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April 23, 2020 – Industrial Realty Group, LLC (“IRG”) filed a motion to compel the Debtors to return two deposits made in respect of assets that IRG bid on in the Debtors' recently completed auction process [Docket No. 1756]. IRG asserts that it bid on two asset groups, (i) the "Hayward Assets" which the Debtors removed from the auction process after (a) determining that no qualified bids had been received and (b) receiving ING's good faith deposit as required by the Debtors' bidding procedures; and (ii) the Debtors' "Hawaii Assets" in respect of which ING was declared the successful bidder, but which, ING argues, the Debtors cannot deliver as agreed, with key intellectual property having been otherwise sold to The Dairy Farmers of America ("DFA"). IRG argues that the "untenable" withholding of a deposit in respect of assets the Debtors did not even offer for sale is part of an attempt to bring pressure in respect of the spilled milk in Hawaii, stating: "the Debtors appear to be attempting to retain the Hayward Deposit by brute force as liquidated damages in connection with the failure of the parties to consummate a transaction for the Hawaii Assets."
The Debtors see things rather differently. In an April 13th press release, the Debtors announced that IRG had terminated their agreement in principle and hinted that they had another buyer in the wings. In an April 22nd emergency motion seeking to sell a portion of the Hawaii assets to Logix Capital, LLC ("Logix") for $7.0mn [Docket No. 1743], the Debtors stated that following the entry of an April 6th sale order in respect of the Hawaii assets, IRG ran into trouble with its acquisition financing and looked to rewrite the terms of the deal: “IRG informed the Debtors that its operating partner, who had intended to provide a portion of the cash required to fund its purchase price, was changing the terms of its agreement with IRG, thereby adversely impacting the viability of the IRG Sale Transaction from IRG’s perspective. As a result, the Debtors continue “IRG (a) altered its bid, stating that it would no longer acquire the Hawaii assets on a going-concern basis, but rather simply wanted to pursue the transaction as a non-operating real estate acquisition and (b) reduced the cash purchase price of its bid from approximately $25.5 million to approximately $19.1 million. After much consideration, the Debtors and their advisors determined, in consultation with the Committee and the DIP Agent, that it was in the best interests of the Debtors and their estates to retain and remarket the Hawaii assets instead of proceeding with the revised IRG Sale Transaction.”
So did IRG terminate as claimed in the press release or did the Debtors pull the plug on the transaction? Not very clear. Further muddying the waters, the Debtors April 22nd press release heralding the sale to Logix affiliate "MGD Acquisition" specifically notes the inclusion of the Meadow Gold Hawaii brand name and related intellectual property as part of the sale; exactly the IP that IRG insisted had being sold to DFA. Not helping an understanding is the purchase price paid by Logix for part of the Hawaii assets, just $7.0mn against the IRG's revised bid of $19.1mn; with the assets not being sold (the Debtors' Honolulu operations) to be shut down with an obvious cost of jobs (the partial sale to Logix heralded by the Debtors' as a going concern sale).
The Debtors' April 22 motion sums up: "Given that the IRG Sale Transaction is no longer executable as originally approved under the IRG Sale Order through no fault or failing of the Debtors, substantial justice would be obtained by vacating the IRG Sale Order to stem any damages or expenses for the Debtors related to the IRG Sale Transaction and ensure that the Debtors can move forward with the Hawaii Sale without any hindrance or complication. Nevertheless, the Debtors reserve all available rights and remedies against IRG, its operating partner, and each of their affiliates with respect to the IRG Sale Transaction and its withdrawal therefrom, including retention of IRG’s good faith deposit and assessment of any damages." The Hayward Assets are not referenced in the Debtors' motion.
A hearing to consider the fate of the deposits, which total $3.64mn ($1.54mn and $2.1mn for Haywars and Hawaii, respectively), is set for May 26th.
The IRG Motion
The motion elaborates, “The Debtors cannot provide any rational basis to retain IRG’s Deposits given their decision to abandon the sale of the Hayward Assets after the Debtors and the Consultation Parties determined that no acceptable bids had been received.
