Creditors of supermarket chain Haggen Holdings LLC are set to battle its owner in a trial scheduled for October, but may of the issues in the case may be resolved before then.
Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware in Wilmington on Tuesday, Sept. 26, considered a request by lawyers for Comvest Group Holdings LLC, the private equity firm that owned Haggen when it entered Chapter 11 in September 2015, for summary judgment on a number of the allegations ahead of the trial.
Haggen's official committee of unsecured creditors on Sept. 7, 2016, sued Comvest entities over Haggen's ill-fated acquisition of 146 Albertson's LLC stores, which bulked up Haggen 800% from 18 locations overnight. The committee alleged the PE firm fraudulently transferred the chain's real estate assets into nondebtor entities and shut out claims held by creditors.
Comvest, in turn, is disputing claims by the creditors' committee that it orchestrated a complicated transaction to enrich itself while driving Haggen into bankruptcy.
"Even the best-laid plans can go awry. That is what happened to Haggen," Comvest said in court papers filed Aug. 25. Despite the accusations by creditors, Comvest added, it didn't "walk away in the money" and rather lost its initial $50 million investment in Haggen as well as control of a chain that it valued at $100 million.
As a result, Comvest has requested Gross issue a summary judgment dismissing the allegations of fraudulent transfer of property -- when purchase rights of the property were assigned to a subsidiary -- and fraudulent transfer of rent payments.
Fraudulent transfer laws allow funds transferred while a company is insolvent, but not yet in bankruptcy, to be clawed back. Much of Comvest's argument hinges on its contention that Haggen wasn't insolvent at the time of the transactions.
Additionally, Comvest has requested denial before trial of a request for substantive consolidation, which would rolls various Haggen entities into one for the purposes of the case.
Comvest did not request summary judgment on claims of actual fraudulent transfer, breach of fiduciary duty or unjust enrichment; the firm said it "eagerly anticipates telling [its] story at the October trial" on the allegations.
The committee responded in opposition of the summary judgment motion, saying that Comvest failed to respond to the substantive allegations and instead the motion for summary judgement is "an exercise in obfuscation and misdirection." It also alleged Comvest stands to recoup $40 million while creditors owed $100 million go unpaid.
Haggen sold a majority interest in the once family-owned chain to Comvest in 2011, initially shrinking its footprint from 30 grocery stores to 18 by 2014. That year Comvest picked up 146 stores from Albertson's in 2014 for roughly $309 million and implemented a convoluted corporate structure, the committee alleged, likening the transaction to a leveraged buyout.
The committee alleged that Comvest sequestered 67 of the new stores in nondebtors and then sold 39 of the 67 leases to third parties through sale-leaseback transactions. The remaining 28 leases were assigned to nondebtor property companies. The sale of the real estate was used to finance the transaction.
This created a situation in which Comvest enriched itself at the debtor's expense, the committee alleged, adding that the 67 new leases were inflated above market rate for the purpose of generating more sale proceeds for Comvest but ultimately hastening Haggen's demise.
"The massive and inflated rental obligations incurred by the [operating companies] contributed directly to their rapid collapse," the committee said in its complaint. "Almost immediately after the closing, a large number of previously profitable stores began losing money and continued to do so in the ensuing months, leading to Haggen's precipitous bankruptcy filing and liquidation."
The suit recalls similar litigation with private equity firms over real estate transactions followed by bankruptcy filings, such as the $1.2 billion buyout of discount retailer Mervyn's LLC by Cerberus Capital Management LP in 2004. Mervyn's went bankrupt on July 29, 2008, and it and its committee sued Cerberus and other parties to the sale, alleging the buyers transferred certain real estate assets from Mervyn's, which ultimately rendered the company insolvent.
The parties ultimately settled for $166 million.
Haggen, which was formed in Washington and Oregon in 1933, has sold all 164 of its stores since filing for Chapter 11 protection on Sept. 8, 2015. Albertson's reacquired 44 of the locations it sold to Haggen.
Alan J. Kornfeld, Beth E. Levine, Colin R. Robinson and Bradford J. Sandler of Pachulski Stang Ziehl & Jones LLP represent the creditors' committee. Yates M. French, Stephen C. Hackney, Richard U.S. Howell, Jeffery Lula and Brendan Ryan of Kirkland & Ellis LLP are counsel to Comvest.
Neither Levine nor French responded to requests for additional information.
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