October 7, 2011 5:42 PM

The Bankruptcy Files: Friendly's and Other Distressed Delicacies

Posted by Brian Baxter

It's been a big week for corporate bankruptcies, which trailed off earlier this year from the peak levels of 2009 and 2010 but have begun to mount again recently amid fears of a double-dip recession. At the same time the spate of actual filings didn't stop the insolvency-minded from focusing their attention on others that might be looming.

Consider American Airlines parent AMR, whose shares plunged early in the week after a series of reports speculating about a possible bankruptcy spooked investors about the state of the Fort Worth–based company's financial health. Despite losing a third of their value, AMR shares had rallied by Friday and fears about a potential Chapter 11 filing appeared to have dissipated. (AMR generated plenty of nonbankruptcy legal work this summer through a massive plane purchase and the spin-off of regional carrier American Eagle.)

Also facing a fluctuating share price this week—its stock both dipped and jumped—was famed imaging and photography company Eastman Kodak. As previously reported by The Am Law Daily, Kodak—whose IP portfolio's value now exceeds the company's revenue from operations—has hired Jones Day to provide restructuring advise. (All of which may help explain why the company retained Wachtell, Lipton, Rosen & Katz this summer to protect $2.9 billion in tax credits that Kodak plans to use to offset income from the sale of certain patents.)

The restaurant industry—which has been hurt by both rising food costs and cash-strapped customers dining out less often—looks particularly beleaguered this week, with several prominent chains joining the likes of Perkins & Marie Callender's, Sbarro, Charlie Brown's Steakhouse, and Fuddruckers in Chapter 11.

Friendly Ice Cream

Those of us with fond Fribble memories were saddened this week to learn that the Friendly Ice Cream Corporation, better known simply as Friendly's, filed for bankruptcy in Delaware.

The Wilbraham, Mass.–based chain of nearly 500 family restaurants known for their hamburgers and ice cream sundaes began Chapter 11 proceedings on October 5. Friendly's, which also sells ice cream and other frozen desserts to supermarkets nationwide, has about 10,000 employees. The company has been serving culinary delights—like the Forbidden Fudge Brownie and Big Beef cheeseburger—since its founding in 1935.

Boca Raton, Florida–based private equity firm Sun Capital Partners bought Friendly's for $337.2 million in 2007. But a sour economy, rising food costs, and a $250 million debt load led Friendly's to fall on hard times. The company has announced that it will close 63 stores as it tries to reposition itself in the market—its restaurants recently ranked in the bottom tier of a survey of consumers on food quality and reputation—ahead of a possible bankruptcy sale.

Kirkland & Ellis restructuring partners Ross Kwasteniet and James Stempel are advising Friendly's in its Chapter 11 case. Laura Davis Jones, a name partner at bankruptcy boutique Pachulski Stang Ziehl & Jones, is serving as local counsel to Friendly's. Neither firm has yet filed billing statements with the bankruptcy court.

Morgan, Lewis & Bockius financial restructuring partner Neil Herman and Delaware's Young Conaway Stargatt & Taylor are advising Sun Capital in the Chapter 11 case. Operating under the name Sundae Group Holdings, Sun Capital will be the lead or "stalking horse" bidder for Friendly's in an auction process for the company. (The opening bid has been set at $122.6 million.)

Paul Hastings bankruptcy partner Jesse Austin III is advising Wells Fargo Capital Finance, which has been in talks with Friendly's on extending the company a $70 million loan to help keep it afloat. And there are many that hope Friendly's will survive. The Wall Street Journal reported this week that Kelley Drye & Warren partner Robert LeHane, who represents a group of landlords in the Friendly's bankruptcy, said in court that his own daughter had encouraged him to do everything in his power to make sure Friendly's stays open.

Chef Solutions

Prepared foods provider Orval Kent and parent Chef Solutions filed for bankruptcy in Delaware on October 4 under a plan to sell off assets to pay creditors. The Wheeling, Ill.–based company listed both assets and debts of up to $500 million in its bankruptcy filing.

