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Randy Klein, a Principal in the firm and Chair of the Bankruptcy & Creditors’ Rights Group, and David Morrison, a Principal in the Litigation Group, have prevailed in the Southern District of New York on behalf of Fun Eats and Drinks, LLC., which was formed by the private equity company Kelly Companies.

Fun Eats and Drinks, LLC ("FEAD") acquired the majority lender position in a secured credit facility; in late September 2016, it acquired in a Section 363 Sale under the Bankruptcy Code the assets of a Chapter 11 debtor that operated 80 restaurants and bars nationwide. The Delaware bankruptcy court entered a sale order that did not require a cash-only payment at closing. Instead the court approved the use of non-cash consideration in the form of promissory notes that were offered and accepted in satisfaction of the first lien credit agreement obligations.

In January 2017, FEAD was sued in the Southern District of New York by another private equity firm, DW Fund, which was a disappointed auction participant and minority lender in the secured facility acquired by FEAD. In DW Last Call Onshore, LLC et al. v. Fun Eats and Drinks, LLC, DW Fund attempted to use the implied covenant of good faith and fair dealing to extract one-third of the value of the purchased company from Goldberg Kohn's client.  

The Southern District of New York dismissed the minority lender's implied covenant of good faith claim as an improper collateral attack on the bankruptcy court's prior rulings. After a trial on the merits of the remaining breach of contract claims, in which the minority lender attempted to establish that FEAD breached the "sharing provision" contained in the credit agreement when, instead of tendering cash at closing, FEAD tendered the approved non-cash consideration, the New York federal court granted judgment fully in favor of Goldberg Kohn's client.

Based on the record of evidence that Mr. Morrison and Mr. Klein established, with the assistance of paralegal Kristina Bunker, the SDNY Court ruled that the Delaware bankruptcy court's orders were binding and that the minority lender could not collaterally attack those orders in New York. In light of the bankruptcy court's approval of both the asset sale and the use of non-cash consideration, the SDNY held that the plain language of the credit agreement defeated the minority lender's remaining breach of contract claims. 

The decision represents a significant win for majority lender rights, and rejection of the minority lender's efforts to establish a rule of law that would have prohibited the use of non-cash consideration at bankruptcy auctions.