by The soap opera of FRG-AF-BHF takes another nasty turn
Keeping all of the parties, companies and subsidiaries tied to Franchise Group straight is pretty daunting. Keeping up with all of them in the courts? Nearly impossible.
You might recall that the new FRG that exited bankruptcy is suing AF Newco, owners of more than 60 American Freight stores, half of those acquired out of the FRG bankruptcy for $1.1 million. FRG claims, among other things, that AF Newco threatened to delete critical corporate records and misled the bankruptcy court about its ties to FRG’s former CEO, Brian Kahn, and Kahn’s involvement in AF Newco.
Why would Kahn’s involvement be a big deal? Kahn was at the wheel when FRG declared bankruptcy in November 2024. In late September, the SEC filed suit against Kahn and Prophecy Asset Management executive Jeffrey Spotts for “a multiyear investment adviser fraud” that the SEC estimates cost investors $350 million, according to the SEC’s filing. And on Nov. 6, as expected, Kahn was charged by the feds with felonious conspiracy to commit securities fraud related to the same hedge fund.
(Kahn has denied knowledge of or involvement in any criminal or fraudulent activities.)
Recall also that AF Newco countersued FRG, denying all of FRG’s claims but acknowledging to Bloomberg News shortly after that filing that it had, in fact, taken on Kahn in July as a consultant for compensation of $50,000.
Remember also that several groups of Buddy’s franchisees sued FRG for breaches of their franchise agreements, specifically that agreement’s noncompete clauses, claims left flapping in the wind when FRG’s reorganization plan was approved in Delaware bankruptcy court in June this year.
Well, add another lawsuit to the giant heap that is beginning to resemble the interminable litigation in Dickens’s Bleak House, this one from AF Newco principal Brent Turner, who, with fellow former Liberty Tax executive Michael Piper, launched AF Newco to buy the American Freight stores in January this year.
As chairman of PHONIX RBS LLC, Turner signed the papers to sue Buddy Mac Holdings, which until September was the largest of the Buddy’s franchisee groups, for breach of contract and nonpayment of a $12 million-plus loan, according to his filing with Kansas’ district court in Sedgwick County.
The loan came due at the end of August but was acquired from INTRUST Bank in Wichita by PHONIX on Sept. 2.
Why would an executive of AF Newco buy a loan owed by BMH? Perhaps as a chess move to set up this lawsuit as a means to take control of BMH’s 43 or so stores and expand the phoenix-like network of American Freight stores to more than 100? I’m simply theorizing, but it’s plausible.
The old, un-bankrupted FRG acquired American Freight for $450 million in 2020, which is to say, the Kahn-led FRG. Now a Kahn-consulted AF Newco is maneuvering to snipe 43 Buddy’s Home Furnishings stores to turn them into American Freight stores? Looks like it.
PHONIX, which at least on paper is based in Delaware, is seeking the loan amount and more than $3,300 per day in accruing interest on that same loan, according to its filing.
As we reported here earlier, according to public records filed in Texas, specifically a form called a UCC filed with the office of the secretary of state, PHONIX acquired the loan to BMH from INTRUST. The lawsuit by PHONIX confirms that Turner, who was for four years the CEO of Liberty Tax, is the chairman of PHONIX. He signed the court papers on Oct. 23.
Liberty Tax is the company that was used to form FRG in a reverse IPO in 2019.
Turner was named president and CEO of Liberty Tax in October 2019 and fired in June 2023, according to news accounts. Piper, formerly CFO at Liberty Tax, is AF Newco’s managing member, according to court documents.
According to the filing, BMH failed to pay back the loan by its maturity date of Aug. 31, or two days before PHONIX acquired the loan and three days prior to FRG demanding that BMH “de-brand” as Buddy’s.
“Since that date, Borrower has not made any payments to Plaintiff,” which claims it has repeatedly notified BMH of the outstanding balance. According to the suit, BMH was notified of the money due on Sept. 4, two days after acquisition of the already-due loan. Despite several notices, BMH has not “remedied the default or made payment or given any indication that such payment is forthcoming,” according to the filing.
The filing also describes a “catastrophic” decline in revenues and inventory suffered by BMH in the last 12-18 months, or the period leading up to and subsequent to FRG filing for bankruptcy.
In July, about a dozen vendors gave BMH notice of their intent to cut off supply for nonpayment, according to the lawsuit, which has “created a vicious cycle” in which BMH cannot “procure inventory because of insufficient revenues but cannot generate more revenues because they have no inventory to sell or rent.”
PHONIX further claims that “as a result of the Defendants’ reckless financial mismanagement,” the value of BMH’s collateral for the loan is being diminished by as much as $100,000 per day.
Thus, PHONIX is urgently concerned about BHM’s ability to pay back a loan that matured before PHONIX even acquired it, asking the court to assign a receiver before things get much worse.
“It is likely that the value of Plaintiff’s collateral will be depleted beyond the point of no return in very short order,” the filing states.
In an abrupt change of approach, FRG went from pleading Buddy’s franchisees to sign their lease agreements to ending its partnership with BMH on Sept. 3, or the day after PHONIX acquired BMH’s loan.
To return to Kahn, federal prosecutors charged him on Nov. 6 using what is called a “criminal information,” a document that often precedes a guilty plea. This charging document lists specific charges, but it is filed by a prosecutor rather than a grand jury, which allows prosecutors to move forward more quickly. In other words, it’s a lot like an indictment
In addition, a U.S. attorney at a hearing in Trenton, New Jersey, last month, Aaron Webman, told the judge he anticipated that more are “planning” to plead guilty in the Prophecy fraud case.
Seemingly impossibly, despite the fact that Kahn took FRG private in August 2021 for $2.6 billion, filed with the Trenton court is an “Appointment of and Authority to Pay Court Appointed Counsel” form, which grants Kahn a court-appointed attorney because, quoting the form, “the above-mentioned person represented has testified under oath” that he is “financially unable to employ counsel.”
You can’t make this stuff up.
Addendum: After the story above was written, I learned of an arbitration award unsealed yesterday in Delaware Chancery Court that demands that Kahn pay nearly $310 million to reimburse Prophecy Asset Management (PAM) investors.
A trustee representing the investors filed a complaint seeking to confirm the arbitration award and enforce an Oct. 14 arbitration decision that found Kahn liable for multiple breaches of contract stemming from a 2022 settlement agreement, according to the filing. Arbitrator Leslie A. Berkoff found Kahn’s conduct constituted “willful” breach of contract and fraud, stipulating that the awards include:
+ $30 million in damages against Kahn personally for willfully refusing to transfer the FRG shares
+ $279 million jointly against Kahn and his entity Samjor Family LP for defaulting on the promissory notes
+ $30,501 in arbitration fees