Richards, Layton & Finger bankruptcy partner John Knight in Wilmington is serving as primary Chapter 11 counsel to Chef Solutions. The firm has not yet filed billing statements with the bankruptcy court.

According to a list of the company's 20 largest unsecured creditors, Chef Solutions owes $337,291 to Kirkland on a "professional services claim" and another $240,000 to the U.S. Department of Justice's Office of Regional Counsel in Kansas City, Kansas, in connection with a "consent decree resolving litigation."

Chef Solutions has received clearance to borrow $9 million to fund its operations while it pursues a sale of its assets to a joint venture between private equity firm Mistral Capital Management and rival Reser's Fine Foods. DLA Piper partners George South III, Stuart Brown, Sidney Burke, and of counsel Bennett Silverberg are advising Mistral. Reser's has turned to Young Conaway and Portland, Oregon–based Tonkon Torp.

Schulte Roth & Zabel's Lawrence Gelber and Womble Carlyle Sandridge & Rice's Mark Desgrolleilliers are advising Wells Fargo Capital Finance, which is providing bankruptcy financing to Chef Solutions.

Real Mex Restaurants

With its El Torito and Chevys brands, Real Mex Restaurants operates more than 200 Mexican-themed restaurants in a dozen U.S. states. But sales from all those quesadillas, tacos, and pitchers of sangria couldn't prevent Real Max from filing for bankruptcy protection in Delaware on October 4.

Milbank, Tweed, Hadley & McCloy financial restructuring cohead Paul Aronzon, bankruptcy partner Mark Shinderman, and corporate partner Adam Moses are advising Real Mex in the Chapter 11 case. Pachulski Stang's Davis Jones and partner Curtis Hehn are serving as local counsel to Real Mex. Neither firm has yet filed billing statements with the bankruptcy court.

Cypress, Calif.–based Real Mex, which, as it happens, is owned by an affiliate of Friendly's private equity parent Sun Capital, plans to sell its assets to creditors through the Chapter 11 process. Reuters reports that Real Mex is down to its final $1 million, but plans to seek approval for a $49 million debtor-in-possession loan from GE Capital. (Bloomberg reports that Real Mex has won approval to borrow up to $25 million.)

Latham & Watkins restructuring partner Peter Knight is representing GE Capital, while Schulte Roth partners David Hillman and Adam Harris are advising majority second-lien noteholders. Lee Bogdanoff, a founding member of Los Angeles bankruptcy boutique Klee, Tuchin, Bogdanoff & Stern, is representing Z Capital Management, a privately held distressed investor that holds almost two-thirds of a $36 million unsecured loan owed by Real Mex.

Board resolutions by the debtor show that Irell & Manella bankruptcy head Jeffrey Reisner and Loeb & Loeb corporate partner Gerald Chizever were present at a meeting of Real Mex's board of directors in September, when the company made the decision to file for Chapter 11. Real Mex stated in court filings that its revenues had fallen to $478 million in 2010 from $553 million in 2008.

Star Buffet

Scottsdale, Ariz.–based Star Buffet, the parent company of Denver's famous Casa Bonita restaurant and 30 other eateries in 15 states, filed for bankruptcy protection in Phoenix on September 28.

Casa Bonita is probably best known for its cliff divers and other forms of exotic entertainment, which were featured in a classic 2003 episode of South Park. The Associated Press reports that Star Buffet entered Chapter 11 after being unable to come to an agreement to pay a $723,489 judgment against the company.

S. Cary Forrester ($400/hour) and John Worth ($350) of Phoenix's Forrester & Worth are serving as counsel to Star Buffet in the bankruptcy case. Court filings by the firm show that it was paid a prepetition retainer of $55,000. Craig Ganz of Phoenix's Gallagher & Kennedy is serving as counsel to Spirit Master Funding, which secured the judgment against Star Buffet.

According to a list of Star Buffet's 20 largest unsecured creditors, the restaurant chain owes money to several law firms, including Lubbock, Texas–based McWhorter Cobb and Johnson ($70,293), Salt Lake City's Parr Brown ($27,000), Billings, Mont.–based Moulton Bellingham ($20,000), and Ridenour, Hienton & Lewis in St. Louis ($5,000).

