Balasiano v. Borell (In re Furniture Factory Ultimate Holding, L.P.)
| Docket Number | 20-12816 (JKS),Adv. Pro. 22-50390 (JKS) |
| Decision Date | 31 August 2023 |
| Parties | In re: FURNITURE FACTORY ULTIMATE HOLDING, L.P., 1 Debtor. v. JONATHAN H. BORELL, et al., Defendants. STEVEN BALASIANO, NOT INDIVIDUALLY BUT SOLELY IN HIS CAPACITY AS TRUSTEE OF THE LIQUIDATION TRUST OF FURNITURE FACTORY ULTIMATE HOLDING, L.P., et al., Plaintiff, Related Adv. D.I. 27, 29, 30, 31, 32, 33, 34, 35, 36 |
| Court | U.S. Bankruptcy Court — District of Delaware |
Before the Court are two motions seeking dismissal of the amended complaint[2] (the "Complaint") filed by Steven Balasiano (the "Trustee") solely in his capacity as Trustee of the Liquidation Trust of Furniture Factory Ultimate Holding, L.P., et al. The first motion, brought by the Defendant directors and officers (collectively, the "D&Os"), seeks to dismiss claims of breach of fiduciary duties, fraudulent transfers, and breach of the applicable Limited Liability Company agreements (the "D&Os Motion to Dismiss").[3] The second motion, brought by Defendants Sun Capital Partners, Inc. ("Sun Capital Partners"), Sun Capital Management VI, LLC ("Sun Management"), and Furniture Factory Note Holding LLC ("Note Holding" and together with Sun Capital Partners, Sun Management and any other of its affiliates, "Sun Capital"),[4] seeks to dismiss claims of aiding and abetting breach of fiduciary duties, recharacterization of debt, equitable subordination, and wrongful distribution (the "Sun Capital Motion to Dismiss", and together with the D&Os Motion to Dismiss, the "Motions to Dismiss").[5] Having considered the parties' submissions, and for the reasons discussed below, the Motions to Dismiss are granted, in part, and denied, in part.
PROCEDURAL BACKGROUND[6]
On November 5, 2020 (the "Petition Date"), Furniture Factory Ultimate Holdings, L.P. and its debtor affiliates and subsidiaries (collectively, "FFO") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code.
On September 21, 2021, the Court confirmed the Plan,[7] which became effective on November 3, 2021 (the "Effective Date"). The Plan provided for the establishment of the Liquidation Trust (the "Trust") on the Effective Date, and the Trustee was approved as the trustee of the Trust.[8]
The Trustee commenced this adversary proceeding on My 12, 2022.[9]
On October 20, 2022, Defendants filed the Motions to Dismiss.[10] On November 3, 2022, the Trustee filed oppositions to the Motions to Dismiss.[11] On November 10, 2022, the Defendants submitted replies in support of their Motions to Dismiss.[12] On November 22, 2022, a Notice of Completion of Briefing was filed.[13] Oral argument was requested, but the Court determined that argument was unnecessary to rule on the Motions to Dismiss.
FFO operated furniture factory outlet stores primarily in the South Central and Midwest United States and carried prominent home furniture brands, including Serta, Jackson Catnapper and United/Lane, as well as a range of products under its Natural elements brand.[15] FFO provided quality furniture at highly competitive prices with the "everyday low price" guarantee (as opposed to a "high/low" pricing model that encouraged customers to negotiate down from an item's sticker price).[16]
At its peak, FFO had annual revenues of approximately $143 million, operated 68 locations, and employed approximately 675 employees. As of the Petition Date, FFO operated 31 retail locations, a bedding manufacturing facility, and a distribution facility, and employed approximately 270 employees.[17]
As of the Petition Date, FFO had funded-debt obligations in the aggregate principal amount of approximately $49.4 million, comprised of (i) $22 million outstanding under the Stellus Credit Agreement (defined below), (ii) $12.7 million outstanding under the Sun Credit Agreement (defined below) and (iii) $14.7 million outstanding under certain unsecured Grid Notes (defined below); and trade debt of approximately $14.9 million, excluding lease termination and rejection claims.[18]
On December 17, 2020, the Bankruptcy Court approved the sale of substantially all of FFO's assets to American Freight FFO, LLC for approximately $14 million, plus the assumption of certain liabilities.[19] The sale closed on December 27, 2020.[20]
The FFO Entities were portfolio companies of Sun Capital. Sun Capital acquired FFO on February 3, 2016, at an enterprise valuation of $34 million (the "Sun Acquisition").
