by Lenders, creditors agree on global settlement
WILMINGTON, Del. — After months of legal warfare, the various litigants in the contentious Franchise Group bankruptcy proceeding have agreed to “put down their weapons,” as one of the many attorneys put it, producing a settlement that is likely to conclude the bankruptcy on May 20.
Just a week after agreeing to sell Vitamin Shoppe to private equity firms Kingswood Capital Management and Performance Investment Partners for $193.5 million, Franchise Group’s debtors-in-possession announced through counsel at a hearing in bankruptcy court last week a “global settlement” to which all of the principal litigants have agreed. These litigants include, in addition to the DIP, the Freedom Lender Group, the Ad Hoc Group of first lien lenders, and the creditors’ committee.
Freedom Lender Group is a second lien lender that has challenged the holding company’s and DIP’s moves seemingly at every turn. While certainly delaying the proceeding by its adversarial stance, the Freedom Lender Group has succeeded in guaranteeing some relief for non-1L lenders when I believe most watchers would have said that seemed unlikely.
J. Christopher Shore, counsel for the Freedom Lender Group, said at the hearing that his clients are “thrilled to be moving forward to consensual resolution. Hopefully the next time we see you,” referring to the presiding judge, Laurie Silverstein, “it is for a consensual confirmation” on May 20.
Per the settlement, $15 million in cash is set aside for holders of pre-bankruptcy 2L loan claims, a class that includes Freedom Lender Group. Another $25 million is allocated by the settlement to a “Reorganized Common Equity,” or shared ownership that unites the various litigants in a new holding company (“New TopCo”) post-bankruptcy. Lastly, the settlement allocates $13.25 million to the Freedom Holding Co. debtors for contributions to a newly established Litigation Trust.
This Litigation Trust committee, which has members from the various groups, might pursue legal action going forward that could recover additional funding through that litigation. If there are awards and/or settlements, the new settlement agreement slices the pie in this way:
+ 58% to Freedom Holdco lenders.
+ 30% for pre-petition loan claims.
+ 12% to holders of operating company claims.
The settlement values what’s left of Franchise Group at $1.1 billion less net debt, which is stipulated not to exceed $600 million.
The one thing the various litigants seemed to agree on leading up to the settlement, a view that likely fueled the recent “good faith, arm’s length negotiations,” was that the legal actions, counter-suits, claims and counter-claims were churning through FRG’s remaining cash at an alarming rate. I said this in a previous column, but it’s a rare thing when attorneys are alarmed at the money being spent on their own fees.
“We expect withdrawal and stay of all litigation,” said Nicole Greenblatt, attorney with Kirkland & Ellis for the DIP. “All intercompany claims are settled.”
I wasn’t in the courtroom, and the hearing was conducted via Zoom anyway, but had there been a F2F proceeding, I can imagine a collective gasp after Greenblatt’s announcement.
The settlement awaits Judge Silverstein’s approval, but with her procedural questions answered and with clear consensus in the virtual room, it appeared likely that she would approve the settlement after having had a chance to read it in full.
“We’re not anticipating significant objections,” she said at the conclusion of the hearing. “We might need to address objections of individual creditors, but we can deal with that if it comes up.”
Thus, while 1L creditors are still owed nearly $2 billion, and while the proposed sale of The Vitamin Shoppe will likely bring in less than $200 million, there does seem to be a path forward after months of little hope.
“We’re happy to be resolving,” said Jayme T. Goldstein of Paul Hastings LLP, representing the 1L lenders. “All parties agreed to put down their weapons and stop fighting, to work instead toward being future owners. We look forward to making this litigation détente a permanent one.”
Another lawsuit for B. Riley Financial
The day before the settlement hearing in Delaware, in U.S. District Court for the Central District of California, a class action complaint for violation of federal securities laws was filed by Mike Coan and the KL Kamholz Joint Revocable Trust against B. Riley Financial, the latest in a series of legal claims against the embattled boutique investment firm.
