by One last obstacle: Former CEO Brian Kahn’s objection
Tuesday’s much-awaited Franchise Group bankruptcy hearing centered on a last-minute objection from former FRG CEO Brian Kahn and a little-known (at least to me) clause in the U.S. Code specific to bankruptcies known as “A10.”
After six hours of testimony, the fate of the FRG global settlement is in the hands of U.S. Bankruptcy Judge Laurie Selber Silverstein, a plan that would reorganize and re-structure FRG as a new holdco controlled by a board of seven members. Silverstein told the courtroom that the plan is 100 pages long and that at that length, she’s “going to find stuff in there I don’t like.” She pledged to rule on the settlement “promptly.”
Attorneys for the debtors-in-possession lobbied for the agreement that has been agreed to by all of the major parties in the case except Kahn. Derek Hunter, attorney with Kirkland & Ellis, for the DIP, said the plan would cut $1.5 billion of the nearly $2 billion in debt declared when FRG filed for bankruptcy in November last year and preserve the approximately 1,700 retail locations that remain in the FRG portfolio, nearly all of them Buddy’s Home Furnishings stores and Pet Supplies Plus stores. At stake also are approximately 9,000 jobs.
The agreement in Silverstein’s hands is the ninth version of the attorneys’ proposed global agreement, one that would allow FRG “to preserve business value and emerge and let this company do what it’s supposed to do, which is not stay in bankruptcy but go out and be a great retailer,” Hunter said. “The key question before the law: Is the settlement reasonable? We haven’t heard from any party that it isn’t reasonable. It is the best outcome possible.”
The hearing then moved to the objection filed by Brian and Lauren Kahn, equity holders in Freedom VCM Holdings (“Topco”) to the tune of $13.3 million. They object to the establishment of a Litigation Trust in the same amount, arguing that these funds should not be taken from equity holders against whom there are no creditor claims.
Representing the Kahns, who were not present at the hearing, was attorney Paul H. Aloe of Kudman Trachten Aloe Posner, a law firm relatively new to the FRG case. Aloe told the court that although Kahn supports the settlement, he objects “to the plan that takes Topco’s cash away from Topco” to effect that plan and, specifically, to set up the litigation trust.
“One of the reasons we have an objection is there is a reference to a highly confidential report that makes vague allegations,” Aloe said, referring to the Wartell Report.
The Wartell Report
Michael Wartell is an independent investigator appointed by the debtors. In his declaration of support of the settlement, he mentions claims the creditors might pursue in litigation once the settlement is approved, claims in connection with 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 $54 million in funds from FRG’s holding company to Freedom VCM Holdings; and the decision to file for bankruptcy, according to the declaration filed with the court.
The full docket is available here.
“Up to the settlement, Topco got its percentage share” of what is left of the cash assets, Aloe said Tuesday. “Suddenly, all that’s gone for a litigation trust. … You take everything I’ve got and all I’m going to get? … I’m just giving away everything?”
Aloe pointed out that the report of Wartell’s findings remains confidential, that Kahn has not been charged with any crime, and that there is dispute about what Wartell refers to as a “fraudulent conveyance” on the part of Kahn in the amount of $54 million.
At this moment in the proceedings, Aloe provided the room with a bit of levity. Attempting to explain how Freedom VCM got control of $60 million, Aloe paused to say he didn’t know the source of the money. Silberstein interjected: “Your client probably knows,” emphasizing Kahn’s conspicuous absence at the hearing.
Chris Shore of White & Case on behalf of the ad hoc group of second lien lenders, also provided some irony. When arguing against Kahn’s attempt to block the settlement’s approval, Shore said, “I can hardly say that standing in the way of the path to recovery of assets is a bad thing.” The courtroom erupted in laughter. Shore and the ad hoc group of 2L lenders have tenaciously fought the debtors for more than five months, “standing in the way of the path to recovery of assets.”
Shore argued that the court “has nothing in the record to establish that [Kahn] has a legitimate claim.”
This brings us to A10, which refers to 11 U.S.C. § 1129(a)(10), a section that outlines a requirement for confirming a Chapter 11 reorganization plans like the one submitted Tuesday. The requirement mandates that if a class of claims is impaired under the plan, at least one impaired class must have accepted the plan. After the presentations at the hearing, it is up to Silverstein to determine if, in fact, the Kahns have a claim of impairment or, alternatively, if they have standing in the court to make their objection.
