November 18, 2020 – The Debtors notified the Court that their Chapter 11 Plan had become effective as of November 13, 2020 [Docket No. 821]. The Court had previously confirmed the Debtors’ Plan on November 5, 2020 [Docket No. 816].

On November 14, 2019, HRI Holding Corp. and 38 affiliated Debtors (d/b/a as Houlihan’s Restaurants, Inc. “HRI or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12415. At filing, the Debtors, who owned and operated forty-seven restaurants under the Houlihan’s, J. Gilbert’s, Bristol and Devon brands, noted estimated assets of approximately $79.8mn and estimated liabilities of approximately $76.9mn.

On December 20, 2019, the Court hearing the HRI Holding Corp cases approved the $40.0mn sale of substantially all of the Debtors' assets  to restaurant group Landry's (see further below).

The Debtors were represented by (i) M-III Advisory Partners as financial advisor (with Matther R. Manning to serve as Chief Restructuring Officer), (ii) Piper Jaffray & Co. as investment banker, (iii) Hilco Real Estate, LLC as real estate advisor and (iv) Kurtzman Carson Consultants LLC as claims agent.

An administrative claims bar date has been set for December 9, 2020 with professional fee claims due by December 14th.

Overview of the Plan

The Debtors' memorandum in support of Plan confirmation [Docket No. 805] notes: “After exploring out-of-court strategic alternatives, the Debtors concluded that the best way to maximize value for the benefit of all stakeholders was through filing for Chapter 11 protection, obtaining postpetition financing and pursuing an orderly sale of their assets in a controlled, court-supervised environment (the 'Sale'). Following the successful Sale and Global Settlement with the Creditors’ Committee and the Prepetition Secured Lenders, winddown of operations and the subsequent sale of certain miscellaneous assets, and less than one (1) year after commencing these Chapter 11 Cases, the Debtors now seek confirmation of the Plan with the full support of the Creditors’ Committee and the Prepetition Secured Lenders. If confirmed, the Plan will fairly and appropriately distribute the remaining assets in and value of the Debtors’ estates to their creditors and provide for the orderly wind down of the Debtors’ estates.

The Plan is the culmination of the Debtors’ substantial efforts over the past year to bring these Chapter 11 Cases to a fully consensual, value-maximizing close following the sale of substantially all of the Debtors’ assets and the winddown of the Debtors’ operations. The Plan includes and effectuates the terms of the Global Settlement reached among the Debtors, the Creditors’ Committee and the Prepetition Secured Lenders that compromises claims and Causes of Action asserted or that could have been asserted by the Creditors’ Committee, and by and against the Debtors and the Prepetition Secured Lenders, as well as potential disputes related to the allocation of available value as among the Debtors’ stakeholders. The Global Settlement forms the framework for the Plan and provides significant value for general unsecured creditors, who, given the Debtors’ capital structure, would likely receive no (or a substantially diminished) recovery absent the substantial consideration provided by the Prepetition Secured Lenders pursuant to the terms of the Global Settlement, as incorporated into the Plan.”

The Disclosure Statement [Docket No. 735] adds, “Generally, the Plan:

• vests the Remaining Estate Assets in the Post-Effective Date Debtors for the purpose of distribution to holders of Allowed Claims;
• designates a Plan Administrator to winddown the Debtors’ affairs, monetize certain liquor licenses, reconcile Claims, pay Allowed Claims, and administer the Plan in an efficacious manner;
• effectuates the Global Settlement by and among the Debtors, the Creditors’ Committee and the Prepetition Secured Lenders as memorialized in the Plan Term Sheet; and
• provides for one hundred percent (100%) recoveries for holders of Allowed Administrative Claims, Allowed Priority Tax Claims, Allowed Secured Tax Claims, Allowed Other Secured Claims, and Allowed Other Priority Claims.

Pursuant to the Plan, the Debtors, the Post-Effective Date Debtors or the Plan Administrator will pay or provide for payments of Claims as follows: 

• the Debtors or the Post-Effective Date Debtors shall pay Allowed Administrative Claims, Allowed Priority Tax Claims and Allowed Class 3 Other Priority Claims in full from the Priority Claim Reserve; 
• the Debtors shall fund the Professional Fee Escrow Account, which Professional Fee Escrow Account shall be used to pay Allowed Professional Fee Claims; holders of Allowed Class 1 Secured Tax Claims shall receive, at the option of the Plan Administrator: (a) payment in full in Cash or (b) equal semi-annual Cash payments over five (5) years with interest at the applicable non-default rate under non-bankruptcy law, subject to the option of the Plan Administrator to prepay the entire amount during such time period; 
• holders of Allowed Class 2 Other Secured Claims shall receive, at the option of the Plan Administrator: (a) payment in full in Cash; (b) the collateral securing such holder’s Allowed Other Secured Claim; (c) reinstatement of such holder’s Allowed Other Secured Claim; or (d) such other treatment rendering such holder’s Allowed Other Secured Claim Unimpaired; 
• holders of Allowed Class 4 Prepetition Secured Claims shall receive payment to the Administrative Agent of: (i) any Residual Cash Reserve Amounts, (ii) Residual Cash and (iii) the Residual Remnant Liquor License Proceeds; 
• holders of Allowed Class 5 General Unsecured Claims shall receive their Pro Rata share of Class A and Class B Interests; 
• holders of Allowed Class 6 Prepetition Secured Obligations Deficiency Claims shall receive their Pro Rata share of Class B Interests;
• existing Intercompany Interests will be cancelled without any distribution to the holders of such Interests; and 
• existing Interests in Holdco will be cancelled without any distribution to the holders of such Interests."

