to help AF Newco start up its operations following the acquisition.
According to AF Newco’s filing, Schedule 2.01 of this TSA explicitly specified that the service period was “not to exceed April 30, 2025.” AF Newco states it proposed a longer service period, but FRG’s executive vice president at the time, Andrew Kaminsky, rejected the proposal.
AF Newco further asserts that the TSA contains clear language stipulating that any amendment would require a written document signed by both parties, but that no such written amendment was ever executed.
One thing on which the two parties do agree: Their interactions and negotiations became increasingly hostile after April 30. They differ, however, on which party was the aggressor.
“Extortion“
In late June, Kaminsky emailed AF Newco’s internal counsel with a proposed amendment to the TSA, seeking execution “as soon as possible,” according to Monday’s filing. When AF Newco’s counsel, Chuck Jennings, responded that the TSA had terminated and questioned whether an amendment could work, FRG next responded with threats, according to AF Newco’s account.
Potentially problematic for FRG is the AF Newco claim of an email sent from Kaminsky to Piper in July asking whether Piper consented to the TSA amendment, a question that would seem to acknowledge that the TSA had, in fact, expired and had not been extended. This date-stamped email either exists or it doesn’t.
When Piper declined to consent, Kaminsky threatened litigation against AF Newco, Monday’s filing states. The next day, Kaminsky sent Piper a draft complaint, hearing transcript and proposed TSA amendment, threatening to file suit by 3 p.m. that day unless AF Newco signed the amendment, the filing states. Also alleged is that Kaminsky threatened to notify the SEC and other governmental agencies about the pending complaint.
“AF Newco did not succumb to FRG’s extortion and refused to sign the proposed TSA amendment,” the response states.
Other claims AF Newco makes include that “FRG contacted journalists to request that they disparage American Freight and its AF Newco, even attacking the integrity of the individual owners of the business,” a claim based on “information and belief.” This charge is a bit surprising because neither the old FRG nor the new holdco have been notable for their access to journalists.
The response also alleges that FRG “siphoned AF Newco’s talent” by hiring away key personnel.
What’s sought
AF Newco is seeking a declaratory judgment that the TSA expired on April 30, that no oral contract or signed written extension exists requiring any ongoing obligations, and that damages, plus pre-judgment and post-judgment interest, costs and attorneys’ fees, be paid by FRG to AF Newco.
In denying the claim that Kahn is involved in AF Newco, even controlling it, the response does not elaborate beyond affirming that testimony offered at the sale hearing was “true and accurate.” Piper testified that Kahn was not involved in AF Newco and that Piper did not anticipate Kahn to become involved in any way.
(The SEC filed suit against Kahn and Jeffrey Spotts on Sept. 29 for “a multiyear investment adviser fraud” that the SEC estimates cost investors $350 million, according to the SEC’s filing. The SEC alleges that Kahn and Spotts deceived investors by falsely claiming they were putting their money into an investment that minimized risk.)
Neither does the response address the FRG claim that AF Newco sought two Buddy’s Home Furnishings stores in negotiations since the January acquisition other than to simply deny the claim. FRG’s complaint asserts that Piper conditioned data and document access on FRG agreeing to sell two Buddy’s Home Furnishings stores to AF Newco, a condition “presented (as) an ultimatum.”
The response does describe uncompensated services and courtesies AF Newco has provided to FRG since the transaction, including forwarding the previous American Freight entity’s mail and invoices on a biweekly basis, forwarding all workers’ compensation and EEOC claims received for the old American Freight’s associates, and all pay stub and W9 requests.
Since the $1.12 million acquisition, AF Newco has added 30 locations to push its store total over 60, a growth trend that the response claims FRG is hoping to “disrupt” through litigation.
Unclear for any of these actions, including AF Newco’s countersuit, is what effect, if any, the federal government shutdown is having or will continue to have on proceedings, investigations and the courts’ work more generally. As of this writing, for example, the countersuit had not yet been posted to the court docket online. Whether a hearing date and time have been set, therefore, is not known.
Buddy’s update
One of the larger loose ends remaining after FRG emerged from bankruptcy in May were the cure claims brought by four groups of owner-operators of Buddy’s Home Furnishing, or claims that their franchise agreements had been violated with respect to noncompete clauses and marketing territories for stores. There has been virtually no progress on this front, and franchisees complain of radio silence from FRG.
There is one exception: Buddy Mac and its approximately 80 Buddy’s locations. The largest of the franchisees, Buddy Mac was apparently notified that its franchise agreement has been voided, although this has not yet been confirmed. A message has been left with Buddy Mac offices in Desoto, Texas.
If the agreement has been voided, it demonstrates that the reorganized FRG has little interest in keeping the furniture division, choosing instead to focus on Pet Supplies Plus. Messages have also been left with FRG L1s and their representatives.
B. Riley update
Switching coasts, B. Riley Financial received a letter from Nasdaq again alerting the company of its noncompliance with Nasdaq listing rules in failing to file its quarterly reports for the periods ended March 31 and June 30. BRF filed its 10K for fiscal 2024 on Sept. 19.
The Nasdaq’s letter said the exchange “lacked the discretion within Nasdaq’s rules” to grant BRF a further exception beyond Sept. 29, but that BRF may request a hearing and that such a request would give BRF 15 additional days before potentially being de-listed, according to a BRF press release. BRF states that it intends to submit that hearing request.
BRF replaced both its CFO and its auditor this year prior to that Sept. 19 10K, a filing that shows a $772.3 million loss for 2024. Scott Yessner became CFO in May. BDO replaced Marcum as BRF’s auditor last month.
