December 11, 2020 – Further to an October 23rd bidding procedures order and absent any further qualified bids beyond that of stalking horse BSP Agency, LLC (the "Stalking Horse," an affiliate of Benefit Street Partners), the Debtors have designated the credit bidding Stalking Horse as the successful bidder in a sale of substantially all of their assets [Docket No. 351]. A sale hearing is scheduled for December 16, 2020.

The Stalking Horse's "Initial Credit Bid" was comprised of $18.0mn of debtor-in-possession ("DIP") financing and prepetition credit agreement obligations. At filing, the Debtors and BSP were embroiled in an acrimonious dispute with the Debtors accusing BSP of using the COVID-19 pandemic as a pretext for "seizing control of the restaurants." 

By mid-August, 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 Debtors' DIP financing and has now successfully fronted a group of prepetition-turned-DIP lenders in efforts to purchase 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.

Key Terms of Stalking Horse APA:

• Seller or Sellers: K.G. IM, LLC; IM LLC-III; IL Mulino USA, LLC; IMNYLV, LLC; IM NY Florida, LLC; IM NY Puerto Rico, LLC; IMNY AC, LLC; IM Products, LLC; IM Long Island Restaurant Group, LLC; IM Long Island, LLC; IM Franchise, LLC; IM 60th Street Holdings, LLC; IM Broadway, LLC; IMNY Hamptons, LLC; and IM Payroll, LLC (each a “Seller and Collectively the “Sellers”)
• Buyer: 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, with their permitted successors, designees and assigns.
• Purchase Price: On the terms and subject to the conditions contained herein, the purchase price (the “Purchase Price”) for the Purchased Assets shall consist of:
  • A credit bid in an amount equal to the sum of: (i) $2,200,000 consisting of a portion of the outstanding Liabilities under the DIP Facility as of the Closing Date (the “DIP Credit Bid”); and (ii) $15,800,000 consisting of a portion of the Liabilities arising under, or otherwise relating to, the IL Mulino Prepetition Credit Documents, plus such additional amount as may be credit bid pursuant to the Bidding Procedures Order in connection with the Auction (the “IM Prepetition Obligations Credit Bid,” and together with the DIP Credit Bid, the “Credit Bid Purchase Price”) and the Credit Bid and Release whereby Buyer acknowledges the satisfaction of the portion of the DIP Obligations and a portion of the IL Mulino Prepetition Obligations, each as included in the Credit Bid Purchase Price;
  • The payment or other satisfaction of all Cure Amounts in cash;
  • The assumption of the Assumed Liabilities; and
  • The payment of $100,000 to be set aside by the Sellers for distribution to holders of allowed general unsecured claims in the Chapter 11 Cases.
• Bid Protections: Breakup Fee: a breakup fee equal to $700k, which amount shall constitute a super-priority administrative expense of Sellers with priority over any and all administrative expenses other than the DIP Obligations and shall be secured by a lien on any deposit posted by any Qualified Bidder with respect to a potential Alternate Transaction and secured by a junior lien on the assets securing the DIP Facility.

Further Background

The Debtors' bidding procedures motion [Docket No. 260] states, “At the commencement of these cases, the Debtors were engaged in a significant dispute with its prepetition secured lenders BSP and faced with the prospect of expensive, drawn-out litigation. However, the Debtors and BSP were able to settle that dispute and, on August 14, 2020, the Debtors, exercising their sound business judgment, appointed Mackinac Partners LLC and Mr. Craig Boucher of Mackinac to manage the Debtors and exercise all authority with respect to the Debtors. Subsequently, this Court confirmed the consensual delegation of management authority to Mackinac Partners LLC and the appointment of Mr. Boucher as CRO.

Since that time, the Debtors have engaged in a thorough assessment of their restructuring alternatives, which lead first to intensive negotiations with BSP with respect to potential DIP financing. Those negotiations ultimately led to discussions over a more holistic approach to the resolution of these bankruptcy cases, with BSP providing a DIP Facility and serving as a stalking horse bidder for a sale process designed to facilitate a value-maximizing restructuring transaction. Importantly, 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 wind-down 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. The Debtors believe that this process represents the best opportunity available to the Debtors to maximize value for the benefit of all stakeholders and entry into the Stalking Horse APA and seeking approval of the Bidding Procedures are sound exercises of their business judgment.”

DIP Financing Motion

In conjunction with the BSP Agreement, the Debtors also requested Court authority to (i) access $3.2mn of debtor-in-possession (“DIP”) financing, including $1.0mn on interim basis, to be provided under the Prepetition Secured Credit Facility and (ii) use cash collateral [Docket No. 209].

The DIP motion states, “The framework provided by the proposed DIP financing includes the budgeted funding of accrued and unpaid administrative expense claims and professional fees, PACA Claims, the marketing of the Debtors’ assets, and BSP’s stalking horse bid that contemplates a potential recovery for general unsecured creditors.”

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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