The following is summary of classes, claims, voting rights and expected recoveries (Defined terms are as in the Plan and/or Disclosure Statement, See Liquidation Analysis below):

• Class 1 (“Secured Tax Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $47,000 and the estimated recovery is 100%.
• Class 2 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $0 and the estimated recovery is 100%.
• Class 3 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. The aggregate amount of claims is $4,000 and the estimated recovery is 100%.
• Class 4 (“Prepetition Secured Obligations Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $47,366,373 and the estimated recovery is 65%. Each holder will receive: consistent with the Plan Term Sheet and pursuant to and conditioned upon the approval of the Global Settlement by Final Order, payment to the Administrative Agent of: (i) any Residual Cash Reserve Amounts, (ii) Residual Cash and (iii) the Residual Remnant Liquor License Proceeds.
• Class 5 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $34.0mn and the estimated recovery is approximately 3%. Holder will receive, consistent with the Plan Term Sheet and pursuant to and conditioned upon the approval of the Global Settlement by Final Order, its Pro Rata share of Class A and Class B Interests, which shall entitle such holder to its Pro Rata share after deducting the expenses of the Plan Administrator of the following (A) on account of its Class A Interests: (i) the Residual Retained Sale Proceeds, (ii) the Residual Wind Down Amounts and (iii) the Identified Liquor License Proceeds and (B) on account of its Class B Interests: the Residual Excluded Liquor License Proceeds. NB: The projected amount of Allowed General Unsecured Claims and the projected Plan recovery on such Allowed Claims is based on the total amount of General Unsecured Claims asserted in the Chapter 11 Cases prior to any claims reconciliation process. Additionally, the projected amount of recovery does not include any proceeds for recoveries on account of Class B Interests as the amount of the Prepetition Secured Obligations Deficiency Claims presently is unknown as explained below.
• Class 6 (“Prepetition Secured Obligations Deficiency Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims and estimated recovery is Unknown. Prepetition Secured Obligations Deficiency Claim shall be calculated by the Plan Administrator in consultation with the Administrative Agent after all distributions have been made to the Prepetition Secured Lenders on account of their Allowed Class 4 Prepetition Secured Obligations Claims. As such, the projected amount of the Allowed Claim and the projected Plan recovery on such Allowed Claim presently are unknown.
• Class 7 (“Subordinated Claims”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 8 (“Intercompany Interests”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.
• Class 9 (“Interests in Holdco”) is impaired, deemed to reject and not entitled to vote on the Plan. The aggregate amount of claims is N/A and the estimated recovery is N/A.

Voting Results

On November 3, 2020, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 803] which were as follows:

• Class 4 (“Prepetition Secured Obligations Claims”): 39 claim holders, representing $2,030,853,117.93 (100%) in amount and 100% in number, voted in favor of the Plan.
• Class 5 (“General Unsecured Claims”): 152 claim holders, representing $3,254,360.80 (84.55%) in amount and 84.44% in number, voted in favor of the Plan. 28 claims holders, representing $594,559.66 (15.45%) in amount and 15.56% in number, rejected the Plan. 2 claim holders abstained, representing $892.00
• Class 6 (“Prepetition Secured Obligations Deficiency Claims”): 39 claim holders, representing $39.00 (100%) in amount and 100% in number, voted in favor of the Plan.

The Disclosure Statement attached the following documents [Docket No. 735]:

• Exhibit A: Joint Chapter 11 Plan [Docket No. 724]
• Exhibit B: Liquidation Analysis

Further Background

Asset Sale

On December 20, 2019, further to the cancellation of a planned December 18th auction in respect of a sale of substantially all of the Debtors' assets (the "Sale") and the designation of Landry's as the successful bidder [Docket No. 296], the Court hearing the HRI Holding Corp cases issued an order approving (i) the asset purchase agreement (the “APA”) memorializing the terms of the Sale and (ii) the $40.0mn Sale itself [Docket No. 322]. The APA is attached to the order.

About Landry's

The Buyer's website states: "As a group, Landry’s owns and operates more than 600 properties, including more than 60 unique brands such as Landry's Seafood, Chart House, Saltgrass Steak House, Bubba Gump Shrimp Co., Claim Jumper, Morton's The Steakhouse, McCormick & Schmick's, Mastro's Restaurants and Rainforest Cafe and tout a combination of good, fresh food, unparalleled service and marvelous locations. When you add five Golden Nugget Hotel and Casino locations operated by affiliated entities to the mix, along with numerous hotel properties and other entertainment destinations, you can see how Landry’s has vaulted into position as one of America's leading dining, entertainment, gaming and hospitality groups.

