March 22, 2023 – The Debtor's Official Committee of Unsecured Creditors (the “Committee”) objected to the Debtor’s March 20th motion to convert its Chapter 11 case to a case under Chapter 7 [Docket No. 379] arguing that its "extensive negotiations with Goli…are likely to pave the path toward a settlement of claims and a value-maximizing sale in chapter 11 that may provide $5 million to the estate" and that the Debtor's conversion efforts are a "patently self-interested maneuver by Debtor’s management to evade the Committee’s oversight and appointment of a chapter 11 trustee." Casting further shade, the Committee argues that the Debtor's legal arguments in favor of conversion are poor, with the Debtor relying on a "a single, out-of-Circuit, 30-year-old case [and ignoring] controlling case law that has developed in the decades since the Debtor’s cited decision was issued."
A hearing on the motion is scheduled for March 28, 2023.
The Committee notes as to its negotiations with Goli (a Canadian entity that owns 25% of the Debtor and is, the Debtor argues, the perpetrator of "a series of wrongful acts" that compelled the need for bankruptcy shelter): "As of the date of this Opposition, the Committee and Goli are in the process of negotiating a settlement of claims with Goli that would permit a sale of the assets used in the operation of the Norco Facility (including certain manufacturing equipment that Goli claims to own)….The Committee and Goli are negotiating a proposed settlement that would permit a sale to move forward and provide the estate with at least 25% of the proceeds of such sale, or $5 million in cash if certain thresholds are satisfied…Goli has been discussions with third parties that have expressed an interest in such a potential sale transaction…Importantly, the proposed settlement and sale process contemplates a chapter 11 sale, and not a liquidation in chapter 7."
Case Status
On December 20, 2022, Better Nutritionals, LLC (“Better Nutritionals” or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn. At filing, the Debtor, a “state-of-the-art contract manufacturer and R&D leader in nutritional supplements,” cited “a series of wrongful acts by a Canadian entity” as compelling it to seek bankruptcy shelter.
On March 20, 2023, the Debtor requested Court authority to convert its Chapter 11 case to a case under Chapter 7 [Docket No. 369], noting that, “the Debtor has well over $1 million of postpetition debts it cannot afford to pay at this time, closed down its operations in Norco, generally is required to vacate the Norco property by April 1, 2023, is not currently generating revenues sufficient to pay the expenses of operating its Gardena facility, and is incurring hundreds of thousands of dollars per month in professional fees.”
The Committee Objection
The Committee's objection [Docket No. 379] notes, “The Debtor’s Conversion Motion is a legally flawed and patently self-interested maneuver by Debtor’s management to evade the Committee’s oversight and appointment of a chapter 11 trustee. It is telling that the Debtor did not file the Conversion Motion until after the Committee filed its own Motion to Appoint Chapter 11 Trustee. The Conversion Motion is based on the notion that the Debtor has an 'absolute right' to convert from chapter 11 to chapter 7. The Debtor cites a single, out-of-Circuit, 30-year-old case for this incomplete proposition. The Debtor’s facially appealing (if summary) analysis ignores much more recent authority stemming from the United States Supreme Court’s decision in Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007). In Marrama and its progeny, the Supreme Court and lower courts have rejected reliance on the language of legislative history on which the Debtor relies, and, instead, hold that courts must analyze whether conversion to chapter 7 would work a 'procedural anomaly' if statutory grounds exist to simply reconvert the case back to chapter 11. The Debtor’s failure to address the ample, controlling case law that has developed in the decades since the Debtor’s cited decision was issued is, alone, grounds to deny the Conversion Motion.
A critical analysis of the relevant factors demonstrates that creditors would successfully reconvert the Bankruptcy Case to chapter 11 in light of the Committee’s extensive negotiations with Goli that are likely to pave the path toward a settlement of claims and a value-maximizing sale in chapter 11 that may provide $5 million to the estate. Section 706(b) permits the Court to reconvert a case to chapter 11 'based on what will most inure to the benefit of all parties in interest' after considering a number of factors.
First, the potential settlement and sale process the Committee and Goli are currently negotiating may yield $5 million of recovery to the estate without the time, expense, and uncertainty associated with the Debtor’s preferred path of all-out litigation with an unfavorable contingency-fee arrangement dependent upon litigation financing. However, a sale will only yield material value if it takes place in chapter 11.
Second, reconverting to chapter 11 would not constitute a “futile and wasted act” because all of the parties appear to agree that dismissal is not appropriate under § 1112(b).
Third, chapter 11 remains appropriate if a settlement and sale resolve the two principal obstacles to confirmation currently faced by the Debtor: staunch opposition by Goli and the Debtor’s failure to maximize value through independent business operations.
Fourth, a value maximizing sale will benefit all stakeholders as even the Debtor observes in its Conversion Motion. (citing “a change in circumstances or a mutually beneficial agreement with Goli” as preferred outcomes to the Debtor’s apparently failed effort to “reorganize around Gardena”).
