In re Family Christian, LLC

• Court: U.S. Bankruptcy Court — Western District of Michigan
• Writing for the Court: John T. Gregg, United States Bankruptcy Judge
• Citation: In re Family Christian, LLC, 533 B.R. 600 (Bankr. W.D. Mich. 2015)
• Decision Date: 18 June 2015
• Docket Number: Case No. GG 15–00643–jtg Jointly Administered
• Parties: In re: Family Christian, LLC, et al.,Debtors.

533 B.R. 600

In re: Family Christian, LLC, et al.¹ Debtors.

Case No. GG 15–00643–jtg Jointly Administered

United States Bankruptcy Court, W.D. Michigan.

Signed June 18, 2015

APPEARING: Erich Durlacher and Brad A. Baldwin, BURR & FORMAN, LLP, Atlanta, Georgia and A. Todd Almassian and Gregory J. Ekdahl, KELLER & ALMASSIAN, PLC, Grand Rapids, Michigan for the Debtors. Robert S. Hertzberg and Deborah Kovsky–Apap, PEPPER HAMILTON, Southfield, Michigan for Hilco/ Gordon Brothers Joint Venture. Michael G. Menkowitz, FOX ROTHSCHILD LLP, Philadelphia, Pennsylvania, Paul J. Labov, FOX ROTHSCHILD LLP, New York, New York and John T. Piggins, MILLER JOHNSON, Grand Rapids, Michigan for the Official Committee of Unsecured Creditors. Jennifer C. Hagle and Gabriel R. Macconaill, SIDLEY AUSTIN, LLP, Los Angeles, California and Scott H. Hogan, FOSTER SWIFT COLLINS & SMITH, PC, Grand Rapids, Michigan for Credit Suisse AG, Cayman Islands Branch. Allison Bach, DICKINSON WRIGHT, PLLC, Detroit, Michigan for the Ad Hoc Consortium of Consignment Vendors. Steven L. Rayman, RAYMAN & KNIGHT, Kalamazoo, Michigan, Scott B. Lepene, THOMPSON HINE, LLP, Cleveland, Ohio and John F. Isbell, THOMPSON HINE, LLP, Atlanta, Georgia for FC Special Funding. Todd C. Meyers and Paul M. Rosenblatt, KILPATRICK TOWNSEND & STOCKTON, LLP, Atlanta, Georgia and Ronald A. Schuknecht, SMITH HAUGHEY RICE & ROEGGE PC, Traverse City, Michigan. Gordon J. Toering, WARNER NORCROSS & JUDD, LLP, Grand Rapids, Michigan for Infor (US), Inc. Thomas J. Salerno, STINSON LEONARD STREET, LLP, Phoenix, Arizona for Bridgestone Media. Marc M. Bakst, BODMAN, PLC, Detroit, Michigan for Provident Distribution, LLC. Ronald A. Clifford, BLAKELEY, LLP, Irvine, California for several consignment vendors. Michael V. Maggio and Michelle M. Wilson, OFFICE OF THE UNITED STATES TRUSTEE, Grand Rapids, Michigan for the United States Trustee. Robert F. Wardrop, II and Denise D. Twinney, WARDROP & WARDROP, PC, Grand Rapids, Michigan for Cole Mt. Clarksville, Indiana, LLC, Cole Mt. Canton Marketplace, LLC, Los Banos Gravel Company, Whitehall Crossing A, LLC, and GE Fleet Services. David L. Pollack, BALLARD SPAHR, LLP, Philadelphia, Pennsylvania for Brixmor Property Group. Dustin P. Branch, KATTEN MUCHIN ROSENMAN, LLP, Los Angeles, California for GEM Realty Capital, Inc., Starwood Retail Partners, LLC, Prudential Insurance Company of America, and Acadia Realty Trust. Ronald E. Gold, FROST BROWN TODD, LLC, Cincinnati, Ohio for WP Glimcher and Belwether Enterprises. Paul S. Magy, CLARK HILL, PLC, Birmingham, Michigan for several landlords. David Mollicone, DAWDA MANN MULCAHY & SADLER, PLC, Bloomfield Hills, Michigan for RPAI Southwest Management LLC and RPAI U.S. Management LLC. Eric Novetsky, JAFFEE RAITT HEUER & WEISS, PC, Southfield, Michigan for World Vision USA, IA South Frisco Village, LLC, IA Fultondale Promenade, LLC, MB Sioux City Lakeport, LLC, Greenville (Woodruff) WMB, LLC, and Inland Orland Lagrange Rd. Outlot, LLC. Lisa A. Hall, PLUNKETT COONEY, Grand Rapids, Michigan for DDR Corp., Regency Centers, LP, Rouse Properties, Slawson Companies, and Weingarten Realty. Elisabeth M. Von Eitzen, WARNER NORCROSS & JUDD LLP, Grand Rapids, Michigan for MAG Jewelry Company, Inc.

