In re K.G. IM, LLC
| Decision Date | 29 September 2020 |
| Docket Number | Case No. 20-11723 (MG) |
| Citation | 620 B.R. 469 |
| Parties | IN RE: K.G. IM, LLC, et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
ALSTON & BIRD LLP, 90 Park Avenue, New York, NY 10016, By: Gerard S. Catalanello, Esq., William Hao, Esq., Counsel to Debtors and Debtors-in-Possession
GOODWIN PROCTER LLP, The New York Times Building, 620 Eighth Avenue, New York, NY 10018, By: Michael H. Goldstein, Esq., Howard S. Steel, Esq., Counsel to BSP Agency, LLC, Providence Debt Fund III L.P., Benefit Street Partners SMA-C L.P., Benefit Street Partners SMA LM L.P., Providence Debt Fund III Master (Non-US) Fund L.P., and Benefit Street Partners SMA C SPV L.P.
WESTERMAN BALL EDERER MILLER, ZUCKER & SHARFSTEIN, LLP, 1201 RXR Plaza, Uniondale, NY 11556, By: Thomas A. Draghi, Esq., Counsel to Gerald Katzoff
JONES DAY, 51 Louisiana Avenue, N.W., Washington, D.C. 20001-2113, By: Dan Moss, Esq., Counsel to Boardwalk 1000, LLC and HR Atlantic City Lender, LLC
OFFICE OF THE UNITED STATES TRUSTEE, 201 Varick Street, Suite 1006, New York, NY 10014, By: William K. Harrington, Esq., Benjamin J. Higgins, Esq., Shannon Anne Scott, Esq.
Pending before the Court is the United States Trustee's (the "UST") Motion for Reconsideration of the Stipulation and Order Appointing Chief Restructuring Officer and Establishing Operating Protocol for the Debtors . ("Reconsideration Motion," ECF Doc. # 86.) The Debtors and BSP2 filed responses and declarations in opposition to the Reconsideration Motion. ("Debtors' Objection," ECF Doc. # 136; "Catalanello Declaration," ECF Doc. # 138; "BSP Objection," ECF Doc. # 137; "Dasaro Declaration," ECF Doc. # 139; "Supplemental Catalanello Decl.," ECF Doc. # 156.) The UST filed a supplemental memorandum of law ("Supplemental Brief," ECF Doc. # 121) and a reply to the oppositions ("UST Reply," ECF Doc. # 145).
Also before the Court is the Debtors' Application for an Order to (I) Employ Mackinac Partners, LLC and (II) Affirm Designation of Craig M. Boucher as Chief Restructuring Officer, Effective as of August 14, 2020 . ("CRO Retention Application," ECF Doc. # 84.) The UST filed an objection ("UST's Objection," ECF Doc. # 134) and the Debtors filed a reply ("Reply," ECF Doc. # 147). BSP joins in the Debtors' Reply. (ECF Doc. # 149.)
The issues having been fully briefed, and the Court held a telephonic hearing on September 22, 2020 via CourtSolutions to consider the Reconsideration Motion and the CRO Retention Application. After hearing from the parties, the Court ruled from the bench as follows: (i) the Reconsideration Motion was GRANTED in part and DENIED in part; and (ii) the UST's Objection was OVERRULED and the CRO Retention Application was APPROVED .
On September 28, 2020, orders were entered with respect to both of the rulings. (See ECF Doc. ## 166, 167.) The Court issues this memorandum decision to further explain its reasoning.
On July 28, 2020 ("Petition Date"), K.G. IM, LLC and certain affiliated entities (collectively, the "Debtors") filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code.3 The Debtors are operating their business and managing their properties as debtors-in-possession pursuant to Bankruptcy Code sections 1107(a) and 1108. (Debtors' Objection ¶ 4.) No trustee, examiner, or official committee of unsecured creditors has been appointed. (Id. )
The Debtors own and operate certain Il Mulino restaurants—one of the country's premier Italian luxury dining brands. The Il Mulino family of restaurants comprises sixteen locations across the United States and Puerto Rico. ("Katzoff Decl.," ECF Doc. # 4 ¶ 3.) These chapter 11 cases, however, have only been commenced for seven Il Mulino locations (collectively, the "Restaurant Operator Debtors").4 In addition to the Restaurant Operator Debtors, several affiliated non-operating entities are also debtors in these chapter 11 proceedings.
Debtor K.G. IM, LLC ("K.G. IM") is the indirect parent of the Debtors. ("Supp. Katzoff Decl.," ECF Doc. # 15 at 13.) With the exception of debtor IMNY Hamptons, LLC ("IMNY Hamptons"), K.G. IM is the sole "Manager" of the Debtors (the "K.G. Managed Debtors")5 . J.B. IM, LLC ("J.B. IM") is the "Manager" of IMNY Hamptons.6 K.G. IM and J.B. IM are majority owned by Gerald Katzoff and Brian Galligan. (See Supp. Katzoff Decl. at 13.)