Fifth, the Debtor’s Conversion Motion smacks of a disingenuous effort to circumvent the Committee’s attempt to install a chapter 11 trustee: it was filed in a response to the Trustee Motion and cites facts already in existence before the Trustee Motion was filed as its sole bases for approving immediate conversion. Under the appropriate analytical framework, conversion to chapter 7 will not inure to the benefit of interested parties where the Committee is on the verge of negotiating a value-maximizing sale. Accordingly, the Court should deny the Conversion Motion."
Conversion Background
On March 20th, the Debtor requested Court authority to convert its Chapter 11 case to a case under Chapter 7 [Docket No. 369], noting that, “the Debtor has well over $1 million of postpetition debts it cannot afford to pay at this time, closed down its operations in Norco, generally is required to vacate the Norco property by April 1, 2023, is not currently generating revenues sufficient to pay the expenses of operating its Gardena facility, and is incurring hundreds of thousands of dollars per month in professional fees.”
As to why the Debtor has gone from a projected $300k cash surplus as at the end of March to a $1.0mn current deficit, the Debtor notes: "the last three months have not gone as planned. Forecasts prepared by the Debtor’s former CFO before the Petition Date were either woefully inaccurate or just did not come to fruition, and a $3 million sale of aged inventory expected during the first few months of the case did not occur. As shown by the original projections, the Debtor expected to pay postpetition debts, pay rent to the landlord of the Norco Property, make payments to professionals pursuant to the Knudsen order, and still have approximately $300,000 of cash on hand at the end of March 2023."
A "Consolidated Variance Analysis" (see motion to Exhibit 1 for notes) details the shift:
The Conversion Motion
The motion [Docket No. 369] states, “Exactly three months ago, Better Nutritionals, LLC (the ‘Debtor’), filed for chapter 11 with the intention of (1) restructuring its significant existing debt, (2) pursuing claims against Goli Nutrition, Inc. (‘Goli’), and certain other defendants, and (3) ultimately paying its creditors in full from future revenues and, primarily, recoveries from Goli and other defendants. Needless to say, the last three months have not gone as planned. Forecasts prepared by the Debtor’s former CFO before the Petition Date were either woefully inaccurate or just did not come to fruition, and a $3 million sale of aged inventory expected during the first few months of the case did not occur. As shown by the original projections, the Debtor expected to pay postpetition debts, pay rent to the landlord of the Norco Property, make payments to professionals pursuant to the Knudsen order, and still have approximately $300,000 of cash on hand at the end of March 2023. Instead, the Debtor has well over $1 million of postpetition debts it cannot afford to pay at this time, closed down its operations in Norco, generally is required to vacate the Norco property by April 1, 2023, is not currently generating revenues sufficient to pay the expenses of operating its Gardena facility, and is incurring hundreds of thousands of dollars per month in professional fees. For these and other reasons, the Debtor has made the very difficult decision to convert this case to chapter 7, where a chapter 7 trustee can administer the estate without the substantial additional costs of a chapter 11 case, liquidate assets of the estate, and make distributions to creditors.
With respect to the Committee’s pending motion for appointment of a chapter 11 trustee (the 'Committee Motion'), there is no valid reason for appointment of a chapter 11 trustee instead of conversion to chapter 7. The Committee claims that the estate needs ‘[a] neutral operator,’ to ‘assess the value of continuing the Debtor’s operations at’ the Norco facility. As the Committee knew when it filed its motion, the Debtor’s operations already were being shut down and Goli had filed a motion for relief from stay so it could evict the Debtor from the premises. In any event, pursuant to a stipulated order resolving Goli’s motion, the Debtor (and any trustee) has no right to occupy, possess or enter the Norco property after March 31, 2023, except for the limited purposes set forth in the order. While appointing a chapter 11 trustee would replace the Debtor’s existing management and might temper Goli’s scorched-earth litigation tactics, conversion to chapter 7 will have the same effect at lower cost to the estate.”
Background
Goals of the Chapter 11 Filing
According to the Debtor's cash collateral motion [Docket No. 8], "The Debtor’s long-term plan will be influenced by, among other things, the Debtor’s ability to generate revenues during the case, cuts in expenses, the willingness of suppliers to continue to do business with the Debtor, the potential for short-term and/or long-term financing, offers (if any) it may receive from potential purchasers and recoveries from Goli and others whose fraudulent actions have caused damage to the Debtor and its creditors. In the short term, the Debtor needs the respite afforded by the automatic stay to preserve its assets from potential creditor suits and judgment enforcement actions… Facing the prospect that judgment creditors will commence enforcement proceedings, and plaintiffs will seek pre-judgment right-to-attach orders and writs of attachment, the Debtor filed for bankruptcy to preserve its assets, continue operating and develop a plan to restructure its operations and debt."
