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Goldberg Kohn Wins Trial in Southern District of New York Representing Fun Eats and Drinks, LLC

March 12, 2019

Randy Klein, a principal in the firm and Chair of the firm's Bankruptcy & Creditors’ Rights Group, and David Morrison, a principal in the firm's Litigation Group, represent Kelly Companies, a private equity company, that formed a business Fun Eats and Drinks, LLC ("FEAD").  FEAD acquired the majority lender position in a secured credit facility, and in late September 2016 acquired the assets of a Chapter 11 debtor that operated 80 restaurants and bars nationwide in a Section 363 Sale under the Bankruptcy Code. The Delaware bankruptcy court entered a sale order that did not require that only cash be paid at closing, but instead 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, another private equity firm, DW Fund, a disappointed auction participant and minority lender in the facility, sued FEAD in the Southern District of New York, attempting to use the implied covenant of good faith and fair dealing to extract 1/3 of the value of the purchased company from our client.  

In DW Last Call Onshore, LLC et al. v. Fun Eats and Drinks, LLC, 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 the firm's client.

Based on the record 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.

To view the decision, please click here

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