by WILMINGTON, Del. — U.S. Bankruptcy Court Judge Laurie S. Silverstein confirmed the Ninth Amended Plan of Reorganization for 53 out of the 54 debtors affiliated with Franchise Group, approving a sweeping restructuring that will slash the company’s debt by $1.5 billion and preserve an estimated 9,000 jobs across 1,700 stores.
However, as it relates to the 54th debtor, Topco/Freedom VCM, of which Brian Kahn and Lauren Kahn are equity holders, the plan was not confirmed because of technical noncompliance with bankruptcy code provisions, specifically what is called section A10. The Kahns’ claim remains to be resolved, but Silverstein said in a hearing Wednesday afternoon that she would not allow it to block approval of the overall settlement.
Brian Kahn is the former CEO of FRG. The bankruptcy case’s docket, including the recording of Wednesday’s hearing, is available here.
“As expressed at the hearing, I will not accept an objection to a claim a week prior to the hearing in order to impact confirmation,” Silverstein said, “and I will not turn a confirmation hearing into a claims objection hearing in the circumstances here. Regardless, until a claim is disallowed, it exists, even if the holder of that claim cannot vote” on the settlement plan.
The Kahns’ claim centers on approximately $13.25 million remaining in Freedom VCM cash that the Kahns argue they would have a better opportunity to recover in liquidation, according to their objection filed with the court. They also argue that the cash should not be diverted to establish a litigation trust of the same amount if there are no creditor claims against Freedom VCM.
“Mr. Kahn argues that this money should be distributed to stakeholders in Topco and that there is no basis for the transfer to the trust,” Silverstein summarized. “This is contrary to Mr. [Michael} Wartell’s declaration. Mr. Wartell testified that his investigation revealed that between August and December 2023, approximately $54 million was transferred by the Freedom Holdco debtors to or for the benefit of Topco. He further testified that there was no apparent value given for these transfers, and there may have been an intent with these transfers to keep those funds out of the hands of the Freedom Holdco lenders.”
Michael Wartell is an independent investigator appointed by the debtors. In his declaration of support of the settlement filed with the court, he describes 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; the transfers of the $54 million in funds into Freedom VCM; and the decision to file for bankruptcy, according to Wartell’s declaration, which is the testimony to which Silverstein referred.
Wartell concluded that FRG has “a fraudulent conveyance claim against Topco for $54 million under either an actual or constructive fraudulent conveyance theory or both,” Silverstein said Wednesday. “I note here that Mr. Kahn chose not to cross-examine Mr. Wartell, nor did he proffer his own witness to counter the existence of the fraudulent conveyance claims.”
Section A10, which refers to 11 U.S.C. § 1129(a)(10), outlines a requirement for confirming a Chapter 11 reorganization plan that mandates that if a class of claims is impaired under the plan, at least one impaired class must have accepted the plan. While the Kahns said through counsel last week that they support the reorganization plan, they object to how it stipulates use of the $13.25 million held by Freedom VCM.
Buddy’s Home Furnishings
Also still in play or otherwise unsettled are the remaining cure claims brought by four groups of owner-operators of Buddy’s Home Furnishings: Greene and Greene (78 franchises), Pentex RTO (73 franchises), BB BHF (62 franchises) and A-Team Leasing (10 franchises). Along with Buddy Mac Holdings, the four groups each filed objections to the global settlement on the basis of what they say are noncompete violations by FRG of the franchise agreements governing Buddy’s stores, according to their respective filings.
Buddy Mac Holdings (82 franchises) reached an agreement with FRG a week ago, according to BMH’s attorney, the terms of which have not been released.
“At the time of the confirmation hearing, certain outstanding cure objections or contract-related objections remained,” Silverstein said from the bench. “Each of those that was not resolved prior to confirmation will be resolved subsequently.”
Also still to be determined and/or announced are the remaining two members of the controlling board for the new holding company and the management team that will take the reorganized FRG forward.
The plan includes the equitization of first-lien loan claims into 100% of the reorganized equity, and it ends six months of highly contentious litigation, including multiple appeals and disputes over professional fees, valuations and intercompany claims, Silverstein said.
“No creditor has argued that this procedure was not sufficient or that it needed more time to consider or reconsider its vote,” she said during the 21-minute hearing. “Considering the totality of the circumstances, debtors have met their burden to show that the Martin factors have been met with respect to the global settlement.”
“Martin factors” refer to a set of criteria used by courts to evaluate proposed settlements in bankruptcy cases, particularly when dealing with third-party releases.
“It is uncontroverted that the global settlement was the product of good faith, arms-length negotiations, and has the support of all the major stakeholders,” Silverstein said. “It resolves numerous issues among all the debtors. … Accordingly, it is in the best interests of the creditors, none of whom have objected to approve the settlement.”
Still to be done, then, is revising a proposed confirmation order, one that reflects Silverstein’s rulings. Once finalized and approved, this revised order will formally confirm the plan for all debtors except Freedom VCM. How that outstanding claim gets resolved is likely among the first orders of business for the new FRG holding company.
The next and potentially last hearing in the bankruptcy, presumably during which the confirmation order will be approved, is scheduled for 10:30 a.m. June 17, according to a filing made this morning.
BRF update
Also Wednesday, B. Riley Financial announced it received a delinquency notification letter from Nasdaq that indicates that BRF is not in compliance as a result of the delayed filing of its quarterly report for the period ended March 31.
Nasdaq has informed BRF that it must submit a plan by June 2. BRF said in a statement that it expects to submit an updated plan by the new deadline.