In addition to Casa Bonita, Star Buffet operates Barnhill's Buffet, K-BOB's Steakhouse, BuddyFreddys, Holiday House, HomeTown Buffet, and Whistle Junction. (Click here to hear South Park creators Trey Parker and Matt Stone sing the praises of Casa Bonita, which they liken to a "Disneyland version of Mexico.")

Ezenia

Ezenia, a software and communications company that services the defense industry, filed for bankruptcy protection in Manchester, New Hampshire, on September 30. Founded in 1991, the Nashua, New Hampshire–based company laid off half its work force and saw three board members quit earlier this year.

Nixon Peabody bankruptcy partner Daniel Sklar in Manchester is serving as lead counsel to Ezenia, which cited a decline in business with military contractors as precipitating its Chapter 11 case. The firm has not yet filed billing statements with the bankruptcy court.

According to a list of Ezenia's 20 largest unsecured creditors, the company owes $44,614 to Utica, N.Y.-based Hage & Hage, $36,180 to Goodwin Procter, and $14,610 to Nutter McClennen & Fish. Goodwin Procter counsel Anthony Medaglia in Boston serves as general counsel to Ezenia.

CDC

Business management software maker CDC filed for bankruptcy in Georgia on October 4 after losing a lawsuit in September with Evolution Capital Management, which a New York state court awarded a $65.4 million judgment to be paid by the debtor.

Represented by New York's Satterlee Stephens Burke & Burke, Evolution sued CDC in 2009 seeking principal of $41.2 million plus interest on notes it had bought in the company, Bloomberg reports. CDC, a leading developer of online games in China, listed $377.4 million in assets against $250.2 million in debt in its bankruptcy filing this week.

James Cifelli, a name and managing partner at Atlanta's Lamberth, Cifelli, Stokes, Ellis & Nason, is serving as lead Chapter 11 counsel to CDC, which is based in both Atlanta and Shanghai. The firm has yet to file billing statements with the bankruptcy court.

According to a list of CDC's 20 largest unsecured creditors, the company owes more than $1.1 million in legal fees to 12 firms: Wilmer Cutler Pickering Hale and Dorr ($251,485); Fisher & Phillips ($247,000); Oakland's Brown Eassa & McLeod ($185,520); Paul Hastings ($179,635); Cupertino, California–based California Business Law ($85,497); New York's Olshan Grundman Frome Rosenzweig & Wolosky ($74,544); New York's Fensterstock & Partners ($42,668); Covington & Burling ($38,228); the piece of Atlanta's Chorey, Taylor & Feil that is now part of Barnes & Thornburg ($14,899); New York's Ellenoff Grossman & Schole ($14,557); Atlanta's Coleman Talley ($1,194); and Kasowitz Benson Torres & Friedman ($835).

Open Range Communications

Solyndra isn't the only government-backed company to slip into bankruptcy in recent weeks. Open Range Communications—a privately held, Greenwood Village, Colo.–based provider of rural broadband Internet service—filed for bankruptcy in Delaware on October 6 having failed to repay $73.5 million in federal loans, according to The Denver Post.

Approved for a $267 million loan from the U.S. Department of Agriculture during the last days of the Bush administration, Open Range only received about $78 million of that sum. The company, which lists assets of $114 million against liabilities of $110 million in its Chapter 11 filing, plans to sell those assets or liquidate its operations.

Norman Pernick and Marion Quirk with Cole, Schotz, Meisel, Forman & Leonard in Wilmington are serving as lead bankruptcy counsel to Open Range. The firm has not yet filed billing statements with the bankruptcy court.

According to a list of Open Range's 30 largest unsecured creditors, the company owes $370,490 to Drinker Biddle & Reath and $335,000 to Latham & Watkins. Public records show that Drinker Biddle provided government affairs and regulatory advice to Open Range, while Latham advised on a private equity investment in the company.

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