by Insider concerns put time back on the clock for marketing, accepting bids
WILMINGTON, Del. Ruling that the debtors of American Signature failed to meet their burden to show that their accelerated asset sale timeline is appropriate, the bankruptcy court rejected that timeline, citing concerns about insider control and an inadequate marketing process.
The core concerns were raised by the U.S. trustee in the case, the unsecured creditors committee and a group of landlords holding leases to American Signature locations and properties. After a morning of testimony, the judge asked the parties to renegotiate a new timeline, one that allowed for higher scrutiny and greater transparency. Through counsel, the parties agreed on a new, lengthier timeline, one that Judge J. Kate Stickles approved late that afternoon.
The new timeline has a final hearing set for Feb. 6, adding a month to the overall schedule. The Dec. 30 deadline for bids was extended to Jan. 5, with a Jan. 8 date set for the auction. GOB sales for the 87 stores not already winding down will now begin on Jan. 9 at the earliest, if no bid topping that of the stalking horse is forthcoming.
Judge Stickles also approved a Jan. 28 deadline for objections to the sale, a Feb. 2 deadline for a reply to those objections and a Feb. 4 sale hearing.
The flurry of rulings capped a long day of questioning and testimony, most of it centered on three points of contention, according to objections filed with the court and testimony presented Monday in court:
+ Insider concerns involving the Schottenstein family holding interests on virtually all sides of the proposed transaction.
+ The lack of a chief privacy ombudsman to ensure protection of personally identifiable information.
+ Financial guarantees requested by the stalking horse bidder, ASI Purchaser, regarding expenses incurred making the bid and capital needed to replenish inventory to administer GOB sales.
Trustee’s concerns validated
Counsel for the debtors and their consultants pushed for the expedited sale process. The U.S. trustee and the UCC pushed every bit as hard for more time to ensure the scrutiny they say the U.S. Bankruptcy Code requires when a proposed sale has insider concerns. And this proposed deal has them in spades.
“The proposed sale includes causes of action for which the insider parties are beneficiaries, but there’s no time to investigate and little time for alternative transaction,” Judge Stickles said in denying the accelerated timeline proposed by the debtors and the chief restructuring officer. “These same parties control the funds and the process,” she said, referring to the Schottenstein family.
Stickles said the morning’s testimony showed that the debtors failed to conduct a pre-petition marketing process of any substance, only initiating the marketing process on Nov. 26, or after the insider stalking horse agreement was executed and after filing for Chapter 11 protections.
“The proposed timeline is inconsistent with local practice, and it is insufficient to facilitate a fair and open and competitive marketing process designed to maximize value for all creditors,” she said.
Moving forward
The rulings meant that all parties surrendered things they wanted, but also got at least essentially what they were seeking. The office of the U.S. trustee wanted most to slow the bankruptcy down to allow for greater scrutiny and accountability, citing the web of insider relationships on all sides of the proposed transaction, a web connecting intersecting Schottenstein family interests. The debtor, the stalking horse bidder, both pre- and post-petition lenders and the consultancy all should be considered insiders under U.S. bankruptcy law, according to the U.S. trustee, a fact that created what the court viewed as a problematic concentration of control over both the funds and the sale process.
ASI Purchaser did get approval of up to $1.5 million in expense reimbursements, with the judge finding that the amount satisfied legal standards as an “actual and necessary” cost of preserving the bankruptcy estate. But, she ordered that there be greater transparency and scrutiny of those expenses and their reimbursements, including access to invoices for the UCC. With that access promised, the UCC stood down in its opposition to the bankruptcy moving forward, which was perhaps the day’s biggest event.
However, Judge Stickles dealt a blow to ASI Purchaser’s position by denying its request for super-priority status on those expense claims. Instead, the reimbursements will have ordinary administrative expense status, meaning they would be paid alongside other costs of administering the estate rather than ahead of them.
At the U.S. trustee’s strong suggestion, the court also flagged the absence of a consumer privacy ombudsman, required under Section 363 of the Bankruptcy Code when personal information is being sold and ordered that an order be drafted stipulating the appointment of an ombudsman. The judge authorized the trustee’s office to identify and propose just such an ombudsman.
At the end of the long day, the bankruptcy was still moving forward, and it appears to most parties that it is proceeding as a complete liquidation and shutdown. ASI Purchaser has indicated its intentions to liquidate all 87 remaining stores. GOBs are already underway at 33 stores. The American Signature store in Kennesaw, Georgia, in metro Atlanta, for example, has almost completely sold off its inventory, according to eyewitness accounts. Only Teresa Kohl, a managing director with SSG Advisors, American Signature’s investment banker, disputed the characterization of the bankruptcy as a complete liquidation, according to testimony given Monday.
For the trustee, this distinction is important.
“This is not a going concern bid,” said Tim Fox, counsel for the Office of the U.S. Trustee. “From our viewpoint, this is a liquidation sale. If it proceeds as is, no jobs will be saved, there will be no buyer for suppliers and there will be no one assuming leases.”
Thus, more attention should be paid to the many insider interests and beneficiaries, Fox said.
It is true that a bid could still come forward that seeks to reorganize the business and continue it in some form or another. Kohl testified that 11 parties had applied and received approval for access to the “data room,” or the repository of all the information for which due diligence for a bid can be accessed. Another five NDAs to get access are “in process,” she said.
Also approved Monday was $5 million for purchasing new product to “augment” or replenish what’s on American Signature store floors for the purposes of the GOB sales.
Early in the day, co-chief restructuring officer, Rudy Morando of Berkley Research Group, testified that under the proposed plan and timeline, he projected that $19 million would be preserved or otherwise left over to pay unsecured creditors. Because that timeline was not approved, that amount is likely to be smaller. The UCC pushed for the timeline extension knowing that amount likely will get reduced, but it is a number the UCC did not give much credence to in the first place, according to its counsel Monday.
Buddy Mac and Franchise Group
In the other two bankruptcies I’ve been tracking, not much to report. For Buddy Mac, a hearing schedule has been approved, with the next hearing set for Feb. 4, according to a filing Wednesday.
In the Franchise Group debacle, still no word on the sale of Buddy’s and another salvo fired off Wednesday by AF Newco in its festival of litigation with FRG’s new owners over allegedly missing inventory and whether a data services agreement was breached or even ever existed, according to the crossfire filings in that dispute.
Finally, an emergency hearing was called in the FRG bankruptcy Wednesday so the judge could get an explanation as to why the lawyers for the consultants (Ducera Partners) to the first-tier lenders submitted a bill for more than $533,000. She was “surprised” and not just a little bit skeptical, according to a transcript of the hearing.