Messrs. Katzoff and Galligan are "Co-Managers" of K.G. IM and J.B. IM. (See "K.G. IM Operating Agreement," ECF Doc. # 138-18; "J.B. IM Operating Agreement," ECF Doc. # 138-20.) On August 14, 2020, as further discussed below, both Katzoff and Galligan executed the CRO Stipulation (defined below), agreeing to vest management authority with respect to K.G. IM and, accordingly, K.G. IM's management authority over the K.G. IM Managed Debtors to Mackinac Partners, LLC ("Mackinac," or the "CRO"). (See "CRO Stipulation," ECF Doc. # 59-1.) Pursuant to the CRO Stipulation, both Katzoff and Galligan also agreed to vest management authority with respect to J.B. IM, solely as to Debtor IMNY Hamptons, in the CRO. (See id. )
Prior to the Petition Date, BSP declared an event of default under certain credit agreements with the Debtors and sought enforcement of its right under those agreements to exercise the authority of K.G. IM to manage the Debtors. (See ECF Doc. # 19 at ¶¶ 3–10.) The Debtors voluntary chapter 11 petitions were filed without prior notice to, or knowledge of, BSP.7
On August 3, 2020, BSP filed a Motion for an Order Granting Relief from the Automatic Stay (the "Stay Relief Motion," ECF Doc. # 19) and a Declaration of King Jang in Support of the Stay Motion ("Jang Declaration," ECF Doc. # 20). The Stay Relief Motion and Jang Declaration, inter alia , alleged that Katzoff was not authorized on behalf of K.G. IM to file voluntary chapter 11 petitions for the K.G. IM Managed Debtors and sought relief from the automatic stay to (i) authorize BSP to ratify the chapter 11 cases for all of the Debtors except K.G. IM and IMNY Hamptons and to confirm its authority to exercise management rights of K.G. IM and IMNY Hamptons that was pledged pre-petition to BSP; and (ii) to permit BSP to exercise its rights and remedies with respect to certain collateral of the Debtors. (Stay Relief Motion ¶ 81.)
BSP sought to have the Stay Relief Motion heard on shortened notice on August 5, 2020. (See ECF Doc. # 23.) On August 4, 2020, the Court denied BSP's request and instead ordered BSP and the Debtors to confer and submit a proposed stipulation and order setting forth a schedule to litigate the Stay Relief Motion. (See ECF Doc. # 27.) BSP and the Debtors were unable to reach a mutual resolution and submitted competing proposed scheduling orders (the "Scheduling Orders"). (See ECF Doc. ## 35, 36.)
On August 25, 2020, the Court held a hearing on certain of the Debtors' first day motions (the "First Day Hearing") and addressed, inter alia , the Scheduling Orders with respect to the Stay Relief Motion. The UST appeared at the First Day Hearing. (First Day Hr'g Tr. at 9:15–16.) Before hearing from the parties, the Court said it was considering entering an order to show cause whether a chapter 11 trustee should be appointed, either for cause under section 1104(a)(1) or in the interests of the estate under section 1104(a)(2). (Id. at 45–46.) The Debtors' counsel indicated that the Debtors had selected a proposed restricting officer, but had not conferred with BSP's counsel about the selection.
After hearing from counsel, the Court stated that neither side's proposed Scheduling Order for the Stay Relief Motion was acceptable and observed that the parties were headed towards a "death march." (Id. at 60:15–18.) Ultimately, the Court suggested that, before heading down a path of extensive litigation over the Stay Relief Motion, BSP and the Debtors should meet and confer regarding the selection of a chief restructuring officer and implementation of case operating protocols. (Id. at 48:1–4; 62–63.) The Court directed BSP and the Debtors to file a status letter on the docket by Monday, August 10, 2020, addressing whether the parties were able to reach a consensual agreement (the "CRO Agreement Deadline"). (Id. at 62–63.)
After the First Day Hearing, BSP and the Debtors engaged in discussions concerning a resolution of the Stay Relief Motion. (Debtors' Objection ¶ 14; BSP Objection ¶ 18.) On August 10, August 11, and August 12, BSP and the Debtors filed joint status letters (the "Joint Status Letters") providing updates on the status of chief restructuring officer selection and case protocol negotiations. (See ECF Doc. ## 50, 53, 56.) Copies of each Joint Status Letters were served on the UST electronically through the Court's CM/ECF system and via First Class Mail. (See ECF Doc. # 64.) The UST raised no formal or informal objections in response to the Joint Status Letters. (BSP Objection ¶ 19.)
On August 13, 2020, BSP and the Debtors filed a final joint status letter reporting that the parties reached an agreement regarding the selection of a chief restructuring officer and implementation of case operating protocols. ("Final Status Letter," ECF Doc. # 59.) Annexed to the Final Status Letter was the CRO Stipulation. On August 13, 2020, the UST and all ECF parties received a copy of the Final Status Letter and CRO Stipulation through the Court's CM/ECF System. (See ECF Doc. # 97.) On August 14, 2020, the Court entered the CRO Stipulation. ("Stipulation and Order," ECF...
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