Jean and Mark Bernstein argue in a new U.S. Bankruptcy Court filing that Flying Star’s unsecured creditors committee has put forth a “fundamentally flawed” reorganization plan for the business. The committee proposes selling Flying Star, a six-restaurant chain, at an auction. Southwest Brands, parent company of Garduño’s and Keva Juice, has already agreed to bid $2.5 million for Flying Star with the intent to keep it open.
The Bernsteins have offered a competing reorganization plan under which they would give up their existing equity and inject $1.5 million to stay in control and keep the company running. They say in a disclosure statement filed Tuesday that the many expenses associated with implementing the committee’s plan would ultimately limit the payout to Flying Star’s general unsecured creditors. That group has a collective $3.7 million in allowed claims, according to the document. The Bernsteins allege that unsecured creditors would get only 6.72 percent of the value of those claims under the committee’s plan versus 20.52 percent under the Bernsteins’ plan.
Priority claims get paid in full immediately under both plans. Each also would pay in full secured claims — like those from lenders — although the Bernsteins’ plan would pay them back in monthly installments over time, while the committee’s plan would pay them immediately with the auction proceeds.
The bankruptcy judge has not yet reviewed or approved either plan or disclosure statement, a necessary step before the affected creditors get to vote on them, according to the Bernsteins’ attorney, James Askew.
The Bernsteins filed their original reorganization plan and disclosure statement about two weeks before the committee filed its own. The couple’s new filing represents an amended version, this one offering a pointed takedown of the committee’s proposal. Unsecured creditors, they argue, would get less money because of various costs associated with the committee’s plan. Those costs include a $120,000 earmark to sue the Bernsteins and their other companies for money believed to be owed to Flying Star; the taxes associated with the company’s sale (estimated by the Bernsteins at $380,000); and the expenses a new owner would incur to keep the restaurants running.
“Flying Star is not a turnkey operation,” the Bernsteins’ filing states, noting that the cafe chain relies on resources from the Bernsteins’ other company, Rio Chan Brands. “…In order for another operator, such as Southwest Brands, to operate Flying Star, it would need to replace all of the interconnected registers, inventory control, ordering and invoicing services it uses, which are owned by Rio Chan Brands.”
The committee’s attorney, Paul Fish, said that means the Bernsteins aren’t giving any competing bidders a fair chance.
“By refusing to allow a buyer to use the software that they contend is crucial, they are violating the principle that they have to give a competing bidder a fair shot,” he said in an email Thursday.
The Bernsteins’ new document also argues that any creditor attempt to sue the Bernsteins for mismanaging the company would “be meritless, drag on for years and generally waste money” that the creditors might otherwise get.
“…the known hidden costs, complexity, and unsubstantiated promises of additional monies obtained through proposed and protracted litigation against the Bernsteins shows the (committee’s) plan for what it is — smoke and mirrors,” the filing states.
Askew told the Journal in an email that the committee’s plan “can’t deliver what it promises” and encouraged creditors to wait to form any conclusions until they get official notification from the court regarding the plans.