October 18, 2021 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) filed a Plan of Liquidation and a related Disclosure Statement [Docket Nos. 478 and 479, respectively]; and further filed a motion requesting Court approval of (i) the Disclosure Statement, (ii) proposed Plan voting and solicitation procedures and (iii) a proposed timetable culminating in a October 22nd Disclosure Statement hearing and a December 1st Plan confirmation hearing [Docket No. 481].
The Committee points to "rather insidious insider relationships" and the fact that there "is no question that any recovery is based on litigation against the Guarantors and the Debtors’ Insiders, including VitaNova," in urging creditors to support their Plan (which would establish a liquidating trust and install a liquidating trustee to pursue what they estimate is $20.0mn of potential causes of action that the Debtors would otherwise try to release) instead of the Debtors' proposed path of appointing a Chapter 7 Trustee.
The Committee argues that the Chapter 7 path would "…in many respects [be] the equivalent of rewarding the Guarantors and Insiders for mismanagement, misconduct and bad faith. They will benefit by the extraordinary delay and costs that a Chapter 7 trustee would incur in reviewing the case and the massive amount of information that the Committee professionals have previously analyzed. Creditors have already paid for that work and should not have to pay for it again.
The Plan is competing"" in the sense that it is not supported by the Debtors who have yet to file their own Plan, the Debtors Plan exclusivity having fallen away when on August 24th, the outside date for approving a sale of the Debtors' assets to insider VitaNova'. The Committee takes full credit for blocking that sale, noting: "Without the Committee’s intervention, VitaNova would have successfully purchased the Debtors’ assets at a below market value and the Guarantors would have received releases of an estimated $20 million of potential liability for pre-Petition misconduct. Instead, the Committee soundly defeated the proposed asset sale…"
Committee Plan Overview
The motion to approve the Disclosure Statement [Docket No. 481] provides: ““[On] October 7, 2021, this Court approved the sale of substantially all of the Debtors’ assets to BBQ Growth, LLC (‘BBQ Growth’) and the sale closed on October 8, 2021. After the payment of the break-up fee to the competing bidder and the liens held by Arizona Bank & Trust and VitaNova Brands, LLC (‘VitaNova’) the Debtors netted cash of approximately $1.2 million from the sale. The Committee understands that the Debtors are currently holding total cash of about $2,018,783.
BBQ Growth purchased the Debtors’ Tahoe Joe’s restaurant operations, all of the Debtors’ intellectual property, and certain Causes of Action limited to those specifically relating to Tahoe Joe’s vendors and employees. It did not purchase the approximate $20 million of potential Causes of Action that the Committee has identified. Because of the sale, the Debtors no longer have any business operations and what remains is the task of liquidating the Causes of Action and distributing the proceeds to creditors. The Committee believes that best way to accomplish these tasks is through a Liquidating Trust and a Liquidating Trustee.
On October 18, 2021, the Committee filed The Committee of Unsecured Creditor’s Joint Chapter 11 Plan of Liquidation (the ‘Plan’) [Doc No. 478] and Disclosure Statement. The Plan is simple and straightforward. It provides for the creation of a Liquidating Trust to which all of Estates’ assets will be transferred on the Effective Date of the Plan. A Liquidating Trustee will be appointed to evaluate and liquidate the assets for the benefit of Creditors, to prosecute and litigate Causes of Action and Claim objections, and to ultimately distribute all proceeds to Creditors and Interest Holders in accordance with the priorities established by the Bankruptcy Code.
The Plan will be funded by the cash on hand and the prosecution of the Causes of Action. Court may recall the extensive testimony of David Gonzales, the Committee’s financial advisor presented at the hearing to sell the Debtors’ assets to VitaNova. He opined that the Causes of Action have a potential value of nearly $20 million. The Disclosure Statement outlines these same Causes of Action and the estimates of time and costs to pursue them.”
The Disclosure Statement [Docket No. 479] adds: “From the Committee’s perspective, as this Case unfolded, it became apparent that it was designed to be a fait accompli to benefit the Debtors’ owners (also referred to as the Guarantors) with total disregard for the creditors holding the $75 million in debt the Guarantors had amassed and planned to discharge. A few months prior to the Petition Date, the Guarantors had (a) installed one of the companies they owned VitaNova Brands, LLC (‘VitaNova’) as the manager of the Tahoe Joe’s operations; (b) entered into a loan agreement with VitaNova that pledged previously unencumbered assets as security and set milestones for a sale of all of the Debtors’ assets to VitaNova; and (c) orchestrated a sale to VitaNova for a purchase price that produced no cash to the Debtors and effectuated a full release of what the Committee believes are close to $20 million of potential claims (referred to as the ‘Causes of Action’) against the Guarantors and other Insiders and Affiliates. VitaNova and the Debtors maintained the same office address and shared the same Chief Financial Officer (‘CFO’). The Debtors appointed an Independent Director Vineet Batra, but he was invited to be a Board member by VitaNova.