MEMORANDUM DECISION REGARDING MOTION TO SELL SUBSTANTIALLY ALL ASSETS OF DEBTORS

John T. Gregg, United States Bankruptcy Judge

This matter comes before the court in connection with a motion to sell substantially all of the Debtors' assets and assume and assign certain executory contracts and unexpired leases pursuant to sections 363 and 365 of the Bankruptcy Code [Dkt. No. 487] (the “Sale Motion”), filed by Family Christian, LLC (the “Operating Debtor”), Family Christian Holding, LLC and FCS Giftco, LLC (collectively, the “Debtors”).² For the following reasons, the court shall deny the Sale Motion.³

INTRODUCTION

The sale process in these cases has been prolonged, controversial and contested. The Debtors' proposed sale to the winning bidder, an indisputable insider, is subject to objection by the second highest bidder, a national liquidation firm whose participation the Debtors solicited in order to maximize the value to their estates. The second highest bidder alleges that the sale process was “rigged” for the benefit of the winning bidder and insider. After two days of robust bidding, the second highest bidder, for a second time, refused to continue to participate in the auction. The second highest bidder demanded that the Debtors inform it of the value allocated to the going concern nature of the bid submitted by the winning bidder. Because the Debtors declined to ascribe such a value, the second highest bidder contends that the auction was flawed. The second highest bidder also objects to the structure of the proposed sale to the winning bidder.

The sale is also opposed by one of the Debtors' creditors who allegedly sold goods to the Debtors on consignment. According to the consignment vendor, the structure of the proposed sale violates two fundamental tenets of the Bankruptcy Code, equality of distribution among similarly situated creditors, and the prohibition on the release of insider claims outside the context of a plan.

The Debtors' selection of the insider as the winning bidder is, importantly, supported by the Official Committee of Unsecured Creditors, the Debtors' two secured lenders, an ad hoc committee of consignment vendors holding approximately $14 million in consignment claims, and numerous other parties who desire the Debtors' business to continue as a going concern.

JURISDICTION

The court has jurisdiction pursuant to 28 U.S.C. § 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(N).

BACKGROUND

The Debtors sell religious merchandise such as books, music, movies and other supplies at more than 250 brick and mortar retail stores located throughout 36 states. As of the petition date, the Debtors maintained a labor force of approximately 3,100 employees. The Debtors operate as non-profit organizations whose collective mission is to donate their profits to the Non–Debtor Parent for charitable purposes such as disseminating bibles, supporting orphans and others in need, funding mission trips, and orchestrating natural disaster relief efforts.

A. The Debtors' Prepetition Lending Relationships

In 2012, the Debtors obtained a revolving line of credit up to the maximum principal amount of $40 million from JPMorgan Chase Bank, N.A. (“JP Morgan Chase”), as agent for a syndication of lenders. As security for the line of credit, the Operating Debtor granted to JP Morgan Chase an alleged first priority security interest in certain of its assets, including accounts receivable, inventory and cash collateral, and a subordinated security interest on the majority, if not all, of its remaining assets. At that time, the Debtors also received a term loan in the principal amount of $38 million from certain third party lenders (the “Term Lenders”) for whom Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”) acts as agent. As security for repayment of the term loan, the Debtors granted to Credit Suisse an alleged first priority security interest in those assets in which JP Morgan Chase allegedly held a subordinated security interest, and a subordinated security interest in those assets subject to the alleged first priority security interest of JP Morgan Chase.

The Debtors apparently began to suffer financial distress in 2014, if not before, and were at risk of JP Morgan Chase terminating the line of credit. In order to allow for continued borrowing under the revolving line of credit, Richard Jackson, through his entity Jackson Investment Group, LLC, allegedly paid $7 million to JP Morgan Chase to avoid, or perhaps cure, an event of default. Thereafter, FC Special Funding, LLC (“FC Special Funding”), a special purpose entity under the control of Commenda Capital, LLC (“Commenda”), was created for the purpose of purchasing JP Morgan Chase's position.⁴

In exchange for payment of all indebtedness owed by the Debtors to JP Morgan Chase, FC Special Funding was assigned any and all rights under the revolving line of credit loan documents, after which FC Special Funding began advancing funds to the Operating Debtor.

B. The Debtors' Bankruptcy Filings

On February 11, 2015, the Debtors each filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code. As of the petition date, the Debtors estimated that they owed approximately $24 million to FC Special Funding on the revolver, approximately $34 million to the Term Lenders, and at least another $40 million to trade creditors.

Concurrently with their petitions, the Debtors filed various motions, including a motion for the use of cash collateral on an expedited and interim basis.⁵ At the first day hearings, the parties presented a modified agreement for the use of cash collateral. The court, however, declined to approve certain adequate protection proposed for the benefit of FC Special Funding, including, among other things, a waiver of surcharge under section 506(c), without first hearing testimony. The court's decision was driven, in large part, by the failure of the Debtors to disclose their relationships with FC Special Funding and FCS Acquisition, LLC (“Acquisition”) in their first day pleadings.⁶ In lieu of testimony, the parties again reformulated the interim cash collateral arrangement, which the court ultimately approved on the record [Dkt. No. 114].⁷

C. The Initial Sale Motion

One day after filing for bankruptcy, the Debtors filed a motion seeking to sell substantially all of their assets [Dkt. No. 30] to Acquisition, which was identified as a “stalking horse” bidder in the sale motion and related bidding procedures. The initial sale motion proposed to sell all of the Debtors' assets, including inventory allegedly sold on consignment to the Debtors by various vendors. In response to the initial sale motion, an ad hoc committee of consignment vendors (the “Ad Hoc...