In re Erin Food Services, Inc.
| Decision Date | 16 July 1990 |
| Docket Number | Adv. No. 90-1052.,Bankruptcy No. 89-12250-HAL |
| Citation | 117 BR 21 |
| Parties | In re ERIN FOOD SERVICES, INC., Debtor. CAMBRIDGE MERIDIAN GROUP, INC./MICHAEL E. WEINGARTEN, Trustee of Erin Food Services, Inc., Plaintiffs, v. CONNECTICUT NATIONAL BANK, as it is Indentured Trustee, the Travelers Insurance Co., the Travelers Corporation, the Travelers Indemnity Co., General American Life Insurance Co., Home Life Insurance Co., Home Life Financial Assurance Corp., the Penn Insurance & Annuity Co., and the Prospect Co., and David W. Murray, Defendants. David W. MURRAY, Plaintiff-in-Counterclaim, v. CAMBRIDGE MERIDIAN GROUP, INC./MICHAEL E. WEINGARTEN, Trustee of Erin Food Services, Inc., Defendants-in-Counterclaim. |
| Court | U.S. Bankruptcy Court — District of Massachusetts |
James D. McGinley, Celeste P. Duffy, Gaston & Snow, Boston, Mass., for plaintiffs.
Evan D. Flaschen, Jeffrey L. Williams, Hebb & Gitlin, P.C., Hartford, Conn., J. Christopher Marshall, Joseph A. Foster, McLane, Graf, Raulerson & Middleton, P.C., Manchester, N.H., for defendants.
Harold B. Murphy, Joan N. Feeney, Hanify & King, Boston, Mass., for David Murray.
STATUS OF SECURED CLAIM
Plaintiff, Cambridge Meridian Group, Inc./Michael E. Weingarten ("Trustee"), Trustee of Erin Food Services, Inc. ("Erin Foods"), was appointed Chapter 11 Operating Trustee of Erin Foods in May of 1989. Erin Foods is engaged in the business of operating Burger King franchised restaurants in New Hampshire and northeastern Massachusetts. David W. Murray ("Murray") directly owned 100% of the stock of Erin Foods until April 1, 1985, when he took ownership indirectly through a holding company, Hospitality Holding Corp. ("HHC"). Erin Foods opened its first restaurant in 1973 and currently operates 28 restaurants.
From its formation, the basic structure of Erin Foods has remained essentially the same. Murray had the exclusive rights to develop Burger King franchises in six southern New Hampshire counties through a series of exclusive agreements with Burger King Corporation. Murray, through the Murray entity Erin Realty Company ("Erin Realty") and BK Construction Co., Inc., would respectively purchase and develop real estate sites into Burger King restaurants and finance the acquisition and construction costs with local New Hampshire banks who were given first mortgages on the restaurants. Erin Foods would then operate the Burger King restaurants pursuant to franchise agreements issued to Murray.
Twenty-two of the real estate parcels upon which the Burger King restaurants currently operate are owned by Murray and are leased to Erin Foods; the remainder of the six restaurants are located upon land leased to Murray and subleased to Erin Foods. Murray, additionally, owns other parcels used in connection with or held for development as Erin Foods Burger King restaurants.
Through July 30, 1987 it had been Erin Foods' practice to lease the real estate upon which the Burger King restaurants operated under long-term leases which called for Erin Foods to pay Murray a rent based upon an 8% of gross revenues formula. A floor was built into the rent formula to insure a minimum payment. An 8½% payment arrangement with a minimum established payment is common in the Burger King franchise business.
In addition to Erin Foods, which operates the Burger King restaurants exclusively, Murray also owned corporations operating specialty upscale restaurants in New Hampshire (the "Specialty Restaurants") and the Bedford Village Inn. HHC had held these additional corporations since April of 1985. In 1986, in order to comply with New Hampshire laws proscribing vertical integration in the alcohol industry, Murray transferred the Specialty Restaurants and Bedford Village Inn operating companies out of HHC and into various trusts.
Murray had borrowed many millions of dollars in order to acquire the Specialty Restaurants, the Bedford Village Inn, a beer and liquor distributorship, and a golf course as well as large personal residences or vacation homes in Bedford, New Hampshire, in Boston, on Beacon Street, in Moultonboro, New Hampshire, and in Nantucket, Massachusetts. Much of the monies which Murray borrowed to fund his expanded enterprises were borrowed through Erin Realty and secured by guarantees of Erin Foods. Consequently, in addition to paying rent to Erin Realty (Murray) from 1982 through July 30, 1987, Erin Foods steadily advanced funds to Erin Realty (Murray) and only booked and recorded the transactions in its "due from affiliate" account. The records of Erin Foods were properly maintained and certified by Arthur Young in financial reports dated March 31, 1987.
