by Fallout from the Franchise Group bankruptcy continues to widen
DALLAS — Buddy Mac Holdings, which as recently as a few months ago was the largest franchisee of Buddy’s Home Furnishings, has filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the Northern District of Texas.
Owned and operated by Ian Macdonald (90%) and Aaron Macdonald (10%), Buddy Mac comprised 82 Buddy’s locations across eight states in April this year. When it filed for Chapter 11 on Thursday, the count was down to 47 locations in Texas, Arkansas, Florida, Illinois, Kansas, Missouri, New Mexico and Oklahoma.
Cited for the bankruptcy’s reasons in Ian Macdonald’s declaration include the financial distress associated with Franchise Group, which filed its own Chapter 11 in November last year. The FRG bankruptcy made getting credit from suppliers more difficult, according to the declaration, which caused inventory shortages and, therefore, a drag on sales.
Also cited were litigation with the franchisor, FRG’s Buddy’s Newco division, over its franchise agreement, in particular that agreement’s noncompete clause, as well as the acquisition of a $12.6 million loan by a group that Buddy Mac claims is unwilling to negotiate.
Macdonald also states that the filing is intended to stop foreclosure proceedings on Buddy Mac properties across several states by that same group, Phonix RBS.
The largest unsecured creditors listed are Buddy’s Newco, the franchisor, owed over $1 million; O’Rourke Sales Co., over $1 million; C&L Supply, over $919,000; Leopard Mobility, over $314,000; Progressive Furniture., over $211,000; Noctova Solutions RTO Sleep, over $134,000; and Womble Bond Dickenson, over $80,000.
FRG funk
Once FRG filed for bankruptcy late last year, “Almost immediately, [Buddy Mac] began experiencing serious difficulties in keeping its stores stocked with inventory, because suppliers associated the Company with the Buddy’s franchise and stopped extending credit,” MacDonald stated in his declaration supporting the bankruptcy filing, hurting revenues despite the company maintaining its own supplier agreements independent of the franchisor.
Buddy Mac had been thriving, generating over $73 million in revenue in 2022 and $74 million in 2023, according to the declaration, a track record that culminated in BMH being named Buddy’s franchisee of the year in 2022.
The last straw, however, appeared to be the refusal by lender INTRUST Bank in Wichita, Kansas, to renegotiate the terms of its $11.9 million loan to Buddy Mac when it matured in August. INTRUST refused to renew despite a previously positive relationship, MacDonald attests, leading him to believe that INTRUST became unwilling to take on new exposure in the RTO industry following FRG’s highly publicized collapse.
As we reported in November, just a few days after the loan’s maturity, INTRUST sold the debt to Phonix RBS, which listed its chairman as Brent Turner, who is a principal also at AF Newco and once was CEO at Liberty Tax, the company that became FRG in 2019. Turner and fellow former Liberty Tax executive Michael Piper launched AF Newco in January to buy 31 American Freight stores.
As chairman of Phonix RBS, Turner signed the papers to sue Buddy Mac for breach of contract and nonpayment of a $12 million-plus loan, according to Turner’s filing with Kansas’s district court in Sedgwick County. Phonix also filed foreclosure proceedings on three Buddy Mac-owned properties in Texas, Missouri and Illinois, and sued 44 Buddy Mac entities, according to Macdonald’s declaration.
Objection!
Through legal counsel, Phonix is seeking to block motions by Buddy Mac relating to emergency funding in order to pay, among other things, wages and rents, according to court documents. Phonix’s motion lists no principals, owners or executives by name.
Buddy Mac also continues to be embroiled in litigation with Buddy’s Newco over what the franchisor alleges are $643,000 in unpaid franchise fees. Buddy Mac disputes this claim and has countersued for approximately $38 million, claiming that Buddy’s Newco breached exclusive territory rights by allowing American Freight to sell in Buddy Mac’s territories.
Macdonald also cited Buddy Newco’s refusal to allow the closure of unprofitable store locations, forcing BMH to continue paying royalties despite mounting losses at those locations.
Buddy Mac’s debt structure includes the Phonix-held secured loan, approximately $3.4 million in unsecured subordinated debentures and convertible notes, and roughly $3.3 million in trade payables to suppliers and vendors.
Macdonald stated that management believes reorganization or a going-concern sale, rather than liquidation, offers the best chance to maximize value for creditors.
The case is 25-34838. BMH is based in DeSoto, Texas. The case’s first hearing was scheduled for Monday morning.
Phonix rises
According to its lawsuit against BMH, Phonix is seeking the former INTRUST loan amount and more than $3,300 per day in accruing interest on that same loan.
Phonix’s chairman, Turner, was named president and CEO of Liberty Tax in October 2019 and fired in June 2023, according to news accounts. Piper, formerly CFO at Liberty Tax, is AF Newco’s managing member, according to its own court filings. (AF Newco and FRG also are embroiled in litigation.)
According to Phonix’s lawsuit, Buddy Mac failed to pay back the INTRUST loan by its maturity date of Aug. 31, or two days before Phonix acquired the loan and three days prior to FRG demanding that Buddy Mac “de-brand” as Buddy’s.
“Since that date, Borrower has not made any payments to Plaintiff,” which claims it has repeatedly notified BMH of the outstanding balance. According to the suit, BMH was notified of the money due on Sept. 4, two days after acquisition of the already-due loan. Despite several notices, BMH has not “remedied the default or made payment or given any indication that such payment is forthcoming,” according to the filing.
Macdonald’s declaration portrays efforts to reach an agreement in a very different way: “The Company has made repeated good faith efforts to negotiate and reach a resolution with Phonix to no avail.”
In its motion to block BMH’s motion to allow emergency use of collateral filed Sunday, Phonix states that Buddy Mac filed Chapter 11 “without giving Phonix any prior notice or engaging in any negotiations with Phonix over the terms on which the Debtors can use Phonix’s cash collateral,” according to its own filing. “The Debtors’ decision to file these cases without notice to Phonix is particularly surprising given that, for many weeks leading up to the filing of these cases, the parties had been engaged in negotiations over events of default that had occurred under the relevant loan documents.”
For its part, Buddy’s Newco, which still is led by CEO Michael Bennett, went from pleading franchisees to sign new lease agreements to abruptly ending its partnership with BMH on Sept. 3, or the day after Phonix acquired BMH’s loan, demanding that BMH de-brand as Buddy’s.
The newly reorganized FRG is accepting bids on Buddy’s Newco “as is,” with a decision on a sale expected within days rather than weeks.
