by Judge in Conn’s bankruptcy authorizes funds to be paid to independent dealers
I don’t know which bankruptcy is messier, Franchise Group’s or Conn’s-Badcock’s.
In the case of the former, FRG first-lien lenders and second-lien lenders cannot agree on, well, basically anything, including even on what they disagree. Last week, a three-hour court hearing determined that the bankruptcy proceeding can resume now that debtors-in-possession legal counsel has been replaced, but over the vigorous objections of a group of second-lien lenders afraid of being left out in the fiscal cold when all is said and done, which now looks like sometime in April.
In the Conn’s proceeding, the most recent twist is a nasty dispute and stare-down between an ad hoc group of 93 former Badcock dealers and B. Riley Financial, a now-first-lien party to a bankruptcy in which a B. Riley subsidiary, Great American, conducted the GOB sales. BRF, which bumped up to first lien once JPMorgan Chase bank was paid off, has refused to stand down and allow the dealers to be paid what the DIP plan assures them in commissions and bonuses, according to a motion filed by the dealers.
In response to the dealers’ motion a week ago, the judge in the Conn’s bankruptcy ordered the DIP to file or otherwise allow a surcharge motion, which is necessary for the payment of these commissions and bonuses. At stake is about $5.3 million. The money is owed the dealers for liquidating and closing out their businesses as part of the bankruptcy, according to the motion.
For perspective, compare that $5.3 million potentially to be shared among about 90 dealers to the request for compensation filed the same week by Berkeley Research Group for services to the debtors between October and the end of last year: $6.7 million. Those services include compensation for the chief restructuring officer and his staff.
The ad hoc group of former Badcock dealers filed the emergency motion before the Houston court early last week. The U.S. bankruptcy judge, Alfredo Perez, granted that motion a day later, and a hearing on the motion and Perez’s order is scheduled for March 5.
My question after reading the 121-page emergency motion and the 1-page order granting the motion is this: What’s the hearing for? If the motion has been granted or authorized, doesn’t this mean that the DIP must make the motion to surcharge, which is the administrative move that initiates payment?
Chapter 7?
The answer is a bit elusive, and I don’t wish to speculate any more than is prudent, but as I understand it, the court order means that the DIP, in coordination with BRF, either files the motion to begin payment to the dealers or this bankruptcy could shift to Chapter 7 liquidation, which could leave the dealers and a whole bunch of other creditors holding the proverbial bag.
Both bankruptcies remind me of the scene in Blazing Saddles in which the new sheriff in town holds a gun to his own head and threatens the townspeople that if anyone makes a move, he’ll kill the hostage, which is in this case himself.
According to the dealers’ emergency motion in the Conn’s case, docket No. 1480, the dealers seek emergency relief for money owed them since the end of November last year, compensation the dealers say they need to “offset operational loses” and that which is due them because they “fully performed their end of the bargain.”
The DIP, who previously announced intent to file the surcharge motion to pay the dealers’ administrative claims, now refuse to do so, according to the emergency motion, which singles out BRF as the chief obstructionist.
If I am reading the tea leaves correctly here, BRF is standing in the way because to make the surcharge motion would be effectively to move the dealers in the creditor line ahead of BRF and potentially in front of some of the many attorneys owed fees for their legal services.
Conn’s filed for bankruptcy in July last year. Shortly after filing, the DIP announced their intention to liquidate all furniture and merchandise, while simultaneously pursuing an auction process. The DIP also filed to pay dealers “in the ordinary course,” which included paying a 25% commission and an additional 5% commission, a bonus, payable at the end of the liquidation process, according to the emergency motion. These terms were approved by lenders without objection.
‘Placate’?
According to the motion, however, Bryant Riley, chairman and co-CEO of BRF, voiced concern then that management was “overly enthusiastic in their desire to placate the dealers.” He didn’t like the terms.
The chief restructuring officer, Mark Renzi, putting the cost of these commissions and bonuses at that time at $10 million, responded that the alternative would be “war with the dealers” and a cost of $13 million to move inventory to the distribution centers, according to transcripts submitted as exhibits as part of the emergency motion.
The $10 million shrunk to $5 million because, according to the dealers, without installment and third-party financing, it became more difficult to move the increasingly discounted inventory. In addition, DIP stopped honoring gift cards, accepting returns and/or providing refunds, such that dealers say they were forced to shift to liquidation “with little-to-no help from the GOB liquidator,” BRF’s Great American division.
