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November 18, 2020 – The Court hearing the K.G. Im, LLC cases has extended the periods during which the Debtors have an exclusive right to file a Chapter 11 Plan and solicit acceptances thereof, through and including February 23, 2021 and April 24, 2021, respectively [Docket No. 320]. Absent the relief, the Plan filing and solicitation periods were scheduled to expire on November 25, 2020 and January 24, 2021, respectively.
As provided in the Debtors' extension motion [Docket No. 275], “Since the Petition Date, the Debtors have worked diligently on its restructuring initiatives and, on October 12, 2020, after weeks of negotiations, the Debtors filed their motion for approval of debtor-in-possession financing (the ‘DIP Motion,’ Docket No. 209) and motion for approval of sale and bidding procedures (the ‘Bid Procedures Motion,’ Docket No. 211), which has since been approved (see Docket No. 260, the ‘Bidding Procedures Order’). These motions, along with the Debtors’ entry into a stalking horse stalking horse asset purchase agreement (the ‘APA’) and the Debtors’ application to retain an investment banker to conduct the marketing and sale of substantially all of the Debtors’ assets (see Docket No. 241), provide a comprehensive pathway for these chapter 11 cases.
Significantly, the framework provided by the DIP Motion includes the budgeted funding of accrued and unpaid administrative expense claims and professional fees, PACA/PASA claims, the marketing of the Debtors’ assets and BSP’s stalking horse bid that contemplates a potential recovery for general unsecured creditors. Further, pursuant to the APA, BSP’s bid for substantially all of the Debtors’ assets (the ‘Stalking Horse Bid’) includes a commitment to fund various budgeted expenses that will provide for the orderly winddown of the Debtors’ estates and the potential for, among other things, a small recovery for general unsecured creditors. Thus, the baseline set by the Stalking Horse Bid, along with the DIP facility, ensures that the Debtors will be able to engage in a fulsome sale process to elicit the highest and best offer for their assets and that these chapter 11 cases can be properly administered and wound down thereafter.
Thus, the Debtors have made substantial progress towards the filing of a plan in these chapter 11 cases. The DIP facility ensures that the Debtors will continue to operate and pay their debts as they come due. The sale process approved pursuant to the Bidding Procedures Order contemplates a sale hearing on December 16, 2020. The Debtors believe that the payment of budgeted administrative expenses pursuant to the DIP facility and the funding of winddown expenses and a small recovery for general unsecured creditors and assumption of certain liabilities set forth in the Stalking Horse Bid will allow the Debtors to propose a plan to winddown their estates.
Pursuant to this Motion, the Debtors request a 90-day extension of the Exclusive Periods to ensure they will have sufficient time to carry out the contemplated sale process and propose a plan, which the Debtors intend to file as soon as possible.”
No Plan had been filed as of November 19, 2020.
On July 28, 2020, the privately held Debtors (dba as the New York City-based Il Mulino restaurant group ) filed for Chapter 11 protection with estimated assets between $50.0mn and $100.0mn and estimated liabilities between $10.0mn and $50.0mn. At filing, the Debtors cited COVID-19 and a hostile relationship with BSP Agency, LLC ("BSP," the agent in respect of the Debtors' $30.0mn prepetition credit agreement, see "Events Leading to the Chapter 11 Flings" below) as the key factors forcing them to seek bankruptcy.
By mid-October, however, the Debtors and BSP had arrived at something approaching a working relationship (BSP making clear it would not countenance the priming of its debt which effectively shut down any possibility of third-party financing); the result being that BSP is now the agent in respect of the DIP financing and fronting a group of prepetition-turned-DIP lenders that are serving as a credit bidding stalking horse in respect of the Debtors' assets.
The Debtors are owned by Gerald Katzoff (47.857%) and Brian Galligan (42.143%). Katzoff is Managing Director at private equity house Manhattan Capital LLC and Galligan is the founder of Galligan Hospitality Group.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Katzoff Declaration”), detailed the events leading to the Debtors' Chapter 11 filings. The Katzoff Declaration alleges that BSP used him to circumvent restrictions on access to Cares Act funding and then, once that funding was secured, took steps to "[put] in place a path for BSP to wipe out all stakeholders in a ‘debt’ to ‘equity’ conversion play." The Katzoff Declaration provides: “Beginning with the stay at home order issued for the State of New York in mid-March in response to the Covid-19 pandemic, Il Mulino locations across the country were forced to close and cease operations.
BSP strongly encouraged me to apply for funds under the PPP [Paycheck Protection Program] given the lack of revenues at the restaurants, the uncertainly surrounding the re-opening of any of the locations and its unwillingness to continue to fund any amounts under the Term Loan Credit Agreement. BSP was also fully aware of the restrictions placed upon private equity and hedge funds under the PPP and, therefore, needed me to participate in the application process.
I reached out to personal bank contacts on behalf of the restaurants and the Debtors applied for and, by May 7, 2020, received approximately $2,300,000 in PPP funds (the ‘PPP Funds’).
By securing PPP Funds, I strongly believed that the Debtors were well on their way to stabilize operations, protect the ‘Il Mulino’ brand and otherwise manage through the Covid-19 crises.
Unfortunately, after the Debtors secured the PPP Funds, it became painfully clear that BSP had other plans for the restaurants. Prior to that time, I had multiple discussions with representatives from BSP regarding the businesses and there were no indications that BSP had any intention of seeking to attempt to exercise any control of the Debtors.
In this regard, almost immediately after Il Mulino succeeded in securing PPP Funds, BSP began to take actions and implement plans that were aimed at, among other things (i) exercising control over the Company, (ii) using the PPP Funds to ‘fund’ operations after exercising control, and (iii) putting in place a path for BSP to wipe out all stakeholders in a ‘debt’ to ‘equity’ conversion play without allowing the Debtors the chance to stabilize operations and run a fair and transparent process toward finding an exit out of the Covid-19 lockdown and the consequential financial impact that crippled the companies.
Simply put, it was clear that BSP viewed the Covid-19 impact as a chance to unfairly leverage the Debtors and seize control of the restaurants in a manner that is not consistent with the rights afforded the parties under the Term Loan Credit Agreement or applicable law.
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