Sun Capital acquired all the outstanding equity of FFO and FFO paid for a portion of its own acquisition. First, FFO repurchased all of its outstanding limited liability company interests for approximately $32 million. Thereafter, Sun Furniture Factory, LP, purchased an aggregate of one million newly issued common units from FFO for a purchase price of $7,033 per common unit, or $7,033,826.[21]
To finance the acquisition, Sun Capital (through its affiliate Note Holdings) made an additional capital investment into FFO in the form of unsecured grid notes, pursuant to a note purchase agreement, dated February 3, 2016, (the "Grid Notes") in the initial amount of $9,135,306.[22]
On June 10, 2016, FFO entered into a Credit Agreement (the "Stellus Credit Agreement") by and among (a) FFO, as borrower, (b) FFH and certain subsidiaries of FFO from time-to-time party thereto, as guarantors, (c) Stellus Capital Investment Corporation ("Stellus"), and (d) each of the Lenders (as defined therein) party thereto, in the original principal amount of up to $23 million.
At this time, Sun Capital transferred approximately 3.09% of its ownership interest in FFFI to Stellus and certain of Stellus' affiliates pursuant to that certain Securities Purchase Agreement, by and among Sun Furniture Factory, LP, FFH, and the purchasers thereto (the "Stellus Securities Purchase Agreement"). In connection with the Stellus Securities Purchase Agreement, Stellus also took a participation interest in the Grid Notes, pursuant to that certain Participation Agreement, by and among Note Holdings and each of the participants thereto (the "Stellus Participation Agreement"). As a result of the Stellus Participation Agreement, each of Sun Capital's and Stellus' respective interests in the Grid Notes were con-elated to its equity interests in FFO.[23] Following the Sun Acquisition, FFO's new debt amounted to $32,135,306 - the amount under the Grid Notes and Stellus Credit Agreement. By comparison, as of the date of the acquisition, FFO's funded debt obligations had been just over $2.5 million.[24]
On February 3, 2016, FFO and Sun Capital entered into a consulting agreement (the "Consulting Agreement") whereby Sun Capital provided business consulting services to FFO in exchange for an aggregate annual fee, paid in quarterly installments, and success fees upon the consummation of certain transactions. While FFO's management was responsible for day-to-day business operations, the Trustee alleges that Sun Capital closely supervised and regularly directed FFO's management and operations, including through monthly financial reviews attended by the management team and Sun Capital.[25]
After Sun Capital's acquisition of FFO, Sun Capital replaced FFO's respective Boards, each of which were comprised of two Sun Capital appointees on a three-member board, with the third member being Defendant Lawrence Zigerelli, FFO's CEO.[26]
In 2017, the members of each of the Boards consisted of Sun Capital appointees non-defendant Roach and Defendants Borell and Zigerelli.[27] The Trustee asserts that Sun Capital exercised majority control of the Boards, influenced FFO's management, and controlled FFO's finances to run FFO's business operations and major company transactions. 28
In September 2017, Sun Capital began to consider FFO's acquisition of two Kentucky-based retailers, Mattress & More and Furniture Liquidators (the "Kentucky Acquisition") as part of what was labeled a "Home Add-On Opportunity."[29]
At the time of the Kentucky Acquisition, the Board members of each of the FFO Entities consisted of Roach and Defendants Borell and Zigerelli, and the officers of the FFO Entities consisted of Defendants Zigerelli, Klafter, McConvery, and Rogalski (collectively, the "Kentucky Acquisition D&Os").[30] The Trustee alleges that these individuals were responsible for, and involved in, considering and conducting due diligence on and approving the Kentucky Acquisition.[31] In addition to serving on the Boards, at this time, Borell also served on Sun's "Deal Team" that spearheaded the Kentucky Acquisition and presented it to FFO, and non-party Roach served on Sun's "Ops Team" that provided operational support, guidance, and counsel to FFO's management in connection with the Kentucky Acquisition.[32] The Trustee alleges that there were cultural and operational differences between FFO and the targeted businesses which were not explored during the due diligence process for the Kentucky Acquisition.
The Complaint alleges Sun Capital - through FFO Board members Borell and Roach, as well as non-defendant Feigenbaum, a senior associate at Sun Capital - pushed the Kentucky Acquisition on FFO, urging the acquisition would "accelerate FFO store growth and market expansion" and that the "improved 'financiability' [sic]" of the combined business should enhance equity returns.[33] Sun Capital also represented to FFO's management, including Defendants Zigerelli Klafter, McConvery, and Rogalski, that the Kentucky Acquisition would be a "strong fit with FFO in contiguous market," allowing FFO to expand...
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