by And American Signature closeout company defends against concerns about family ties
It has been a busy week on the courts beat, so plenty to get to on this column’s docket. We begin with the nasty squabble between the reorganized Franchise Group and American Freight buyer AF Newco.
Shifting attention now to the nasty legal squabble between seller FRG and buyer AF Newco, FRG recently filed a sweeping denial of counterclaims brought by AF Newco stemming from its acquisition of 31 American Freight stores. (Access the full docket here.)
The legal battle centers on a Transition Services Agreement that was supposed to facilitate the handover of American Freight assets after FRG’s bankruptcy a year ago. The dispute revolves around what happened after the written TSA expired. AF Newco claims the parties never properly amended the agreement in writing, while FRG insists that company representatives for both reached an enforceable oral agreement to extend services.
FRG argues that AF Newco’s counterclaims fail to state valid legal grounds, that the company is not a proper party to the dispute and that AF Newco failed to mitigate any damages it may have suffered. The counterclaims suggest AF Newco’s own actions, and in some cases inaction, caused any harm AF Newco might have experienced.
FRG is demanding dismissal of all counterclaims with prejudice, along with recovery of its legal costs and attorneys’ fees.
In a separate action, Franchise Group asked the court to dismiss breach of contract allegations made by AF Newco over approximately $670,000 in missing inventory, arguing AF Newco assumed all risk of loss when it paid for the assets 10 months ago.
Poof!
AF Newco claims it cannot locate the inventory purchased from American Freight’s liquidation sale.
For FRG, the question centers on a provision in the Bill of Sale executed on Dec. 22, 2024, that states “all title to and risk of loss for the Purchased Assets shall transfer to [AF Newco] immediately upon [American Freight’s] receipt of the Purchase Price,” and that American Freight “shall bear no responsibility or liability for the Purchased Assets once title and risk of loss have passed to [AF Newco].”
The Bill of Sale is included in the counter-claim filing.
AF Newco paid approximately $2.35 million for the inventory, according to court documents. Under the Bill of Sale’s explicit terms, FRG argues, the risk of any missing or lost inventory shifted to AF Newco at that moment, foreclosing any breach of contract claim.
“AF Newco’s attempt to impose liability on FRG based on the Purchased Assets fails,” the memorandum states, noting that the parties specifically negotiated these risk allocation provisions.
Franchise Group asserts that 10 months elapsed between the sale and AF Newco’s complaint, with no evidence the company ever attempted to reject the inventory or notify the seller of discrepancies during that period.
“Where a buyer has delayed so excessively [in rejecting goods] that his actions become untimely as a matter of law,” Delaware courts have ruled that the buyer is deemed to have accepted the goods and the accompanying risk of loss, according to the memorandum.
FRG also asserts that, as the reorganized ownership, it wasn’t even a party to the Bill of Sale. That agreement was executed between AF Newco and American Freight, a FRG subsidiary. Only parties to a contract can be sued for breaching it, FRG asserts, citing precedent in contract law.
AF Newco has not identified the assets it claims are missing, raising questions about the substantive basis for its claim, FRG asserts.
Quick response from AF Newco
These counterclaims to AF Newco’s own counterclaims (FRG sued first) were quickly answered by AF Newco, which is still claiming $672,000 in missing inventory. AF Newco claims the missing inventory was either never in American Freight’s possession at the time of sale, disposed of beforehand or “knowingly misrepresented as existing assets,” according to its latest filing.
In filing an amended counterclaim, AF Newco accuses Franchise Group of breaching contract terms while attempting to “extort” the company into signing a one-sided service agreement.
AF Newco also seeks a declaratory judgment that the TSA expired on April 30 and that no valid extension exists, alleging that after the TSA expired, FRG executive Andrew Kaminsky sent AF Newco executive Mike Piper a draft complaint and threatened to file it unless AF Newco signed a TSA amendment by 3 p.m. that same day.
The proposed amendment was “replete with inequitable and impossible provisions,” AF Newco claims, including requirements that the company provide services to Franchise Group perpetually, with termination rights only provided for Franchise Group.
“AF Newco did not succumb to FRG’s extortion and refused to sign,” the counterclaim states bluntly.
American Freight into the mix
Subsequent to AF Newco’s amended counterclaim, Franchise Group and American Freight filed a new, comprehensive denial of AF Newco’s allegations. In filing jointly, Franchise Group is making American Freight a codefendant for the first time in what is an escalating dispute.
Franchise Group reiterated its core claim that Michael Gray, acting on behalf of AF Newco, and Andrew Kaminsky, representing Franchise Group, “reached the oral agreement described in FRG’s complaint” and that this oral agreement is “enforceable and imposes on AF Newco obligations to provide certain services.”
Not surprisingly, the filing refutes AF Newco’s characterization that Kaminsky engaged in extortion tactics or proposed an unconscionable perpetual services agreement.
American Signature bankruptcy
Meanwhile, in the same bankruptcy court in Delaware, American Signature’s docket keeps growing, as well. New this week were filings that include a declaration by Robert Raskin of SB360 Capital Partners addressing potential concerns about the complex web of relationships between the struggling furniture retailer, its lenders and its liquidation consultant, all of them sharing common ownership ties to the Schottenstein family.
We reported on these ties on Tuesday.
In the declaration, Raskin defends SB360’s retention to oversee store closing sales for 33 American Signature locations, despite objections from the U.S. Trustee’s office questioning the arrangement’s propriety.
As we reported, American Signature is wholly owned by the Schottenstein family. SB360 is 60% owned by Schottenstein interests, with the remaining 40% held by the Miller family. Adding another layer, Second Avenue Capital Partners, American Signature’s primary lender both before and during bankruptcy, shares the same parent company as SB360.
The U.S. Trustee raised concerns at a Nov. 25 hearing about whether SB360 should be retained given these affiliations and whether its fees are appropriate. The court granted interim approval, allowing sales to continue through the critical Black Friday shopping period.
Raskin’s declaration emphasizes that SB360 operates independently despite the family connections.
“SB360 and ASI have built a strong business relationship” over several years, he noted, pointing to previous collaborations including the 2018 Heritage Home Group liquidation and a creative 2020 consignment arrangement with Art Van Furniture’s bankruptcy estate.
Strong sales
Raskin asserts that SB360’s 2% base fee falls squarely within industry standards, citing court-approved liquidation agreements from similar furniture retailers, including American Freight (2%), Conn’s (1.75%) and At Home Group (2%).
He also attests to early success with the closeout sales, reporting that sales were running approximately $2.2 million — or 18% — ahead of projections at the 33 stores being liquidated.
As Raskin documents, Jay Schottenstein serves as both SB360’s chairman and CEO and was American Signature’s board chairman before bankruptcy. Schottenstein-affiliated entities serve as landlords for 32 of the retailer’s store locations. And several American Signature executives hold silent economic interests in SACP’s lending vehicle.
Raskin emphasizes, however, that both the original consulting agreement and subsequent amendments were negotiated at arm’s length, first by American Signature management, then by restructuring adviser Berkeley Research Group and then were finally reviewed by an independent director before bankruptcy filing.
American Signature has agreed to sell substantially all of its assets to an affiliated stalking horse bidder, which intends to delegate inventory liquidation rights back to SB360, subject to higher competing bids.
A final hearing on the consulting agreement’s assumption remains pending, with the U.S. Trustee reserving all objections despite the interim approval allowing work to continue.
Also filed this week was certification of the unsecured creditors’ committee, which not surprisingly includes the top unsecured creditors. The list is led by Man Wah, but also includes Riverside Furniture, Holland House and Tempur Worldwide.
