23 June 2015

Family Christian Stores Auction Update

A couple of days ago I posted here about the decision of the Bankruptcy Court not to approve the sale of the assets of FCS to an entity controlled by former owner, lender, and all-around √©minence grise Richard Jackson. Based on the news account to which I linked, I observed that a mid-auction communication from the CEO of  FCS, Chuck Bengochea, to Jackson torpedoed the deal.

I've now read the 48-page decision by Judge Gregg. The Bengochea-Jackson contact was only part of the rationale of the court. But with respect to Bengochea's action, the court's comments were scathing:
The testimony and auction transcript reveal that around the same time that Mr. Bengochea placed the telephone call to Mr. Jackson, Acquisition [the Jackson-controlled entity] submitted its final bid, after which it left the auction. Neither Acquisition nor any other party has provided an explanation for Acquisition’s departure. The conduct of Mr. Bengochea and the departure of Acquisition leave this court with the impression that Mr. Bengochea may have represented to Acquisition that it would be declared as the winning bidder, which it eventually was after a recess and an abrupt closing of the auction. While the court is without sufficient evidence to infer fraud on the part of Mr. Bengochea, the timing of the telephone call, the final Acquisition bid [by Jackson's entity], and the closing of the auction cannot be ignored in light of the heightened scrutiny applied to insider transactions. Mr. Bengochea was, at the very least, reckless.

But what, you ask, was the court's principal reason for disapproving the sale to Jackson? The answer: insider releases. For most of my readers that explains precisely nothing but in the world of bankruptcy transactions insider releases mean a great deal.

Insiders include officers and directors of a corporation but can extend beyond those with titular control of a company to reach those who, like Richard Jackson, exercise de facto control. The Jackson bid included not only a purchase of the assets of FCS but would also have required FCS not to pursue any claims against him. The unsuccessful liquidator bidders would have left the claims against Jackson--if any--in place for the additional benefit of the creditors of FCS. In the court's words,
Regardless of whether this failure is considered a mistake or more properly considered in connection with the valuation of the Debtors’ assets in relation to the purchase price, the Debtors’ failure in this regard is fatal, even if the Committee supported the terms of sale. The Debtors’ executives testified that an investigation had not been completed as to the value of the releases in the Acquisition APA or the avoidance actions proposed to be sold when the Acquisition bid was selected as the highest and best bid. ... Moreover, the Debtors were unable to articulate a basis for the granting of such releases, let alone their value, at the sale hearing. This lack of understanding is unacceptable given the insider relationship between Acquisition and the Debtors.

It's not back to drawing board for FCS. The court telegraphed enough of it concerns so that the next round of bidding should go smoothly. Thus, I continue to expect that Jackson will buy back Family Christian but I've been wrong before so stay tuned.

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