On behalf of the debtors, Hunter pushed for approval of the settlement regardless, suggesting approval but, if necessary, allowance for deliberation on the Kahns’ objection and examination of proof of claim after approval. Silverstein did not seem to be very enthusiastic about Hunter’s suggested plan forward.
“I either approve it or I don’t,” she said. “I’m not going to approve it half-way.”
Buddy’s Home Furnishings
The Kahns’ claim tabled, next the attorneys for two groups of Buddy’s Home Furnishings owner-operators, Buddy Mac Holdings and A-Team Leasing, addressed the court. Separately, BMH, A-Team and three other ownership groups objected to the global settlement on the basis of what they claimed were violations by FRG of the franchise agreements governing Buddy’s stores specific to some of their marketing areas. The attorney for Buddy Mac, Matthew Ward, revealed that after “discovery requests, a battle of letters and the filed plan objection,” BMH had reached an agreement with the DIP.
“We have dropped our objections to the plan,” Ward said.
A-Team still is in talks with the DIP to resolve essentially the same issue. Silverstein assured A-Team’s attorney that “we’ll get to you at some point.” The similar cure claims of the other three groups — Greene and Greene, Pentex RTO and BB BHF — did not come up.
New holding company
Just before the hearing Tuesday, the court posted several documents to the docket available online, including a second supplement or addendum to the global agreement up for approval. That supplement identified five of the seven members of the board that would steer the new holding company for what’s left of FRG, if the agreement is approved. The agreement calls for a transition from a board of directors to a board of managers.
If approved, the new holdco would be directed by:
- Chris Rowland, CEO of FRG subsidiary Pet Supplies Plus since 2014.
- Chris Rubin, CEO of boating and fishing supply chain West Marine and former chair and CEO of Michael’s Stores.
- David Barr, a board member for Dogtopia, Domino’s Pizza China, College Hunks Hauling Junk and Moving, Empower Aesthetics, Agentis Longevity and Retail Credit Solutions, and owner of 48 KFC locations, Taco Bells, Capriotti’s and Spice & Tea Exchange units.
- Susan Lintonsmith, COO for European Wax Center and previously CEO of Quiznos.
- Tim Johnson, the new board’s sole member with experience in home furnishings. Johnson was CFO at Big Lots and, from 2021 to 2024, a director on the board of Aaron’s. Currently, he is CFO and CAO for Victoria’s Secret, but he is retiring from those posts on May 31.
This would leave two vacancies to be filled by the five already named. The filing also states that FRG’s current senior management “shall be reinstated and remain unchanged” as of the effective date stipulated in the agreement, suggesting that current CEO Andrew Laurence would continue with the new holdco.
The chairperson of the new board would be determined by the ad hoc group of first lien (secured) creditors, but going forward, this chair would be elected by the board, according to the supplement. The new holding company would be legally titled PSP Midco, according to the supplement document.
B. Riley Financial update
Also this week, B. Riley Financial replaced its chief financial officer after the departure of Phillip Ahn, who left to “pursue another opportunity,” according to the press release. The new CFO is Scott Yessner, and he joins the company just after it failed to meet its latest filing deadline with the SEC.
Yessner previously was CFO of California Expanded Metal Products Co. and, before that, Universal Technical Institute. Yessner joined BRF two months ago as a “strategic advisor,” according to the company.
“Working with the B. Riley team and Phil the past two months has been a great experience and should enable a seamless CFO transition,” Yessner said.
BRF missed its latest deadline to file quarterly results with the SEC, citing “continued efforts” to finalize its 2024 annual report, which is also late and late for the third consecutive year. Thus, BRF again risks being de-listed by Nasdaq.
Earlier this year, BRF wrote off nearly all of the $480 million it either loaned to or invested in FRG, a company BRF helped to take private in 2023. BRF’s dealings with FRG and what it did and did not communicate to its investors and clients is the subject of regulatory investigations. BRF CEO Bryant Riley has denied wrongdoing and, like Kahn, he has not been charged with any crime.
Despite the writeoff, BRG still is linked to FRG, however. BRF announced in October a partnership with Oaktree Capital Management, which is one of the secured creditors in the FRG bankruptcy. Shares of BRF improved to $3.42, or 4.6%, on Tuesday after the company said it reached a deal to cut its outstanding debt by about $46 million. BRF announced that it has agreed with an institutional investor to exchange approximately $139 million in senior notes for $93 million in notes.