In this latest action, which includes a demand for a jury trial, the long and colorful history of the many deals joining Bryant Riley and Brian Kahn is charted in great detail, at least from the perspective of the plaintiffs. The central claims include that BRF “sought to mask their fraudulent conduct in a spiderweb of related party transactions and high-risk financial arrangements,” identifying the fraud as “concealment” of a “scheme to extend over $200 million in undisclosed related party loans to longtime Bryant Riley friend and compatriot Brian Kahn.”
These undisclosed loans “went on for years and fundamentally changed the risk profile of B. Riley,” according to the filing. “This high-risk and undisclosed practice culminated in the largest equity transaction in B. Riley’s history: The company invested $280 million of its own capital to enable Kahn to take his company, Franchise Group, private in a management buyout” (emphasis in the original). You could also say these loans culminated in the bankruptcy of FRG in November last year.
Thus, unbeknownst to investors, according to the complaint, is that taken together, the loan and the equity stake “tied up $480 million in entities controlled by a single high-risk borrower with a history of fraud,” nearly a half-billion BRF would eventually have to write off entirely, according to its much-delayed filings with the SEC last month.
Both Coan and KL Kamholz Joint Revocable Trust filed suit against BRF last year for essentially the same claims. In a 10-Q filed by BRF last month, Coan is identified as filing a class action complaint against BFF in January 2024. The KL Kamholz Joint Revocable Trust is also identified as having filed a complaint against BFR, in March 2024. Thus, the complaint filed last week likely is an amended action that combines the two previous claims and adds to the record new information.
Just what the KL Kamholz Joint Revocable Trust is or represents is a mystery, but that is one reason to establish such a trust, to withhold information. What is a joint revocable trust? I had the same question. Gemini AI tells us that such a trust allows parties to manage their combined assets, giving them to control and access the shared assets while the parties are alive, and that it provides for how those assets will be distributed upon either death or the dissolution of the trust. By being “revocable,” the trust can be changed or dissolved by its parties at any time.
The new Coan-KL complaint recounts a lot of interesting history, including an attempt by Kahn to acquire Rent-A-Center that shipwrecked because someone failed to file the requisite paperwork. Kahn’s Vintage Capital Management ultimately had to pay a $92.5 million breakup fee, according to the filing, an amount negotiated down from more than $126 million stipulated by the agreement to buy Rent-A-Center.
Rent-A-Center brought claims not only against VCM but also against B. Riley as guarantor of the reverse termination obligation set forth in the merger agreement, and according to the Coan-KL complaint, it is this breakup fee that was the catalyst for all of the failed business ventures that followed, beginning with Prophecy Asset Management and continuing with FRG, including American Freight and Buddy’s Home Furnishings, as well as Badcock Home and Conn’s HomePlus.
In November 2023, the CEO of Prophecy Asset Management, John Hughes, pleaded guilty to charges of conspiracy to commit securities fraud, leading to the collapse of Prophecy. At that same time, FRG “learned that Mr. Kahn was one of two unindicted co-conspirators referred to in both the [SEC’s] Complaint and the Indictment,” according to the SEC affidavit. Nine days after Hughes’ plea, when BRF issued its quarterly report, nothing was included about the loans to Kahn, the Coan-KL complaint states.
On page 25 of the complaint, the plaintiffs state that Kahn “forged documents to fabricate collateral that did not exist as [Prophecy Asset Management’s] auditor and administrator began asking questions about his cash collateral deficit.”
The complaint then describes one of these forged documents to be a falsified Buddy’s Home Furnishings stock agreement backdated and created “in response to questions from PAM’s administrator,” questions concerning preferred shares in Buddy’s valued by Kahn at $150 million and promised to PAM. “During this time, Buddy’s never issued any shares to PAM or the PAM Funds,” according to the plaintiffs. In other words, the shares never existed.
A month later, BRF extended a $108 million loan to Conn’s so that struggling chain could buy Badcock from FRG. A month after that, Kahn was gone as FRG CEO. And you likely know the rest.
Buddy’s update
One last note.
We reported here the claims of “incurable” defaults of the franchise agreements governing Buddy’s Home Furnishings by five groups of Buddy’s owner-operators. It’s my understanding that Kirkland & Ellis, counsel for the FRG DIP, has reached out to most of these groups seeking resolution of their claims as momentum builds for winding up the FRG bankruptcy. Stay tuned; I’ll keep you updated.
