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K.G. LM, LLC – Files for Chapter 11 Protection in Respect of Seven “Il Mulino” Restaurants; Accuses Lender of Using COVID-19 “To Wipe Out All Stakeholders” in “Debt to Equity Conversion Play”


July 28, 2020 – Privately held K.G. LM, LLC and 13 affiliated Debtors (dba Il Mulino “Il Mulino” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 20-11723. The Debtors, a New York City-based restaurant group, are represented by Gerard S. Catalanello of Alston & Bird LLP. Further board-authorized engagements include (i) Traxi LLC as financial advisors and (ii) Davis & Gilbert as special corporate counsel. 

The Debtors are owned by Gerald Katzoff (47.857%) and Brian Galligan (42.143%). Katzoff is Managing Director at private equity house Manhattan Capital LLC and Galligan is the founder of Galligan Hospitality Group.

The Debtors’ lead petition notes between 1 and 50 creditors; estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list only a single unsecured creditor: Firstrust Bank with a $1.8mn claim.

The Debtors go to lengths to differentiate which of their restaurants are included in the Chapter 11 filings and which are not, and they are divided as follows:

The following seven locations (collectively the “Restaurant Operator Debtors”) that ARE included in the bankruptcy:  

  1. the Il Mulino New York location in Las Vegas, Nevada, operated by Debtor IMNYLV, LLC, 
  2. the Il Mulino New York location in Miami Beach, Florida, operated by Debtor IM NY, Florida, LLC, 
  3. the Il Mulino New York location in Puerto Rico, operated by Debtor IM NY, Puerto Rico, LLC, 
  4. the Il Mulino New York and Trattoria Il Mulino locations located in Atlantic City, New Jersey, operated by Debtor IMNY AC, LLC, 
  5. the Il Mulino New York location in Roslyn, New York, operated by Debtor IM Long Island Restaurant Group, LLC, and 
  6. the Il Mulino New York location in East Hampton, New York, operated by Debtor IMNY Hamptons, LLC.

The following nine locations (collectively the “Non-Debtor Il Mulino Restaurants”) that ARE NOT included in the bankruptcy: 

  1. Il Mulino New York (including the Greenwich Village, Uptown, Tribeca and Boca Raton, FL locations)  
  2. Il Mulino Prime (Gramercy and Soho locations)
  3. Trattoria Il Mulino (Orlando, FL and Nashville, TN locations)
  4. Bistecca by Il Mulino (Mount Pocono, PA location) 

The Katzoff Declaration, defined below, provides the key to understanding the separation of the Debtors assets in this manner:  "Non-Debtor Il Mulino Restaurants are not parties to the Term Loan Credit Agreement, nor are any of their assets subject to any lien or security interest held by BSP." 

This a critical distinction as these chapter 11 filings seem to be largely a face-off between the Debtors and BSP Agency, LLC ("BSP"), the agent in respect of the Debtors' $30.0mn June 2015 credit agreement (the "Credit Agreement"). The Debtors accuse BSP (a division of Providence Equity owned by Franklin Templeton) of forcing them into bankruptcy having not allowed "Il Mulino access to the additional undrawn amounts the company needed to grow and, instead, dribbled out additional amounts totaling $5,000,000 in a manner that was not  accordance with the intent of the loan agreement or the business plans advanced by management," a lack of financial support and good faith dealing that has accelerated with the arrival of COVID-19.

One gets a flavor of the foodfight to come from the Katzoff Declaration where Gerald Katzoff not only points the finger squarely at BSP for using COVID-19 as an opportunity "to wipe out all stakeholders," but also points out just how hot and crowded it has been in the Il Mulino kitchen, with the Debtors compelled by BSP to engage a CFO with whom Katzen has been working with since 2019. The Katzen Declaration provides: "On or about September 26, 2019, the Debtors, at the insistence of BSP, engaged Mackinac Partners LLC ('Mackinac') [to] provide advisory services and as Chief Financial Officer.  As of the Petition Date, Mr. Craig Boucher [Boucher of course being French for butcher] of Mackinac has been serving as the Chief Financial Officer of the Debtors and has been in that role since August 2019." 

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Katzoff Declaration”), detailed the events leading to the Debtors' Chapter 11 filings. The Katzoff Declaration alleges that BSP used him to circumvent restrictions on access to Cares Act funding and then, once that funding was secured, took steps to "[put] in place a path for BSP to wipe out all stakeholders in a ‘debt’ to ‘equity’ conversion play." The Katzoff Declaration provides: “Beginning with the stay at home order issued for the State of New York in mid-March in response to the Covid-19 pandemic, Il Mulino locations across the country were forced to close and cease operations. 

BSP strongly encouraged me to apply for funds under the PPP [Paycheck Protection Program] given the lack of revenues at the restaurants, the uncertainly surrounding the re-opening of any of the locations and its unwillingness to continue to fund any amounts under the Term Loan Credit Agreement. BSP was also fully aware of the restrictions placed upon private equity and hedge funds under the PPP and, therefore, needed me to participate in the application process. 

I reached out to personal bank contacts on behalf of the restaurants and the Debtors applied for and, by May 7, 2020, received approximately $2,300,000 in PPP funds (the ‘PPP Funds’). 

By securing PPP Funds, I strongly believed that the Debtors were well on their way to stabilize operations, protect the ‘Il Mulino’ brand and otherwise manage through the Covid-19 crises. 

Unfortunately, after the Debtors secured the PPP Funds, it became painfully clear that BSP had other plans for the restaurants. Prior to that time, I had multiple discussions with representatives from BSP regarding the businesses and there were no indications that BSP had any intention of seeking to attempt to exercise any control of the Debtors. 

In this regard, almost immediately after Il Mulino succeeded in securing PPP Funds, BSP began to take actions and implement plans that were aimed at, among other things (i) exercising control over the Company, (ii) using the PPP Funds to ‘fund’ operations after exercising control, and (iii) putting in place a path for BSP to wipe out all stakeholders in a ‘debt’ to ‘equity’ conversion play without allowing the Debtors the chance to stabilize operations and run a fair and transparent process toward finding an exit out of the Covid-19 lockdown and the consequential financial impact that crippled the companies. 

Simply put, it was clear that BSP viewed the Covid-19 impact as a chance to unfairly leverage the Debtors and seize control of the restaurants in a manner that is not consistent with the rights afforded the parties under the Term Loan Credit Agreement or applicable law.

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The post K.G. LM, LLC – Files for Chapter 11 Protection in Respect of Seven “Il Mulino” Restaurants; Accuses Lender of Using COVID-19 “To Wipe Out All Stakeholders” in “Debt to Equity Conversion Play” appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.

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