Events Leading to the Chapter 11 Filing
The Debtor's motion for the use of cash collateral [Docket No. 8] provides the following in respect of the events leading to the Chapter 11 filing, "The Debtor grew significantly from 2019 through 2021. Sales revenues increased from $21.8 million in 2019 to $222.8 million in 2021. However, for the twelve months that ended on September 30, 2022, revenues were down and expenses were up, leading to a net loss during that 12-month period of about $45 million.
The dramatic decrease in revenues and increase in expenses was the result of a series of wrongful acts by a Canadian entity, 12416913 Canada, Inc. ('12416913 Canada'), and certain persons and entities affiliated with that entity. 12416913 Canada is affiliated with the owners of Goli Nutrition, Inc., a Delaware corporation ('Goli Delaware'), which is a subsidiary of Goli Nutrition, Inc., a Canadian corporation ('Goli Canada')….
[T]he Debtor aggressively embarked on an expansion of its operations and incurred substantial debt to trade creditors, building contractors, vendors and other parties, in reliance on Goli’s express representations and promises that it would significantly increase the amount of its purchases from the Debtor if the Debtor took the significant steps needed to supply that capacity. However, at some point in 2021, while representing that it needed more products – causing the Debtor to make the products to satisfy Goli’s requests – Goli took delivery of and paid for only a fraction of what the Debtor made. Goli also refused to allow the Debtor to release the products Goli ordered so the Debtor could sell the products to others. The Debtor now understands that Goli was attempting to induce a private equity firm to invest in Goli, and used the inflated purchase orders as part of its efforts to obtain money from investors, but did not intend to honor its commitment to the Debtor.
The Debtor has attempted to adjust its business model by, among other things, developing relationships with new clients. In mid-2021, over 90% of the Debtor’s monthly sales volume was to Goli. That percentage has declined to 50% to 75%, and the Debtor is developing relationships with new customers, including some Fortune 100 customers. Unfortunately, the increase in revenues from non-Goli customers has not been adequate to dig the Debtor out of the deep hole caused by Goli.
The Debtor’s accounts payable exceed $55 million. Creditors include suppliers of goods, ingredients, equipment, employees and services used by the Debtor in the ordinary course of its business. Creditors also include contractors who worked on expansions to the Norco facility, and suppliers of equipment and materials used in connection with that construction….
To the best of the Debtor’s knowledge, there are currently 28 lawsuits pending against the Debtor. Two additional plaintiffs have reduced their claims to judgment, and those judgments have not yet been satisfied."
The Hoffman Declaration [Docket No. 14] further explains, "Over the past few months, the Company has actively sought offers from third parties to purchase the entirety of the Company’s operations for an amount that would allow the Company to satisfy all of its debts. The Company retained an investment bank, William Hood and Company, to solicit offers. The Company entered into approximately eight non-disclosure agreements, and engaged in negotiations with one private equity firm that expressed a serious interest in acquiring the Company. However, it appears that Goli may have been negotiating with the buyer behind our back. Unfortunately, the offer received was unacceptable and the potential buyer does not intend to provide a full recovery to Better Nutritionals’ creditors."
Significant Shareholders
Seventy-five percent (75%) of Better Nutritionals’ ownership interests are held by RGL Holdings, LLC, a Delaware limited liability company that is solely owned by the Debtor's co-founder, manager and chief executive officer Sharon Hoffman. The other 25% of Better Nutritionals’ ownership interests are held by 12416913 Canada (ie Goli).
About the Debtor
According to the Debtor: “The Debtor is a state-of-the-art contract manufacturer and R&D leader in nutritionalsupplements. The Debtor specializes in making cutting-edge formulations of gummy supplementsfocused on personal health and wellness. The Debtor’s output capacity currently is about nine billion gummies per year. It is an FDA-registered manufacturer, and meets stringent standards to label its products as vegan, Kosher-certified, and free of top-8 allergens and gluten. The Debtor’s headquarters is located at 3390 Horseless Carriage Drive, Norco, California. Its four-building campus in Norco contains approximately 422,000 square feet of manufacturing, warehouse, R&D and office space. The Debtor also manufactures products in an 18,000 square foot facility in Gardena, where it was headquartered until 2021.The Debtor grew significantly from 2019 through 2021. Sales revenues increased from$21.8 million in 2019 to $222.8 million in 2021. However, for the twelve months that ended on September 30, 2022, revenues were down and expenses were up, leading to a net loss during that12-month period of about $45 million."
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The post Better Nutritionals, LLC – Creditors’ Committee Objects to Debtor’s Proposed Chapter 7 Conversion and Insists it is on Verge of Negotiating Value-Maximizing Settlement/Sale with Debtor’s Nemesis Goli; Urges Appointment of Chapter 11 Trustee appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.