Suppliers, former employees and others that are stuck with $150
million in losses from the bankruptcy of grocer Fresh & Easy
LLC have sued billionaire Ron Burkle, accusing the private-equity
chief of plundering the troubled grocery chain.
Through his Yucaipa Cos., Mr. Burkle is a major player in the
hard-hit grocery industry, owning a piece of Great Atlantic &
Pacific Tea Co.—which filed for bankruptcy in July 2015—as well as
Fresh & Easy, which followed A&P into bankruptcy in
October. Both chains are liquidating or being sold off in small
chunks, wiping out thousands of jobs and leaving hundreds of
millions of dollars in debts unpaid.
The lawsuit was filed Tuesday by the official committee of
unsecured creditors in Fresh & Easy's chapter 11 proceeding. A
lawyer for Mr. Burkle said Wednesday that the creditors'
allegations will be disproved.
"It is routine in bankruptcy cases for creditors committees to
pursue litigation against parties who are perceived to have deep
pockets, regardless of merit," the lawyer said.
Creditors want a court order to stop Mr. Burkle and associated
entities from allegedly plundering 19 stores that Fresh & Easy
creditors say rightfully belong to them. Earlier this year, court
papers revealed Fresh & Easy creditors have been demanding
information from Yucaipa about the alleged transfer of the
stores—involving real estate worth at least $40 million, creditors
say—from Fresh & Easy to a Yucaipa affiliate.
Much of the bankruptcy-court complaint is blacked out, but that
April 2014 real-estate transaction is at the heart of the creditor
arguments. Lawyers for the creditors panel say the real-estate
shuffling is "the essence of a fraudulent transfer," meaning that
it was designed to move valuable assets out of the reach of
creditors, a move made by a company that knew trouble was on the
way.
This is Fresh & Easy's second time in bankruptcy. The
company was launched by British multinational retailer Tesco Corp.
and flopped in the U.S. market. After losing more than $2 billion,
according to court papers, Fresh & Easy filed for chapter 11
protection for the first time in 2013.
Mr. Burkle agreed to take it off Tesco's hands in the course of
that bankruptcy proceeding. According to creditors, he "knew the
stores were a financial disaster, so he refused to put any of his
own money at risk." Yucaipa took over leases and borrowed money
from Tesco but put none of its own money into the distressed
business, lawyers for creditors contend.
The complaint quotes Mr. Burkle as saying the grocery chain "was
in a free fall," and Tesco "decided to literally give us" the
business "to see if we could save…their investment."
Mr. Burkle, who allegedly was aware Fresh & Easy would
continue to lose money and burn up its available cash, caused the
company "to give away, for free, its only valuable hard assets—19
stores, unencumbered and held in fee simple—to an affiliate, also
indirectly owned by Burkle," court papers say.
Those stores, creditors contend, should be returned to them to
be sold in an effort to cover some of the bills left behind in
Fresh & Easy's bankruptcy.
Among the unpaid bills are claims for unpaid benefits from
thousands of people who suddenly lost their jobs at Fresh &
Easy. Instead of giving the 60-day notice required by federal law,
Fresh & Easy fired thousands of workers in the days before it
filed for bankruptcy a second time. That opened the door to class
action lawsuits that could mean significant damage claims against
Fresh & Easy, liabilities that could have been avoided by
competent management, according to creditors.
Fresh & Easy says it has liquidated more than 100 of its
leased locations for more than $11 million. Sales at its
distribution center brought in at least another $5 million, but
those proceeds are still dwarfed by the company's $169 million in
total liabilities.
Fresh & Easy, Yucaipa and unsecured creditors tried to reach
a settlement with the help of a mediator last month, but those
talks failed to produce a deal. Another mediation session is set
for this month, and both sides say they are still open to a
settlement, according to lawyers and court papers.
No such lawsuit has surfaced in the A&P bankruptcy, even
though union officials had long been critical of the company's
owners for allegedly failing to invest in the aging chain.
Unsecured creditors agreed to a settlement that, among other
things, allows longtime Burkle associate Greg Mays, chairman of
A&P, to keep $4.5 million he collected in the year before
A&P collapsed. That total includes $2.5 million in bonuses paid
months before the bankruptcy filing.
Yucaipa owned about 23% of the company that owned A&P, which
filed for bankruptcy more than $2 billion in debt, court records
say.
Under the settlement, A&P's owners and leaders will escape
any threat of lawsuits. John Niccollai, president of one of the
largest union locals involved in the A&P bankruptcy, United
Food and Commercial Workers Local 464A, said the settlement was a
pragmatic decision in a bankruptcy in which hundreds of millions of
dollars of debt will likely go unpaid. Thousands of jobs were saved
through sales of operating stores in the A&P case, as well as
more than half the severance pay and other benefit payments for
workers, Mr. Niccollai said.
"It's a question of getting the most you can possibly get and
when you make a value judgment that there's really nothing more
available, then it becomes lunacy to try to continue," Mr.
Niccollai said. "We didn't come away with 100% but we didn't come
away with nothing. My experience is, with a bankruptcy, if you can
end up somewhere in the middle you're doing pretty well."
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection. Go to
http://dbr.dowjones.com)
Write to Tom Corrigan at tom.corrigan@wsj.com and Peg Brickley
at peg.brickley@wsj.com
(END) Dow Jones Newswires
June 01, 2016 17:15 ET (21:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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