As evidence of a deteriorating situation, dealers who provided notice of termination prior to Oct. 31, 2024, got their commissions and bonuses, according to the motion, but those seeking that same compensation a month later did not. The judge’s response was candid: “I find myself in a situation where I don’t think I have the tools to be able to pay [the dealers] currently, but . . . I would like to enter an order granting their claim and to the extent that there is a motion filed to surcharge the collateral,” according to the motion, quoting a hearing transcript.
The irony
Thus, a motion to pay that included a schedule of receiving claims was made, terms to which the dealers agreed. However, by this juncture, JPMorgan Chase had been paid, moving BRF and its $98 million claim up to first-lien status. As the ad hoc group argues, the efforts of their members to conduct the GOB sales contributed to the ability to pay off JPMorgan and, therefore, to BRF’s new priority status as a first-lien creditor, yet BRF now refuses to file the motion to surcharge collateral.
At one of the hearings, Renzi testified that it was his view that “the dealers were very important to monetize the collateral of the first-lien lender and the second-lien lender and the third-lien lender,” according to the transcript. Judge Perez agreed with Renzi’s characterization.
“The Dealers have asked the Debtors to file the Motion to Surcharge, and the Debtors have refused as a result of BRF Financial’s threat to not allow the use of cash collateral to pay the Debtors’ legal expenses related to such motion,” according to the dealers’ motion.
So, we wait to see who, if anyone, flinches on March 5.
Meanwhile, in Delaware . . .
Now, BRF also is a principal in the FRG bankruptcy, the result of being FRG’s largest lender, as well as the key agent in the Brian Kahn-led deal to take FRG private in September 2023, a deal that made BRF a one-third owner of FRG.
Earlier this month, Kirkland & Ellis replaced Willkie Farr & Gallagher as counsel, allowing the proceeding to resume. But, not without drama. Willkie’s ties to both BRF and to Kahn led the judge in that case, Laurie Selber Silverstein, to block Willkie from continuing.
At the hearing during which Silverstein authorized the bankruptcy process to resume, Kirkland attorney Josh Sussberg said, “This case has gotten incredibly personal, and when cases get personal, emotions sometimes get in the way.”
Sussberg pledged that Kirkland and the DIP will do “everything possible” to save the more than 2,000 retail locations and 12,000 jobs” at stake. Counsel for the junior lenders, however, asked Silverstein to put the brakes on the bankruptcy. She denied the request, saying the concerns voiced by the junior lenders can be heard within the time frame now in place. Junior lenders include Pacific Investment Management and Irradiant Partners.
Herding cats
The next step is for the DIP to poll creditors on the proposed restructuring, which is articulated in a fifth version of the reorganization plan. The results of this poll are likely to remain conflicted. As Sussberg put it, “We have two parties who are so dug in.” He said it will be a matter of choosing between whether to come to an agreement or “to allow all of the funds to go to pay the fees of all the professionals in the room.”
This is the key question in the Conn’s bankruptcy, as well, or so it seems to me.
Finally last week, BRF finally filed its 10Q for the quarter ended September 2024 and was served with another lawsuit seeking damages for breach of fiduciary duty in connection with the firm’s many dealings with FRG and its erstwhile CEO Brian Kahn.
Though BRF reported a loss of $284.4 million in its third quarter, on revenues just shy of $200 million, because it signaled having enough cash to survive the year, its share price had a good day. In the past 12 months, BRF shares have lost about 78% of their value.
For the nine months ended Sept. 30 last year, BRF lost $773.2 million on revenues of $637.2 million.
The 10-Q, filed after three announced delays, also acknowledges that last week the Nasdaq notified BRF that it had not met the terms of an exception granted to it for filing the 10Q; the deadline was Feb. 17. BRF filed Feb. 21.
Then, yesterday, BRF announced it will release preliminary financial results for its fourth quarter ended Dec. 31 after market close on Monday, March 3.
“With the filing of the Form 10-Q, B. Riley expects to regain compliance with Nasdaq Listing Rule 5250 (c)(1), which requires listed companies to timely file all required periodic reports with the Securities and Exchange Commission,” according to the company.
After the announcement yesterday, BRF share prices jumped more than a third ($1.14/share) to finish at $4.54 per share.
Another lawsuit
In the latest lawsuit, filed Friday, a BRF stockholder seeks hundreds of millions of dollars in damages for breach of fiduciary duty, as well as the termination of Bryant Riley’s employment contract, according to the heavily redacted case filing.
The lawsuit, brought by Michael Robert Marchner Jr. in the Chancery Court of Delaware, mirrors in many respects class action case lawsuit brought in July by former FRG investors.
For more, the full docket in the FRG case and, separately, the docket for Conn’s.