Likewise, while the Debtors have taken the position in the Logix Sale Motion (Docket No. 1743) that the transaction with IRG for the Hawaii Assets “is no longer executable as originally approved under the IRG Sale Order through no fault or failing of the Debtors”, nothing could be further from the truth. Despite significant efforts, the Debtors and IRG failed to reach an agreement for the sale of the Hawaii Assets because of the Debtors’ inability to deliver material intellectual property rights in “Meadow Gold” and other intellectual property that were a material element of IRG’s March 31, 2020, bid to acquire the Hawaii Assets. Following submission of the IRG’s March 31, 2020 bid for the Hawaii Assets, and IRG being designated as the Successful Bidder for the Hawaii Assets, it became apparent that the Debtors could not sell the Meadow Gold intellectual property to IRG because the Debtors were selling the same intellectual property to Dairy Farmers of America as a part of its larger asset purchase agreement.”
The motion continues, “Pursuant to the Bidding Procedures, on March 30, 2020 IRG made two separate bids, one on the Hayward Assets and one on the Multiple Property Assets (assets in Reno, Miami and Hawaii), and submitted separate Asset Purchase Agreements and deposited with the Debtors’ Escrow Agent separate deposits. Neither bid was deemed by the Debtors to be a Successful Bid. Thereafter, on March 31, 2020, at the request of the Debtors, IRG revised its bid on the Multiple Property Assets to be a bid solely on the Hawaii Assets. On the same day, IRG was declared be the Successful Bidder for the Hawaii Assets. The Hawaii Assets bid submitted by IRG on March 31, 2020 specifically included the Meadow Gold trade name and other intellectual property as assets to be sold to IRG. These assets were material because the trade name is almost 120 years old and is well recognized in the Hawaii diary market as a symbol of quality. However, on April 2, 2020, the Debtors informed IRG that they had already agreed to sell the Meadow Gold trade name to DFA. From April 1, 2020 to April 8, 2020, the parties engaged in good faith negotiations to try to resolve a number of open issues on the Hawaii APA, including the Meadow Gold tradename, but those efforts proved unsuccessful.
On April 8, 2020, with no agreement having been reached on the Hawaii APA and the Debtors having abandoned the Hayward auction process, IRG requested a return of the Deposits. The Debtors refused to return the Deposits stating, among other reasons, that IRG’s bids were binding and that they considered IRG to be a Breaching Bidder under the Bidding Procedures with respect to the Hawaii Assets bid. The Debtors did not – and could not – take the position that IRG was a Breaching Bidder with respect to the Hayward Bid. The Debtors’ position violates its own Bidding Procedures and is factually unsustainable. The Debtors should be compelled to immediately return the Deposits to IRG.
With regard to the Hayward Deposit, no bids on the Hayward Assets were accepted by the Debtors, the Debtors have abandoned the auction process for Hayward in favor of an as yet undefined “real estate marketing process,” and IRG’s Hayward Bid expired by its own terms on March 31, 2020. The Debtors have taken the position that under the Bidding Procedures Order they are permitted to retain the Hayward Deposit indefinitely because a buyer for the Hayward Assets has not yet been found. As the Debtors have abandoned the auction process for the Hayward Assets, that position is untenable. Rather, the Debtors appear to be attempting to retain the Hayward Deposit by brute force as liquidated damages in connection with the failure of the parties to consummate a transaction for the Hawaii Assets. Even if there had been a breach of the Hawaii Bid by IRG, which there was not, there is nothing in the Bidding Procedures Order, the Bidding Procedures or the terms of the Hayward Bid that would allow the Debtors to retain the Hayward Deposit as damages for an alleged breach of the totally separate bid for the Hawaii Assets.
Similarly, the Debtors should be compelled to immediately return the Other Deposit to IRG because IRG is not a Breaching Bidder. First, there is no binding contract between IRG and the Debtors with respect to the Hawaii Assets. While IRG executed the Hawaii APA submitted with its bid on March 31, 2020 as required by the Bidding Procedures, the Debtors were unable to consummate the Hawaii APA as submitted (having elected to sell the Meadow Gold and other intellectual property to another bidder) and so thereafter the parties spent a week negotiating the terms of a potential transaction. No agreement was reached, no amendment to the APA submitted with the Hawaii Bid was executed, and the Debtors never executed and delivered an APA.
Notwithstanding the Debtors’ assertion that IRG is a Breaching Bidder, nothing could be further from the truth. Rather than IRG breaching its bid, the Debtors became incapable of complying with the bid submitted by IRG because the Debtors chose to sell a key asset for which IRG bid, the Meadow Gold trade name and other intellectual property, to DFA. Simply put, it is the Debtors’ inability to accept IRG’s Hawaii Bid on the terms submitted, and not any action by IRG, that resulted in the parties’ inability to consummate that bid.”
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