These rather insidious insider relationships created significant management and financial problems throughout the short history of this case. For example, under VitaNova’s management oversight of Tahoe Joe’s, the Debtors accrued over $300,000 in unpaid vendor and tax liabilities that are now an administrative burden for the Estates. It failed to provide timely or accurate financial information to enable the Debtors to file Monthly Operating Reports (‘MOR’s’). Consequently, MOR’s have not been filed for two months and the Committee believes strongly that the ones that have been filed are erroneous. Despite these failures, VitaNova has collected over $400,000 in management fees and has asserted that it is owed an additional $96,000. Without the Committee’s intervention, VitaNova would have successfully purchased the Debtors’ assets at a below market value and the Guarantors would have received releases of an estimated $20 million of potential liability for pre-Petition misconduct. Instead, the Committee soundly defeated the proposed asset sale. The Court found that the Debtors presented no evidence of a sound business justification for the sale as proposed or evidence that the marketing of the assets had been fair and fulsome or evidence that the sale was in good faith. The Court further found that the sale produced no cash for the Estates, resembled a sub rosa plan, and improperly compromised the Causes of Action. This process clearly did not bring any benefit to the Chapter 11 Creditors and consumed significant cash with the sole objective to benefit the Guarantors. Shortly after the VitaNova sale was denied, a real marketing effort was implemented and in five weeks, an auction was conducted producing over $4 million in cash (approximately $1.2 million over the VitaNova bid) and preserving the Causes of Action to be pursued for the benefit of creditors.
The purpose of this Overview is to assist creditors in understanding their chance for any monetary recovery. The Committee believes that this Plan is the best alternative and the only real opportunity to realize any return. There is no question that any recovery is based on litigation against the Guarantors and the Debtors’ Insiders, including VitaNova. The Committee has already uncovered vast documentary support for pursuing the Causes of Action against these likely defendants. The Plan enables the same Committee professionals who were able to challenge the Guarantors and Insiders during the case to proceed with the task of recovering funds for distribution to creditors… The Debtors have informed the Committee that they believe conversion of the Case to a Chapter 7 and the appointment of a panel trustee is in the best interest of Creditors. The Committee strongly disagrees. Conversion is in many respects the equivalent of rewarding the Guarantors and Insiders for mismanagement, misconduct and bad faith. They will benefit by the extraordinary delay and costs that a Chapter 7 trustee would incur in reviewing the case and the massive amount of information that the Committee professionals have previously analyzed. Creditors have already paid for that work and should not have to pay for it again. The Committee believes that the Plan will allow the Liquidating Trustee to go forward with the same fervor and momentum to maximize Creditor recovery.
The Debtors have informed the Committee that they believe conversion of the Case to a Chapter 7 and the appointment of a panel trustee is in the best interest of Creditors. The Committee strongly disagrees. Conversion is in many respects the equivalent of rewarding the Guarantors and Insiders for mismanagement, misconduct and bad faith. They will benefit by the extraordinary delay and costs that a Chapter 7 trustee would incur in reviewing the case and the massive amount of information that the Committee professionals have previously analyzed. Creditors have already paid for that work and should not have to pay for it again. The Committee believes that the Plan will allow the Liquidating Trustee to go forward with the same fervor and momentum to maximize Creditor recovery.”
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):
- Class 1 (“Priority Wage Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $—and expected recovery is ___%.
- Class 2 (“General Unsecured Creditors”) is impaired and entitled to vote on the Plan. Estimated claims are $___ and estimated recovery is ___%. On the Effective Date, in full and final satisfaction of any Claims against the Debtors, the Holder of an Allowed Claim in this Class shall receive a Pro-Rata beneficial interest in the Liquidating Trust and shall be paid its Pro-Rata share of the Liquidating Trust Fund in accordance with the Liquidating Trust Agreement and the Plan after full payment of Allowed Administrative Claims, Allowed Priority Tax Claims, and the Holders of Claims in Class 1.
- Class 3 (“– Unsecured Insider and Affiliate Claims”) is impaired and entitled to vote on the Plan. Estimated claims are $___ and estimated recovery is ___%. The Claims in this Class shall be deemed disallowed pending the resolution of any Cause of Action or Claim Objection filed against a Holder of a Claim in this Class. If such Claim is Allowed, in full and final satisfaction of such Claim, the Holder shall receive a beneficial interest in the Liquidating Trust and shall be paid its Pro-Rata share of the Liquidating Trust Fund in accordance with the Liquidating Trust Agreement and the Final Order allowing such Claim (that may provide for the subordination of such Claim), after full payment of Allowed Administrative Claims and Priority Claims.
