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Friday, 19 June 2015 14:31

Judge denies sale motion of Family Christian Stores to insider bidder

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Judge denies sale motion of Family Christian Stores to insider bidder MIBIZ FILE PHOTO

The “prolonged, controversial and contested” bankruptcy sale process for Family Christian Stores will continue on a little longer.

On Thursday, U.S. Bankruptcy Court for the Western District of Michigan Judge John Gregg denied a sale motion of all Family Christian LLC’s assets because the proposed sale to an insider, FCS Acquisition LLC, did not meet the heightened scrutiny the court requires when insiders are involved in a sale.

Gregg acknowledged Family Christian “clearly made mistakes at the auction” that was “at times, nothing short of chaotic.” However, he said the allegations of fraud leveled by the auction’s second-place bidder — a joint venture of Boston-based Gordon Brothers Retail Partners LLC and Northbrook, Ill.-based Hilco Merchant Resources LLC that would have liquidated the company — were “in large part, unfounded.”

“(T)he Debtors have convincingly set forth many compelling reasons for the court to approve the sale to (FCS) Acquisition,” Gregg wrote in his opinion. “However, certain elements in the (FCS Acquisition asset purchase agreement) are inappropriate in light of the insider relationships in these cases.”

In a memorandum decision, Gregg said Family Christian’s “fatal” failure in the process was that it did not account for the value of insider releases in the FCS Acquisition bid and could not provide a basis for the releases at the sale hearing.

“The Debtors … have not, overall, articulated a sound business justification for seeking to sell substantially all of their assets to (FCS) Acquisition on the terms in the (FCS Acquisition asset purchase agreement),” Gregg wrote.

Gregg also wrote that the court was “troubled” by a phone call CEO Chuck Bengochea made to Richard Jackson on the second night of the auction. Jackson, Family Christian’s chairman and main source of funding, also controls FCS Acquisition. Jackson’s role in the bankruptcy proceedings has been contentious because of his multiple roles as a creditor, debtor and early stalking horse bidder.

In testimony at the sale hearing, Bengochea said he called Jackson to tell him he needed to increase his bid for the company.

“Any requests for higher bids should have been placed on the record at the auction or communicated through legal counsel,” Gregg wrote. “Moreover, the request should have been made to all qualified bidders, not simply to an insider that has assured the Debtors’ CEO of future employment.”

Noting that the sale of the company’s assets to FCS Acquisition has the support of Family Christian’s stakeholders — including creditor Credit Suisse, which would receive $5.45 million, Gregg wrote that the company could reopen the auction process to qualified bidders.

It remains unclear whether another auction process will take place.

A message left seeking comment with an attorney representing Family Christian was not immediately returned.

Alternatively, the company “may simply wish to file a plan of reorganization so as to avoid any allegations, or concerns from this court, that any proposed transaction fails to comport with the applicable provisions of the Bankruptcy Code,” Gregg wrote.

Sources familiar with the case told MiBiz it would be more likely for the company to file a reorganization plan than for the auction to be reopened.

FCS Acquisition plans to keep the vast majority of the 266 retail stores open, should it be granted the right to purchase the assets. In court testimony earlier this month, Bengochea said that the company would close 15 or 16 stores as part of a five-pillar restructuring and growth plan.

Bengochea would remain in the role of CEO if FCS Acquisition is allowed to move forward with the purchase, as would the rest of the executive team, he told the court.

Much of the company’s growth strategy hinges on expanding Family Christian’s e-commerce activity, an area the retailer of religious books and gifts has avoided because of its lower margins, Bengochea said.

“Historically, we have not been excited about e-commerce, but we don’t have a choice about where our customers shop,” he said.

The retailer’s sales have been in “steady decline since 2008,” according to the initial bankruptcy filing. After posting sales of $305 million in fiscal 2008, the Christian retailer’s sales have trended downward, hitting $230 million in fiscal 2014. The company expects a further decline in fiscal 2015, with annual sales forecasted at $216 million, according to a previous court filing.

Read 17981 times Last modified on Sunday, 28 June 2015 18:00

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