Buddy’s Home Furnishings sold … but to whom?

Buddy Mac pressed to liquidate, no auction for American Signature

WILMINGTON, Del. — The bankruptcy courts have been super busy since last we reported back in mid-December, so let’s get to it. 

First, we have confirmation that the reorganized Franchise Group (Fusion Parent) has sold off Buddy’s Home Furnishings, finalizing that deal on Dec. 31 and notifying franchisees and unsuccessful bidders on Monday. The buyer is yet another holdco, BHF LLC, the principals for which we haven’t yet been able to verify. Nor have the franchisees.

Confirming the sale but scant little else, Buddy’s emailed franchisees Monday of a “new day” that leaves the chain’s management team and organizational structure “unchanged.” While this statement likely was intended to put franchisees at ease, it’s more likely to do the opposite. 

As evidence, one of the largest franchisees remaining, bb (or bebe or Bebe, depending on which legal document you’re reading) filed a motion or claim against Fusion Parent the same day word of the Buddy’s sale went out. In addition, the largest franchisee, Pentex Franchises, filed cure claims against FRG during the FRG bankruptcy last year alleging violations of its franchise agreement. I think there are competing versions of just what a “new day” is supposed to look like here.

“BHF is backed by a well-capitalized group of long-term and patient investors with a broader mission to” . . . blah, blah, blah, according to the vapid email to franchisees announcing the acquisition. Maybe it’s just me, but presenting news of the acquisition to the key stakeholders without identifying the “patient” investors? Particularly on the heels of all that these franchisees have endured since FRG declared bankruptcy in November 2024? Really?

Confusing matters, at least for those of us who weren’t in the Ducera Partners boardroom when the deal was done, bb BHF refers to itself in its Monday filing as BHF. So, it is at least possible that bb BHF, or BHF, is the buyer, though one wonders why a buyer would file an adversarial claim against the seller just days after finalizing a deal. 

Buddy Mac Holdings

Speaking of franchisees enduring the dumpster fire that’s been the FRG bankruptcy, the Buddy Mac bankruptcy in Texas quickly reached a crossroads. 

Buddy Mac (BMH) was the largest Buddy’s franchisee as recently as May last year, when it had 84 stores. Down to 47 locations, BMH declared Chapter 11 bankruptcy on Dec. 4 and since has been trying to fend off Phonix RBS and its aggressive attempts to force BMH into Chapter 7 liquidation. 

Phonix has motioned for a conversion to Chapter 7. BMH has counter-motioned to be allowed to continue to operate and fund operating costs. BMH’s motion was approved by the court on Wednesday; Phonix’s was not. So, BMH remains in Chapter 11 at least for the time being.

As we reported earlier, Wichita lender Intrust sold its loan to BMH on to Phonix right at the loan’s end-of-August maturity date, according to the bankruptcy declaration. Phonix immediately initiated foreclosure proceedings on each of the properties BMH had put up as collateral for the loan, and those efforts were cited by BMH as a reason for its Chapter 11.

By virtue of AF Newco being Phonix’s sole member, Phonix’s principals are Brent Turner and Mike Piper, whose signature appears on the loan agreement between BMH and Phonix. 

According to BMH’s counsel, former FRG CEO Brian Kahn has been managing Phonix as an acquisition company on behalf of Turner. Kahn listened in on the BMH bankruptcy hearing that was held a day before his own pleading in the fraud case brought by the DOJ, according to Phonix counsel, Michael Schaedle.

Kahn admitted in federal court last month to conspiracy to commit securities fraud, part of the Prophecy Asset Management prosecutions that continue with the trial of Prophecy executive Jeffrey Spotts later this month.

Former executives at Liberty Tax, the company that became FRG, Turner and Piper reunited to acquire 31 American Freight stores from FRG out of bankruptcy in January last year. Then, in February, they set up Phonix, according to John Kane, BMH’s counsel. Piper testified at the acquisition hearing for AF Newco that Kahn was not part of the deal to buy the American Freight stores and was not anticipated to have any role at AF Newco. In July, however, Kahn was hired by AF Newco as a consultant. At least this is what Fusion Parent states in its action against AF Newco at the Delaware bankruptcy court, a claim not rebutted in AF Newco’s counter-claim. (Nothing new filed in that litigation duel since Dec. 18, by the way.)

In the BMH bankruptcy, Phonix filed a motion calling for an emergency hearing this week to address its concerns that Buddy Mac is unsalvageable and, in futilely seeking to reorganize, is burning through cash that Phonix has claims on as its largest secured creditor ($12.7 million, the balance on the Intrust loan, plus interest since the transfer). Phonix claims BMH is “self-liquidating.”