- Class 4 (“Equity Interests in the Debtors”) is impaired, deemed to reject and not entitled to vote on the Plan.
The Disclosure Statement [Docket No. 479] attached the following exhibits:
- Exhibit A: Joint Plan of Liquidation
- Exhibit B: Declaration of Mark Shapiro
- Exhibit C: Liquidating Trust Agreement (to be filed in Plan Supplements)
- Exhibit D: Expenses and Distributions
- Exhibit E: Resume of David Gonzales
- Exhibit F: Causes of Action
Key Dates [Docket No. 480]
- Disclosure Statement Hearing: October 22, 2021
- Plan Confirmation Hearing: December 1, 2021
Asset Sale
On October 7th, further to a September 21st bidding procedures order [Docket No. 436] and the completion of an auction held on October 1st, the Court hearing the Fresh Acquisitions cases issued an order approving the sale of substantially all the Debtors’ assets to BBQ Growth, LLC (“BBQ” or the “Purchaser,” an affiliate of BBQ Holdings Inc.) for a purchase price of $4.2mn in cash (plus up to $1.0mn of cure costs and assumed liabilities) [Docket No. 474].
In a press release heralding its acquisition, BBQ (NASDAQ: BBQ) stated: “BBQ Holdings, Inc., the multi-brand restaurant company behind fan-favorite restaurant concepts such as Famous Dave’s, Granite City Food and Brewery and most recently Village Inn and Bakers Square, is adding yet another brand to its portfolio with the acquisition of Tahoe Joe’s, the five-unit Central Valley, California-based steakhouse chain. The deal is set to close on Friday, October 8th and marks the second acquisition for the brand this year. The 26-year-old legacy brand Tahoe Joe’s is known for its famous Lake Tahoe steaks, burgers, pork chops and railroad camp shrimp.”
Recently named stalking horse TJ Acquisition, LLC, an affiliate of stalking Serene Investment Management (“Serene”) was designated as back-up bidder and is in line for a $150k break-up fee (see further below on Serene). Serene was the Debtors’ second stalking horse in an on-again/off-again sale process, with the Court refusing on September 17th to approve a sale to the then credit bidding stalking horse VitaNova (the Debtors’ DIP lender and a non-debtor affiliate) and then approving Serene as a stalking horse on September 21st (see further below on Serene and VitaNova).
In a surprising turn of events, on September 20th the Debtors filed a motion requesting each of a bidding procedures order and a sale order [Docket No. 424]. On September 17th, the Court refused to confirm the Debtors’ proposed sale to DIP lender and credit bidding stalking horse VitaNova Brands, LLC (“VN” or “VitaNova”) without the Debtors then providing any hint that they had in recent weeks “received at least two indications of interest from third party buyers…[with]…sufficient interest to warrant an extremely expedited auction process.”
Those indications of interest included one from Serene which was approved as a stalking horse at an emergency hearing held on on September 21st (the Serene APA filed at Docket No. 426) and (it now seems) one from BBQ. Serene has recently been an active player in respect of Chapter 11 assets, with purchases in respect of sugarfina, FoodFirst Global Restaurants and Warrior Custom Golf over the last several years. Serene also featured in the YogaWorks cases, serving as stalking horse before being outbid by MEP Capital Management LLC.
….and More Sale Background
[As previously reported] On September 17th, further to the apparent collapse of the Debtor’s relationship with DIP lender and stalking horse VitaNova, the Court hearing the Fresh Acquisitions case refused to approve the sale of the Debtor’s assets to VitaNova [Docket No. 421].
On July 29, 2021, further to a May 27th bidding procedures order [Docket No. 203] and absent the receipt of any other qualified bids, the Debtors notified the Court that they had canceled the auction scheduled for July 29, 2021 and designated Stalking Horse Bidder as the successful bidder ($3.5mn credit bid of DIP debt which includes a $500k roll-up) for substantially all of their assets [Docket No. 326]. The VitaNova APA is attached as Exhibit A-1 to the notice.
VN, in addition to providing the Debtors’ current DIP financing, is a non-Debtor affiliate that provides the Debtors “with certain administrative functions, such as accounting, cash management, tax, payroll, HR, IT, marketing, legal and insurance and that itself is owned and controlled by certain individuals who control the Debtors’ ultimate owners and sit on the Debtors’ respective boards.”