The Buyer's CEO is Tilman Fertitta, owner of the Houston Rockets and, according to Forbes (given his estimated net worth of $4.5bn), the “world’s richest restaurateur.” 

Prepetition Debt

• Credit Agreement – The Debtors are party to a December 2015 Credit and Guaranty Agreement with CIT Bank, N.A. as Administrative Agent which provides for a term loan commitment of $42.2mn, a revolving credit commitment of up to $3.0mn and a delayed-draw term loan commitment of $7.5mn (together, the “Loans”). The maturity date on the Loans is December 17, 2020 and as of the Petition date the outstanding balance of the Loans was approximately $42.3mn plus accrued and unpaid interest of approximately $4.6mn. 
• Unsecured Debt – As of the Petition date, the Debtors estimate that their unsecured debt aggregates approximately $30.7mn, consisting of trade debt in the approximate amount of $8.2 million and other liabilities in the approximate amount of $22.5mn. 

Events Leading to the Chapter 11 Filing

The Manning Declaration provides the following detail as to the Debtors’ slide into bankruptcy: “Various industry headwinds, senior management changes and shifts in investment philosophy eventually left the Company without the funds needed to grow their businesses and absorb the costs associated with the shifting labor market, unfavorable leases, and the rapid growth in costly third-party delivery. 

Additionally, in May 2018, the Company acquired seventeen (17) Houlihan’s restaurants from A.C.E. Restaurant Group, Inc., which at the time was the Company’s single largest franchisee. The premise of the acquisition was to bring the units in-house and refresh certain of the locations, but the Company’s liquidity constraints prevented that work from being accomplished. Consequently…this ‘bolt-on’ acquisition has not yet achieved its potential. 

… the Debtors’ capital and debt structure, combined with its limited liquidity, has severely constrained growth and jeopardized the Debtors’ ability to fund current operations. The Debtors have not paid any interest or debt service to the holders of their Loans since December 2018, and certain of their rent obligations and other vendor payments are past due. The Company has been challenged by unsustainably high occupancy costs at many of its locations, accounting for approximately $3.5 million of annual EBITDA losses. Prior to the filing of these Chapter 11 Cases, and after unsuccessful negotiations with certain landlords regarding rent and other lease concessions, the Company closed twelve (12) of its unprofitable restaurants. 

As a result of certain alleged defaults under the Credit Agreement as asserted by the Agent in March and April of 2019, and the Company’s disputes with respect thereto, the Company, the Lenders and the Sponsor entered into that certain Forbearance and Sale Support Agreement dated June 21, 2019 (as subsequently amended or modified, the ‘FSSA’). Pursuant to the FSSA, the Lenders agreed (among other things) to forbear from exercising remedies and the Company agreed (among other things) to engage an investment banker to commence a sale process in connection with the potential sale of all or substantially all of the Company’s capital stock, assets and/or businesses during the Forbearance Period (the ‘Sale Process’) which, absent extension, would expire on November 15, 2019. In connection with the FSSA, the Sponsor’s board members and officers resigned from all of their positions, two (2) independent directors were nominated and appointed to the board of HDJG (the Debtors’ ultimate holding company), I was engaged as CRO, and the existing executive and management teams continued day-to-day operation of the Company’s businesses."

Prepetition Corporate Structure Chart

Liquidation Analysis (see Exhibit B of Disclosure Statement [Docket No. 735] for notes)

About the Prepetition Debtors

Formed in September 1992 under the name “Gilbert/Robinson, Inc.,” and headquartered in Leawood, Kansas, the Debtors today own and operate forty-seven restaurants in fourteen states (Connecticut, Florida, Illinois, Indiana, Kansas, Michigan, Missouri, Nebraska, New Jersey, New York, Ohio, Pennsylvania, Texas and Virginia).

The Company’s thirty-four Houlihan’s Restaurant + Bar (a/k/a Houlihan’s) restaurants are leaders in the “polished casual” dining space, offering a unique, made from scratch menu and energetic bar scene; its six J. Gilbert’s Wood-Fired Steak + Seafood (a/k/a J. Gilbert’s) restaurants offer a modern twist on the classic American steakhouse, crafting high-quality, wood-fired steaks in an upscale yet rustic and warm environment; its six seafood restaurants (three Bristol Seafood Grill (“Bristol”) and three Devon Seafood Grill (“Devon”)) feature high quality ocean fare delivered with simplicity in an elegant, approachable fine dining setting; and its newest concept, Make Room for Truman, offers classic, time-honored recipes prepared with modern techniques, served in an authentic atmosphere. The Company also has twenty-three franchised locations, twenty-one Houlihan’s and two Bristol and Devon, in California, Georgia, Illinois, Indiana, Iowa, Kansas, Maryland, Minnesota, Missouri, Pennsylvania, Texas and Virginia. 

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