Also motioning for a conversion to Chapter 7 were various Texas tax authorities, according to filings made before the U.S. Bankruptcy Court for the Northern District of Texas earlier this week.

It was a rough quarter for BMH, which was cut loose by Buddy’s for failure to pay franchise fees, according to court documents. FRG deactivated Buddy Mac’s point-of-sale system and other information technology systems, and it required that Buddy Mac stores de-brand.

In its more than 1,000-page filing, Phonix claims that BMH purchased none of the $200,000 in inventory it had budgeted for the reorganization and the following week spent less than $200,000 of the $350,000 budgeted for the same. Without sufficient inventory, BMH cannot generate the RTO contracts and receivables that form the basis of its business and serve as Phonix’s primary collateral, Phonix’s emergency motion argues. 

From Kahn to Riley

Kahn’s former long-time business associate, Bryant Riley, also belongs in this update. 

B. Riley Financial, which as of this month became BRC Group Holdings, owns a 76% controlling share of bb BHF and, therefore, of 53 Buddy’s franchises. That subsidiary filed a court objection on Monday claiming that Fusion Parent has continued to charge franchise fees for stores that bb BHF was forced to close, including an automatic debit of more than $30,000 from bb BHF’s bank accounts for the non-existent locations.

The filing supplements earlier objections to Fusion Parent’s proposed assumption of BHF’s franchise agreements, issues that remain unresolved despite the bankruptcy plan’s confirmation in June, and they are issues potentially made moot by the selloff of Buddy’s to the mysterious group of “well-capitalized investors.”  

The bb BHF claim centers on three Jacksonville, Florida, and Moultrie, Georgia, locations that the franchisee was required to vacate by May 20 last year after FRG rejected the subleases, according to the filing. bb BHF purchased the stores in November 2020 as part of a $35 million acquisition of 47 Buddy’s locations. 

In addition, Bloomberg Law reported over the holiday break that B. Riley Financial and its chairman will have to defend against claims that they misled investors regarding undisclosed, risky loans to Kahn, including loans the investment bank backed in the $2.8 billion, management-led deal to take FRG private. 

The former investors bringing a class action lawsuit against BRF and Riley “sufficiently alleged” that the defendants acted with deliberate recklessness to sustain their securities fraud claims, according to the judge in the case, Sherilyn Peace Garnett.

Litigation Trustee

Riley also faces scrutiny with respect to past dealings with Kahn from the litigation trustee in the FRG bankruptcy, Lawrence Hirsh. This week Hirsh filed motions to examine two former FRG directors, Patrick Cozza and Lisa Fairfax. Cozza joined the FRG board in 2018, Fairfax in 2021. 

Hirsh has asked the court to authorize the examination of the two former directors, and he requests “all documents” relating to, among many other things, FRG’s business dealings with B. Riley, B. Riley receivables acquisitions, the Badcock acquisition and subsequent sale to Conn’s, and several matters connected to Kahn’s many roles with FRG and Freedom VCM Holdings. Sought by Hirsh are also “all documents concerning any potential breaches of fiduciary duty, self-dealing, fraudulent transfers, or other legal violations by FRG’s directors, officers, or other fiduciaries,” his motion states.

American Signature

Finally, a check on the docket for American Signature shows a Chapter 11 that actually looks a lot like a Chapter 7. The judge approved a slew of appointments, including those of Berkeley Research Group for restructuring/liquidation, SSG Advisors as investment bank and the many attorneys that the bankruptcy professionals say they need. The U.S. trustee on this case, Andrew Vara, is objecting to the retention of A&G Realty Partners, however, citing a direct conflict of interest on the part of the real estate firm.

More importantly, no competing bids to the stalking horse’s offer were submitted by the deadline Wednesday, though bids were submitted for individual assets. No competing bids submitted cancels the auction, and it sets up that stalking horse, ASI Purchaser, to take possession and immediately proceed with liquidating the entire chain, including distribution centers. For those scoring at home, this will shutter 89 remaining stores, 79 of them Value City locations. A hearing on this is scheduled for the morning of Feb. 4.

Thus, a deal in which the Schottenstein family controls the seller, the buyer, the lenders, the liquidator and a significant portion of the real estate portfolio is hurtling toward consummation. We wonder, as the U.S. trustee has wondered in filings and with testimony, whether this network of shared interests created an environment in which true competitive bidding was ever a realistic possibility.

But what do I know? I’m not a lawyer; I don’t even play one on TV.