by An auction now is likely of FRG assets including Buddy’s Home Furnishings and American Freight
DELAWARE, Ohio — After a fast, even frenetic start to the bankruptcy proceeding for Franchise Group in November, which seems like years ago for this particular saga, that proceeding has ground to a halt.
Yesterday, the judge in the case, Laurie Selber Silverstein, signed the order denying the debtors’ motion to authorize the retention and employment of their attorneys, Willkie Farr & Gallagher, acknowledging concerns raised by creditors and the U.S. Trustee’s office about the law firm’s representation of and work for other parties to the case, including B. Riley Financial and former FRG CEO Brian Kahn.
The order to deny, case document No. 976, came almost exactly 500 court documents and two months after the petition to retain the firm, and it further slows things down for debtors who are quickly running out of time. So far, FRG has no offers for what’s left of operations, principally those relating to Buddy’s Home Furnishings and American Freight. An auction now is likely.
As reported by Home News Now last month, the U.S. Trustee’s office sought to disqualify Willkie Farr & Gallagher because the firm advised B. Riley and Kahn in FRG’s 2023 take-private buyout worth $2.6 billion. The U.S. Trustee Program is the component of the Department of Justice responsible for overseeing the administration of bankruptcy cases and private trustees, according to its website. The U.S. Trustee has broad administrative, regulatory and litigation/enforcement authority.
Also challenging Willkie’s involvement in the bankruptcy is the Settlement-Related Liquidating Trust, a group of creditors that filed a lengthy objection on Jan. 3. The objection motion details what it describes as “longstanding, concurrent and often conflicted representation of Brian Kahn and his affiliated entities” by the law firm.
The creditors’ motion objecting to the law firm’s retention states that Willkie represented both FRG and Kahn simultaneously until sometime in October 2024. Kahn stepped down as CEO in January 2024. Citing section 327(a) of the Bankruptcy Code, the motion argues that Willkie cannot be retained because it is not disinterested and has interests adverse to the debtors’ estates.
Matthew A. Feldman, chairman of Willkie, testified that his firm had created an “ethical wall” to avoid and prevent conflicts of interest. For Silverstein, this wall came too late and it failed to effectively wall off the bankruptcy lawyers from those who had represented Kahn in the $2.6 billion buyout.
Now the debtors-in-position have to replace Willkie for what has been a fractious and complicated proceeding. The next step is a hearing on the DIP plan to pay creditors, a hearing Silverstein delayed by a week. A fourth amended bankruptcy plan was submitted to the court on Wednesday, a plan that states that American Freight is pursuing store closing and liquidation sales at all locations. Also underway are the sales of “substantially all of the assets or equity interests of the Buddy’s Debtors [and] the Vitamin Shoppe Debtors.”
Also as HNN has reported, that payout plan is opposed by two creditors in particular, Pacific Investment Management and Irradiant Partners, who combined are owed approximately $450 million.
Here’s where it gets even more interesting, at least as I see it.
Part of the plan going forward, which was developed with Willkie’s help and presumably direction, is to sue individuals involved in FRG’s take-private deal, a group that obviously includes former Willkie clients Kahn and B. Riley Financial CEO Bryant Riley. In fact, this is one of the few things the DIP and many of the creditors agree upon, which is the utility of suing to recover funds, according to the motions filed with the Delaware bankruptcy court.
The fourth amended plan states, “All potential claims held by the OpCo Debtors against former directors and officers (including, without limitation, Brian Kahn) and all claims against Bryant Riley shall not be released under the Plan and shall be transferred to the Litigation Trust.”
The complete docket for the FRG proceeding: https://cases.ra.kroll.com/FRG/.
