Overly aggressive expansions, lease disputes and sagging interest in craft beer-based casual restaurants were contributing factors to BarFly Ventures LLC’s bankruptcy filing this month before business was decimated by COVID-19, court records show.
The company — which owns the HopCat chain and Stella’s Lounge and Grand Rapids Brewing Co. in Grand Rapids — is actively marketing to potential buyers.
The filing also appears to be an early example of a company seeking bankruptcy protection after receiving a federal Paycheck Protection Program loan to adjust to the pandemic. Bankruptcy attorneys and an official at the U.S. Small Business Administration say it’s unclear how BarFly’s $6.6 million loan will factor into the proceedings.
The case, filed on June 3, is proceeding in the U.S. Bankruptcy Court for the Western District of Michigan. Objections to BarFly’s requests have so far been filed by the U.S. Trustee in the region on behalf of the federal government, as well as BarFly’s landlord at former locations in Michigan, Missouri and Florida.
Claims made by BarFly’s former landlord, Kalamazoo-based Innovo Development Group LLC, suggest a strained relationship between the entities in recent months.
Brendan Best, a bankruptcy attorney at Varnum LLP’s Detroit office, called it a “pretty simple case so far.” Additionally, the absence of secured creditors suggests the company has largely been funded through investors rather than bank loans, said Best, who is familiar with the case but is not representing any of the parties.
‘Craft beer craze’ fading
The HopCat chain “operates during a time when nearly all casual dining concepts in the country are struggling as a result of macro- and microeconomic factors, such as rising wages, increased competition, and online third-party food delivery platforms,” BarFly founder and Chairman Mark Sellers said in a June 3 declaration. He is also the founder of more than 20 affiliated debtors in the bankruptcy filings.
“During the past several years, the Debtors took on an overly-aggressive expansion process by building new HopCat locations that were both too large and geographically diverse, including locations in Florida, Illinois and Minnesota,” Sellers said in the filing. “The ‘craft beer craze’ has also slowed down along with the uneven casual dining interest in a nationally struggling retail market.”
The COVID-19 pandemic came during an “already difficult time” for the company, court filings show. As a result of stay-home orders, the company had furloughed 1,135 employees.
“Despite management’s best effort, their strong brands, and loyal customer base, the Debtors’ efforts have not been enough to address their over leveraged capital structure, certain underperforming locations, and over-market leases,” according to the filing.
Prior to filing for Chapter 11 bankruptcy on June 3, the company engaged Mastodon Ventures Inc. as an investment banker to market the sale of BarFly’s assets. Before starting a “full blown sale,” the company will determine whether lenders would support a debt-for-equity plan or act as a stalking horse bidder to set a floor price for third parties to submit competing offers.
“I believe that a marketing and sale process through these Chapter 11 Cases is in the best interests of the Company and all stakeholder (sic) because it is the best way to right-size it (sic) capital structure while focusing on the Debtors’ core locations,” Sellers said in the declaration. Sellers spoke to MiBiz on June 3 but did not respond to a follow up request for comment.
The parent BarFly organization is using a $6.6 million Paycheck Protection Program approved on April 29 to “stabilize the companies until restrictions imposed as a result of COVID-19 are fully lifted,” according to court filings. BarFly Ventures plans to use the loan for payroll, health care benefits, rent and utilities, as allowed under PPP. The unsecured loan is not being used as collateral.
In early June, Sellers said it was unclear how the loan would affect the proceedings, a sentiment shared by the SBA and some bankruptcy attorneys with knowledge of the case.
“At this time, there’s no direction in the law or additional guidance issued re: bankruptcies after a PPP loan is received and to my knowledge, it isn’t something that’s been seen,” Andrea Roebker, Great Lakes regional communications director for the SBA, said in an email to MiBiz.
Roebker said additional guidance is pending, “so no official detail yet.” She also noted President Trump signed recent amendments to the PPP “should a business not be able to return to the same level of activity prior to February 15.” The changes are meant to increase the likelihood of loan forgiveness, including reducing from 75 percent to 60 percent the amount of a loan that must be used for payroll and extending from eight weeks to 24 weeks the amount of time businesses have to spend the money.
Although the SBA gave guidance that companies can’t receive a PPP loan if they’ve already filed for bankruptcy, some are challenging the provision in court.
“That’s a really interesting situation,” Varnum’s Best said. “There’s cases all over the country, and courts are in polar opposite directions on that issue. It’s really a hot topic.”
Grand Rapids bankruptcy attorney Todd Almassian at Keller & Almassian PLC said bankruptcy courts across the country have disagreed about whether companies in the middle of proceedings should qualify for PPP loans.
“Fundamentally, it’s in the best interest of businesses and the economy for those PPP loans to be given freely to those who need it. And if they use some of that money to reorganize a bankruptcy, why not?” Almassian said. “I think we’re going to see a lot of bankruptcies in the near future for small and large businesses. The power of the bankruptcy code is very redemptive in nature.”
BarFly-affiliated companies have about $29.5 million outstanding under a credit agreement, which includes accrued and unpaid interest. As of June 2, the company estimates that it owes various vendors, suppliers and other unsecured trade creditors about $5.6 million.
Objections, lease dispute
So far, U.S. Trustee Andrew Vara filed objections to BarFly’s requests involving Sellers’ compensation, as well as how the case is organized going forward.
In a June 5 filing, Vara challenged BarFly’s motion to pay employees saying it “lacks transparency as to [Sellers’] salary, benefits, or other amounts that the Debtor proposes to pay him.”
BarFly also requested the Chapter 11 filings from the 24 affiliated companies be consolidated into one, as well as a list of the 30 largest creditors across all of the companies rather than the top 20 for all companies. Vara opposed the motion.
Meanwhile, the company is seeking court approval to get out of leases in Royal Oak, Chicago, St. Louis and Port St. Lucie, Fla. — all locations of HopCats that have closed.
HopCat’s landlord — Innovo — doesn’t oppose rejecting the leases, and is “prepared to assume control of the properties and begin to lease the properties again, and wishes to do so as promptly as possible.”
However, Innovo says it should own the security interest of the liquor license at the Royal Oak HopCat location, as spelled out in the lease. Innovo filed two additional objections involving expediting the case and the rights and interests of counterparties. Innovo estimates the damages from terminating three HopCat leases in Michigan, Missouri and Florida — based on “one year’s basic rent” — is more than $1.5 million.
Innovo also details an allegedly “extremely strained” landlord-tenant relationship in Royal Oak. Two Innovo members are investors and former board members of BarFly Ventures. Innovo says it found out about the bankruptcy filings “through media reports.”
Innovo alleges that BarFly was “many months behind” in rent, according to court filings.
“Relationships between (BarFly Ventures) and Innovo were so bad that police had been involved in the dispute” between BarFly and Innovo at the Royal Oak location, Innovo claims in a June 5 filing.
“Just prior to filing, without notice to Innovo, (BarFly) quickly removed all of (its) personal property from each of the sites, causing significant damage to each of the sites. Removal of the personal property was not done in a professional manner,” Innovo claims, adding the three locations were left in “extremely poor condition, leaving behind trash and rubble.”
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