by Today is the big day for the Franchise Group bankruptcy, with a hearing on the ninth and perhaps final amended restructuring plan scheduled to begin at 10 a.m. Entering today’s courtroom, we have several questions we hope this much-anticipated hearing addresses.
Before we get to those questions, important to today’s proceedings is the testimony of Brian Kahn, former CEO of Franchise Group and the subject of several investigations, including inquiries by the SEC and DOJ. (He has “categorically” denied any wrongdoing and knowledge of any wrongdoing.) Kahn was deposed by the FRG debtors Friday pursuant to the bankruptcy hearing; he was scheduled to appear yesterday (Monday) at 2:30 p.m.
“The deposition is being taken for discovery, for use at any evidentiary hearing or trial, or for any purposes that are permitted by law or under the rules of the court,” according to the debtors-in-possession filing made in U.S. Bankruptcy Court for the District of Delaware.
Kahn’s testimony likely will be of great interest to most of the parties in the case, to the DIP quite obviously, but also federal investigators, former FRG investors who have filed lawsuits, current Buddy’s Home Furnishings owner-operators seeking redress for “incurable” claims related to their franchise agreements, and those adversely affected by the bankruptcy of Conn’s filed shortly after acquiring Badcock Home Furnishings from FRG for stock.
The presiding judge, Laurie Selber Silverstein, has said in her court that Kahn is “synonymous” with the FRG bankruptcy and FRG’s take-private transaction in 2023.
In the name of Freedom
Kahn and his wife, Lauren Kahn, filed a motion last week objecting to the latest amended plan because of that plan’s allotment of $13.3 million to fund litigation that FRG creditors might want to pursue, money that would, therefore, be out of reach for unsecured second lien creditors. The Kahns are the largest equity holders in one of FRG’s affiliates, Freedom VCM Holdings, a second-lien creditor, and as such they argue that a more favorable outcome for FRG than restructuring would be liquidation.
Freedom VCM has filed a claim for the unsecured amount of $322,378, according to court documents.
Also objecting to the restructuring, according to motions filed also last week, are Buddy’s Home Furnishings owner-operators Buddy Mac, Pentex and A-Team Leasing, three of the six Buddy’s groups that have made claims of “incurable” defaults of their franchise agreements specific to the noncompete language in those agreements. Most of those claims were filed back in January.
Buddy Mac Holdings comprises 82 stores; Pentex RTO comprises 73 stores; A-Team has 10 stores. These franchise owners are likely unwilling to relinquish any rights or accept a restructuring that retains existing franchise agreements without knowing first just who will own and/or control the new FRG holding company. This is one of our questions heading into the hearing: Who will sit on the new holdco’s board and call the shots?
‘This can be my testimony’
What else can we expect today? Hopefully answers to some frustratingly durable questions. Here are at least a few of them:
1. As we said, we want to know the identity of the new holdco’s officers or board. The global agreement calls for the formation of a new controlling board. Who will be on that board? What connections, if any, do any of these new holdco board members have to any of the parties in the case? It’s predicted here that most of these members are representatives of the secured first-lien creditors, but will there be any surprises? For example, is Andy Laurence, current FRG CEO and longtime Kahn business associate, continuing? Michael Bennett, CEO of Buddy’s?
2. Will we get any details on the findings of Michael Wartell, an independent investigator who is both the “director” and ONLY member of the “conflicts committee” established in bankruptcy by the various holdco boards? Wartell is on the DIP’s witness list, and on Saturday he filed a witness list of his own. He also filed a declaration in support of the global agreement put forward by the DIP, citing his investigation and its findings, but only very generally. Will the complete findings in the Wartell Reports be entered into the court record?
Also on the witness list are David Orlofsky, FRG’s chief restructuring officer; Christopher Grubb of Ducera Partners, the debtors’ investment banker; Christopher Meyer, director on the boards of FRG and Freedom TopCo; Jeffrey W. Kopa of AlixPartners, the global independent restructuring consulting firm that has been advising the DIP since even before the bankruptcy filing; and Kahn. Orlofsky is also with AlixPartners. Orlofsky, Grubb, Meyer and Kopa all filed declarations in support of the global agreement, with Kopa’s declaration rebutting the central claims the Kahns make in their objection, according to court documents.
3. What will become of Buddy’s Home Furnishings? Last month, 31 American Freight stores were sold off for chump change. Since then, the buyer, AFNewco, has rapidly expanded (see the extensive listing of “new stores”). FRG also just sold The Vitamin Shoppe, a deal worth $194 million. This leaves principally Buddy’s and that chain’s many owner-operators. I hear there is an offer on the table for the Buddy’s stores for $30 million plus the assumption of all cures, but that offer has not been made public. Will it be acknowledged and perhaps even approved today? Will the claims of violations of their franchise agreements by the five remaining groups of Buddy’s owner-operators be addressed? Or will the court continue to kick that particular can down the road? These “cure” claims, according to the hearing agenda issued by the court on Friday, “will be addressed, if necessary, at a subsequent hearing.”
4. With that $13.3 million “Litigation Trust” war chest, who might the secured creditors go after? Wartell at least identifies “potential claims” the DIP might pursue, claims in connection with, “among other things” Kahn’s pledge of shares of common stock in FRG to B. Riley Financial; “the lack of disclosure of Mr. Kahn’s pledging of his Franchise Group shares to B. Riley;” the source of Kahn’s ownership and funding of the shares; the take-private transaction; transfers of funds from FRG to other entities, including Kahn’s Freedom VCM Holdings; and the decision to file for bankruptcy, according to Wartell’s declaration of support filed with the court.
In its “proposed findings of fact” (docket No. 1181), the court stipulates for its list of exculpated parties, or those who are to be released from liability, that specifically not included are “Brian Kahn and Prophecy Asset Management LP, Bryant Riley, B. Riley Financial Inc., B. Riley Receivables II, LLC, WFG and each of their respective Related Parties and Affiliates (other than any officers, directors or employees of the Debtors that acted as an Estate fiduciary after the Petition Date).” Will we learn anything specific as to why, as findings as fact?
5. Finally, questions about the plans of the various federal investigators abound. It’s been 18 months since Prophecy Asset Management co-founder John Hughes was indicted after admitting to his role in the fraud scheme that diverted $294 million from “dozens of investors,” according to the DOJ. Since then, the SEC, several field offices of the FBI and the DOJ have been investigating the links that potentially connect Prophecy to Kahn’s Vintage Capital Management, FRG, B. Riley Financial, the FRG take-private transaction and loans from B. Riley Financial to FRG. With FRG wrapping up, what’s next, if anything? At a time when the Trump administration has ordered a de-emphasis of white-collar criminal cases, what is the next move for any of these FRG-related investigations? (Again, Kahn has denied any wrongdoing, as has Bryant Riley, CEO of B. Riley Financial.)
Hopefully this column helps you make some sense of the day’s proceedings. It’s quite a bit to track. Even the list of holdcos, topcos, newcos and affiliates is longer than a cast list for Aida. But maybe, just maybe, the plus-size lady in this FRG opera will finally get to sing.
