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November 12, 2020 – The Court hearing the K.G. Im, LLC cases issued an order authorizing the Debtors to (i) access the $2.1mn balance of a $3.1mn debtor-in-possession (“DIP”) facility and (ii) continue using cash collateral [Docket No. 304] In an earlier October 23rd order, the Court had authorized access to $1.0mn of the DIP facility on an interim basis [Docket No. 259].
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.
The DIP motion [Docket No. 209] states, “Over the last several weeks, the Debtors and BSP have negotiated a comprehensive pathway for these chapter 11 cases, which includes this Motion seeking approval of DIP financing, the entry into a 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. The framework provided by the proposed DIP financing includes the budgeted funding of accrued and unpaid administrative expense claims and professional fees, PACA Claims (defined below), the marketing of the Debtors’ assets and BSP’s stalking horse bid that contemplates a potential recovery for general unsecured creditors….
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.”
A declaration in support of the DIP financing [Docket No. 210] adds: "Upon my appointment, based upon my assessment of the Debtors’ capital structure, estimated asset values and level of secured debt, it was abundantly clear that it would be highly unlikely for the Debtors to obtain DIP financing on an unsecured or junior basis, and that a priming DIP loan over the expected objection of the Prepetition Secured Lenders would likely result in extensive and costly litigation with no certain outcome of financing available to the Debtors’ estates. Therefore, I immediately engaged with the Prepetition Agent with respect to potential postpetition financing.
After thorough evaluation, which included conferring with counsel for the Debtors over the past several weeks regarding the various legal issues related to using some or all of the Other Prepetition Property as a funding source, and having discussions with third parties regarding the potential value of the LI Real Property and possible ways to quickly convert that value into funding, the Debtors elected to pursue the proposed DIP Facility and Stalking Horse APA for a number of reasons. Any alternative DIP would present at least several material risks including: (i) the potential of a significant and costly priming fight with the Prepetition Secured Lenders who were not willing to consent to the priming of their liens, (ii) the need to demonstrate adequate protection with respect to the Prepetition Secured Lenders’ liens, (iii) execution risk associated with a transaction with a new lender (including any timing and due diligence constraints) and (iv) the inability to secure terms as favorable as those presented by the proposed DIP Facility."
Key Terms of the DIP Facility
- Borrowers: IL Mulino USA, LLC; IM Long Island Restaurant Group, LLC; IMNY Florida, LLC; IM Products, LLC; IMNY AC, LLC; IMNYLV, LLC, IMNY Hamptons, LLC; IM NY Puerto Rico, LLC; and IM Franchise, LLC (in such capacity, each a “Borrower” and collectively the “Borrowers”).
- Guarantors: K.G. IM, LLC; IL Mulino USA, LLC; IMNY AC, LLC, IMNYLV, LLC, IM Long Island Restaurant Group, LLC; IMNY Florida, LLC; IMNY Hamptons, LLC; IM NY Puerto Rico, LLC; IM Long Island, LLC; IM Products, LLC; IM Franchise, LLC; IM LLC-III; IM Broadway, LLC; IM 60th Street Holdings, LLC; and IM Payroll, LLC (the “Guarantors,” and with the Borrowers, collectively, the “Loan Parties”).
- DIP Agent: BSP Agency, LLC
- DIP Lenders: Banks, financial institutions and other lenders under the Prepetition Secured Credit Facility that are parties to the DIP Credit Agreement.
- Maturity: The Maturity Date is the earlier of: (i) 30 days after entry of the Interim Order unless a Final Order is entered before such date; (ii) the consummation of a sale of all or substantially all of the Debtors’ assets pursuant to section 363 of the Bankruptcy Code; (iii) the effective date of any chapter 11 plan of reorganization; (iv) the date that all DIP Loans become due and payable in full in accordance with the terms of the DIP Facility, including due to acceleration upon an Event of Default; and (v) December 7, 2020; provided, however, that if such date is not a Business Day, the Maturity Date shall be the next Business Day.
- Purpose: To fund operating costs and other expenses in accordance with the Budget, subject to a Variance Limit
- Interest Rate: 14%
- Default Rate: 16%
- DIP Commitments: DIP Credit Agreement: Total term loan commitment in the amount of $3.1mn (reduced from the $3.2mn initially requested, see [Docket No. 248]).
- Fees: The Debtors are authorized and directed to pay: (i) all fees when due under the DIP Credit Agreement in the amounts set forth in the DIP Credit Agreement; and (ii) reasonable, documented, out-of-pocket fees, costs and expenses incurred by the DIP Agent, including, without limitation, the reasonable and documented out-of-pocket fees and expenses of the DIP Agent’s legal counsel (Goodwin) and other professionals, hired by or on behalf of the DIP Agent. In addition, the Debtors are authorized and directed to indemnify the DIP Agent and DIP Lenders (and each of their respective directors, officers, employees, agents, representatives, attorneys, consultants, advisors and controlling persons) against any liability arising in connection with the DIP Credit Documents. All such unpaid fees, costs, expenses and indemnities of the DIP Agent and the DIP Lenders shall: (i) constitute DIP Obligations; (ii) be secured by the DIP Collateral; and (iii) be afforded all of the priorities and protections afforded to the other DIP Obligations under this Interim Order and the DIP Credit Documents.
- Milestones: Each Debtor shall satisfy or cause to be satisfied, as applicable, each of the following conditions (each individually, a “Milestone” and collectively, the “Milestones”):
i. On or prior to October 26, 2020, the Debtors shall have filed with the Court motions to reject executory contracts and unexpired leases, effective as of September 30, 2020, which the Debtors do not believe are necessary to effectuate a sale of all or substantially all of the Debtors’ assets;
ii. On or prior to one week from entry of the Interim DIP Order, the Debtors shall file a motion for an order approving procedures (the “PACA Claims Procedures Order”) for the filing and determination of claims pursuant to the Perishable Agricultural Commodities Act and the Packers and Stockyards Act (“PACA Claims”), which such motion shall seek to set October 31, 2020 as the deadline for the filing of PACA Claims;
iii. On or prior to October 19, 2020, the Debtors shall file an application to retain an investment banker;
iv. On or prior to October 12, 2020, the Debtors shall have entered into the Stalking Horse Asset Purchase Agreement with the Prepetition Secured Parties and DIP Secured Parties, filed with the Court the Bidding Procedures and Sale Motion, which seeks a hearing to be held on the Bidding Procedures and Sale Motion on or prior to October 16, 2020 and an auction to be held on or prior to December 11, 2020;
v. On or prior to October 22, 2020, the Court shall have entered an order approving the Bidding Procedures Motion;
vi. On or prior to October 28, 2020, the CRO shall file a written report detailing: i. All intercompany transactions in the four (4) years leading up to and including the report date; ii. All transfers to and from non-Debtor affiliates; iii. All transfers to (or for the benefit of) and from insiders (including payments on guaranteed debt). iv. All payments to BSP.
vii. On or prior to December 16, 2020, the Court shall have entered an order approving the sale of all or substantially all of the Debtors assets;
viii. On or prior to December 23, 2020, the Debtors shall have closed the sale of all or substantially all of its assets; and
ix. On or prior to the Maturity Date, the Debtors shall have made payment in full of all outstanding obligations pursuant to the Prepetition Credit Documents and DIP Loan Documents, pursuant to this Order.
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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