by Hearings make for busy day Wednesday in the 2 bankruptcy courts
In contrast to the Franchise Group bankruptcy, U.S. trustees have proven to be champions of everyday consumers and unsecured creditors in the respective Chapter 11 proceedings for Buddy Mac Holdings in Texas and American Signature in Delaware.
We’ll start in Texas, where the U.S. trustee challenged the financing for the stalking-horse buyer for BMH, Phonix RBS. A pointed objection to the debtors-in-possession financing argued that the proposed terms would inappropriately favor Phonix, the AF Newco entity that is BMH’s largest creditor.
The trustee, Lisa L. Lambert, raised multiple concerns about BMH’s emergency motion seeking court approval for up to $1.5 million in post-petition financing from Phonix, which is also the company’s pre-petition lender. The proposed deal includes a controversial “roll-up” provision that would convert $3 of existing debt into priority claims for every $1 of new money advanced, a clause that could potentially move $4.5 million in pre-petition debt owed to Phonix to super-priority status.
This clause of the agreement to purchase indicates that no matter what else happens, Phonix RBS is really hoping to recover this roughly $5 million portion of their $12.7 million stake in BMH as the largest secured creditor.
Lambert argues that the roll-up inappropriately rewards Phonix while diminishing recovery prospects for other creditors who lack such leverage. Evaluating the roll-up’s impact is nearly impossible because the debtors have failed to file required schedules and statements of financial affairs in any of their jointly administered cases, according to Lambert’s filing.
The U.S. trustee’s objection extends to other aspects of the proposed financing arrangement, including liens granted to Phonix and guarantees against other creditors successfully invoking the equitable doctrine of marshaling against Phonix. (Marshaling requires creditors with claims against multiple assets to exhaust other collateral before reaching assets that represent another creditor’s sole source of recovery.)
National TV sale in question
Separately, Lambert motioned to block the sale of nine BMH stores in Missouri to National TV Sales & Rentals because of consumer privacy concerns and “missing” records and filings. The $700,000 deal is being questioned because unfiled financial statements make it impossible to properly evaluate the transaction, she argues.
Creditors cannot assess which assets belong to which debtors, what secured claims exist against the assets, or the full scope of contracts being assumed and assigned, the motions states, mostly because the BMH debtors missed a Jan. 7 deadline to file these critical documents.
Customer privacy concerns arise from the inclusion in the proposed sale of rent-to-own agreements that contain personally identifiable information. Lambert wants the court to require assurances that the BMH privacy policies governing the data will be honored by the buyer.
It’s clear that time and money are running out for BMH, so it is not surprising to see counsel for both BMH and, separately, Phonix RBS rushing to try to get their deal approved. Fortunately for them, during a hearing Wednesday the court approved bidding procedures for the sale of substantially all BMH assets and its affiliated entities. Phonix RBS, therefore, is the bidder to beat for an auction Feb. 17, if any other bidders materialize by 5 p.m., Feb. 13.
We detailed last week the terms of Phonix’s $9.7 million bid, part of an asset purchase agreement that includes credits and provisions worth up to $2.7 million. These provisions could reduce Phonix’s exposure to $7 million.
One thing we didn’t report: Principal BMH owner Ian MacDonald agreed to provide additional collateral, including a participation agreement involving MRG Boulders, a pledge of his limited partner interests in P.E.C. Finance, and a mortgage on unencumbered real property in Alvarado, Texas. MacDonald is pulling out all the stops, in other words, and this collateral would reduce Phonix’s exposure even further.
Buddy’s v. BMH
Separately on Wednesday, BMH filed a second motion seeking court approval of a settlement with Buddy’s Franchising and Licensing that would resolve multiple disputes stemming from their former franchise relationship the two (and their many affiliates) shared. BMH was as recently as a year ago the largest Buddy’s franchisee.
Buddy’s was sold off last month by Fusion, the company that emerged from the FRG bankruptcy. This week, the Buddy’s buyers, Skyline Investors, issued a press release documenting how excited everyone at Buddy’s and Skyline and Skyline’s investment partner are with the deal, a release glaring in its absence of any substance or detail. It’s all champagne and roses in Orlando.