The Debtors provide a corporate structure chart (see below) which neglects to specify the exact relationship of VN to the Debtors, but it would appear that VitaNova is the Debtors’ ultimate parent (VitaNova CEO Jason Kemp provides the CEO quote in the Debtors’ filing date press release). In January 2021, to avoid conflicts (given the multiple hats worn by the VitaNova management team), the Debtors appointed an independent director.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Shapiro Declaration”), Mark Shapiro, the Debtors’ chief restructuring officer, detailed the events leading to Fresh Acquisitions' Chapter 11 filing. The Shapiro Declaration provides: “Prior to the COVID-19 pandemic, the Debtors were a significant operator of buffet-style restaurants in the United States with approximately 90 stores operating in 27 states. The Debtors’ concepts include six buffet restaurant chains and a full service steakhouse. The Debtors’ buffet restaurants principally operated under the names Furr’s Fresh Buffet®, Old Country Buffet®, Country Buffet®, HomeTown® Buffet, Ryan’s® and Fire Mountain®. These locations primarily offer self-service buffets with entrees, sides, and desserts for an all-inclusive price. In addition, the Debtors own and operate a full service, casual dining chain under the name Tahoe Joe’s Famous Steakhouse®.
Much like its competitors in the all-you-can-eat (AYCE) and dine-in restaurant businesses, the Debtors’ recent history has been impacted by the uncertainty, unexpected challenges, and ever-changing landscape resulting from the COVID-19 pandemic. Despite the Debtors’ efforts to right-size their operations in the wake of a prior 2016 bankruptcy filing, the unpredictable and unprecedented scale of the COVID-19 pandemic significantly disrupted the Debtors’ restaurant operations and severely limited customer demand. As various federal, state, and local governments instituted shelter-in-place orders and restricted restaurant operations to delivery and takeout services, the Debtors (like many other restaurant operators) experienced a significant decline in customer spending and foot traffic. The shutdowns delivered a sudden and significant blow to the business and the Debtors’ overall liquidity position. As such, the Debtors have been forced to close all of their remaining AYCE restaurants; the only locations currently open for business are six Tahoe Joe’s restaurants in California.
In short, the Debtors have responded to the pandemic by conserving financial resources in the face of the pandemic with the goal of maximizing value of the Debtors’ restaurant brand assets.
Prepetition Debt
The Furr’s side of the business is subject to prior secured obligations to Arizona Bank & Trust (“AB&T”). The Buffets side of the business has no prior secured obligations, except as discussed below.
On or about January 2, 2015, Fresh and non-Debtor Alamo Dynamics, LLC (“Alamo”) entered into a Commercial Loan Agreement (“CLA”) with AB&T in the original principal amount of $8,707,500. The CLA was guaranteed by, among others, FMP Management. On or around June 29, 2015, the CLA was modified to incorporate, among other things, a short term bridge loan of $14,500,000. The CLA was further modified from time to time thereafter, including on or about May 30, 2017, when Debtor FMP Management was added as a co-borrower. The CLA is guaranteed by a variety of non-Debtor entities and individuals (the “Guarantors”). As of the Petition Date, Fresh and FMP Management are indebted to AB&T in the approximate amount of $13,466,151.50 in principal and accrued interest, plus additional costs and fees. All amounts owing to AB&T are secured by substantially all assets of each of Fresh and FMP Management, and certain assets of non-debtor Alamo.
As noted above, the Buffets Debtors had no prior secured obligations. They do have unsecured liabilities, including approximately $3.9 million in sales taxes, $900,000 in payroll tax obligations and accrued PTO to certain employees in the amount of approximately $507,763.30.
Effective as of April 16, 2021, each of the Debtors as a borrower entered into that certain Prepetition and Debtor in Possession Credit Agreement dated as of April 16, 2021 with VitaNova as lender (the “DIP Credit Agreement”), for a prepetition advance of $500,000. That advance is secured by a first lien on substantially all assets of the Buffets Debtors, and only a second lien on the Furr’s Debtors’ intellectual property (which is subject to and will remain subject to AB&T’s first priority lien).
Significant Shareholders
Alamo Furrs, LLC holds a 99% ownership interest in the lead Debtor, and Alamo Furrs II, LLC owns 1%.
About the Debtors
Fresh Acquisitions, LLC (Buffets, Inc., DBA Ovation Brands, Inc), engages in the ownership and operation of a chain of restaurants in the United States. The Debtors’ concepts include six buffet restaurant chains and a full service steakhouse, operating under the names Furr’s Fresh Buffet®, Old Country Buffet®, Country Buffet®, HomeTown® Buffet, Ryan’s®, Fire Mountain® and Tahoe Joe’s Famous Steakhouse®, respectively.
Corporate Structure
The Debtors and their brands are all privately owned. The Debtors own and operate their brands through a number of direct and indirect subsidiaries. The Furr’s Fresh Buffet® brand is owned by Fresh, which has the following corporate structure:
The Debtors’ remaining brands (Tahoe Joe’s®, Old Country Buffet®, Country Buffet®, HomeTown® Buffet, Ryan's® and Fire Mountain®) are owned directly or indirectly by Debtor Buffets, LLC (“Buffets”), a Minnesota limited liability company, which in turn is owned by non-debtor Alamo Buffets, LLC, a Texas limited liability company. The corporate structure for Buffets is set forth below:
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