In January of 1987, Salomon Brothers circulated to its contacts a Private Placement Memorandum ("PPM") containing extensive discussion, financial analyses and photographs of the various Erin Foods Burger King restaurants. The PPM proposed $45 million of refinancing and $25 million of revolving credit for future expansion of the Erin Foods' Burger Kings. The PPM did not mention the specialty restaurants, and did not mention that much of the $45 million would in fact be used to pay debt unrelated to the Burger King restaurants.
Salomon Brothers forwarded a PPM to Travelers, and Travelers accepted the proposal, subject to due diligence and legal documentation. The $45 million "Series A" Notes were eventually purchased as follows:
Travelers Insurance $20,000,000.00
Penn Insurance 5,000,000.00
Travelers Corporation 7,000,000.00
Travelers Indemnity 3,000,000.00
General American 5,000,000.00
Home Life 4,000,000.00
Home Financial 1,000,000.00
_______________
$45,000,000.00
The Series B Notes were purchased by the Prospect Company.
Under the intricate documentation, Erin Foods obligated itself to repay all borrowings under the Series A Notes totalling $45 million, and the Series B Notes, totalling up to $25 million. Interest was fixed at 10¼% on the Series A Notes and floated in a slightly higher range on the Series B Notes.
On July 30, 1987, the Travelers loan closed, and proceeds were distributed together with the execution of the Master Lease. The purchase and the distribution of the proceeds of the Series A Notes and the Series B Notes are collectively referred to as the "Closing Transactions". Proceeds of the $45 million Series A Notes were commingled with $7.5 million of the Series B notes at Connecticut National Bank ("CNB"), the indenture trustee. CNB wired the funds directly to Murray's and Erin Foods' creditors, with less than $2 million going directly to Erin Foods. Erin Foods executed a so-called Master Lease at closing, under which Erin Foods was obligated to pay as rent to Erin Realty (Murray) the total amount of principal and interest due under the Series A and Series B Notes. Murray, simultaneously, delivered to Erin Foods two Notes totalling $43,646,518.25, payable with 10¼% interest (the Series A Note rate) in semi-annual installments. These, in turn, were assigned to Travelers. Additionally, Murray issued a guarantee of all obligations to Travelers. The Notes and the guarantee were non-recourse to Murray, meaning that they were supported only by the Erin Realty real estate not including the two Burger King sites, Laconia and Goffstown, owned by Erin Foods. This transaction left Erin Foods insolvent both on a balance sheet and cash flow basis. The trustee alleges that funds were distributed in four categories.
Category A. Payment of Murray obligations, at least some of which were incurred for Murray's non-Burger King interests such as specialty restaurants and Bedford Village Inn, from which Erin derived no benefit. Approximately $16.1 million, plus transaction costs and interest. Unfortunately, the trustee's allegations are not fully supported by the evidence.
Category B. Payment of acquisition costs tangentially related to Burger King developments. Approximately $5.5 million paid on July 30, 1987; $2 million paid thereafter; plus transaction costs and interest.
Category C. Payoff of antecedent acquisition and construction first mortgages on Burger King Restaurants, including Bear Right. Approximately $16.7 million; plus transaction costs and interest.
Category D. Repayment of Erin loans and the furnishing of working capital to Erin. Approximately $12.1 million on July 30, 1987, and $1.5 million thereafter; plus transaction costs and interest.
Salomon Brothers was hired by Murray to arrange a consolidation and refinancing after local attempts to refinance failed. The Private Placement Memorandum which was the basis of the ultimate Travelers financing, was circulated in January 1987. Starting with that Memorandum, continuing in the due diligence study of Travelers, and in the testimony in court, it was clear that all the parties except, of course, the unsecured creditors, were aware of the consistent intention to treat the Burger King operation as a single economic entity and to legally structure the transaction to carry that intention out. Considering the many hats worn by Murray and the control he exercised over the various operations, this was the only realistic manner in which the lenders could get meaningful security. However, Travelers was on notice that the intended obligor was a distinct legal entity with its own creditors. It is arguable, however, that those creditors would benefit from pulling together all of the essential pieces of the Burger King operation regardless of who actually held legal title, but they could only be hurt by assuming indebtedness for any Murray obligation that had no direct or even indirect relation with or benefit to the Burger King business. Travelers knew, or should have known, that such unrelated refinanced debt was included under the circumstances unique to this financing and,...
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