The BMH-Buddy’s settlement, if approved, would end a contentious year or so between franchisor and franchisee. BMH filed cure claims in the FRG bankruptcy, claiming violations of its franchise agreement with respect to marketing areas and noncompete restrictions. FRG then terminated its franchise agreement with BMH in September last year, but remained tethered by virtue of being a creditor in BMH’s subsequent bankruptcy.
Buddy’s then filed a complaint in Florida state court against 43 Buddy Mac entities, alleging breaches of franchise agreements and federal trademark law violations, an action moved to federal court.
Under the settlement agreement, both sides will exchange broad mutual releases covering all claims arising from their franchise relationship, including those asserted in the Florida litigation. However, the releases preserve BMH’s pre-petition unsecured claims filed in the FRG bankruptcy. Similarly, Buddy’s retains its right to assert unsecured claims in the BMH bankruptcy.
Here is the full docket for the BMH bankruptcy cases and filings.
Gardner White gets 9 stores
Let’s shift our attention to Delaware and American Signature, where the court quickly approved the sale of nine stores and their lease agreements to Gardner White.
The court also heard motions, declarations and testimony supporting the global sale of ASI assets to the stalking-horse bidder, ASI Purchaser, an “insider” buyer. No rival bids were made, and the unsecured creditors committee and the debtors worked out their rather significant differences enough to green light the sale. But only the sale. The plan after the sale remains very much in the air.
The committee’s differences, articulated in a lengthy, partially redacted 1,159-page objection, led to “challenging but fruitful” negotiations, according to Jason Adams, counsel for the committee, speaking during the hearing Wednesday.
“Today is not a happy outcome,” Adams said. “Many creditors and employees are going to suffer. People will be negatively impacted by this.”
The negotiations led to the purchase price for ASI Purchasing to increase by $11.25 million. In addition, $24 million in unsecured credit via loans from Schottenstein-controlled interests was moved off the table. If my math is correct, the purchase price now stands at $160 million, with about half of it cash and the other half in assumed liabilities.
The U.S. trustee in this case also wanted to be heard, speaking up for the roughly 36,000 unsecured creditors who represent a total of $57 million in claims.
“These are consumers who put deposits on a couch, who had to file a proof of claim,” said the trustee, Andrew Vara. “We wanted to bring this to the court’s attention.”
American Signature, which operates furniture stores under the American Signature and Value City Furniture brands, filed for Chapter 11 bankruptcy protection on Nov. 22.
The Schottenstein family has controlled the business for decades and, according to the creditors’ filing, the bankruptcy proceedings are rife with conflicts of interest. The family controls not only the debtor company but also the proposed buyer, the bankruptcy lender (Second Avenue Capital Partners), the liquidator (SB360 Capital Partners) and landlords for approximately 45 store locations. The lengthy filing culminated a six-week independent investigation by the committee of the bankruptcy and the proposed sale, an investigation that uncovered what the filing describes as years of questionable financial dealings. Perhaps most notably, the debtors’ books show approximately $50 million in receivables owed by various Schottenstein entities, including $38 million from parent company Schottenstein Stores Corp.
The creditors allege that these debts stem from ASI funding payroll and operating costs for other Schottenstein businesses, as well as personal expenses that include luxury Ohio State football boxes and security details.
In the two years before bankruptcy, ASI paid approximately $27 million to Schottenstein entities on purported unsecured loans, loans the creditors argue were improperly documented, sometimes backdated, and prioritized over payments to legitimate creditors and secured lenders.
The filing also details ASI’s relationship with Kroehler Furniture Manufacturing, another Schottenstein-controlled entity. Kroehler is, or was, an upholstery producer based in Conover, North Carolina. Creditors allege ASI funded Kroehler’s entire operations for years, including paying vendors directly. The creditors object to the proposed sale of Kroehler’s Conover facility for $14 million, value they claim will not benefit ASI’s creditors.
Kroehler laid off nearly 300 workers in mid-January, according to the Charlotte Observer.
Non-insider unsecured creditors owed more than $172 million “will not receive any recovery,” the filing states.
Despite all of that, the parties agreed at least on the sale, with all parties reserving all rights for the next phase of proceedings, the plan going forward after the sale.
Here is the full docket for the ASI bankruptcy cases and filings.
