Furr's Supermarkets, Inc.

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
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06/13/06
Furr's Supermarkets, Inc.
01-10779
Memorandum Opinion In Support of Order Approving Consulting Agreements with
George Golleher and Greg Mays and Transition Agreement with Thomas Dahlen .
Received on: 2001-06-01 08:47:11.000
2001-06-01 08:47:11.000
2001-06-01 00:00:00.000
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1 The final understanding on the Solomon engagement is to
be reflected in a revised engagement letter to be submitted by
Messrs Davis and Thuma (for the UCC and the Debtor
respectively), which contains concessions negotiated by the
UCC. The revised engagement letter will also address a number
of the objections raised by the UST. The revised engagement
letter should be filed as a separate exhibit in the
“pleadings” file in this case.
Page 1 of 15
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
FURRS SUPERMARKETS, INC.
Debtor. No. 11-01-10779 SA
MEMORANDUM OPINION IN SUPPORT OF ORDER
APPROVING CONSULTING AGREEMENTS WITH GEORGE GOLLEHER
AND GREG MAYS AND TRANSITION AGREEMENT WITH THOMAS DAHLEN
On 22 May 2001 the Court conducted final hearings on the
motion to approve the employment of Peter J. Solomon Co.
(“Solomon”) as the Debtor’s investment banker (doc. 185) and
the motion to engage the services of George Golleher, Greg
Mays and Thomas Dahlen (doc. 295), and on the written and oral
objections to both those motions. This memorandum opinion
addresses the latter motion (the “retention” motion). The
Solomon motion will be addressed upon receipt of the final
version of the Solomon engagement letter.1
Present at the hearing were Robert H. Jacobvitz and
Richard Levin for the debtor in possession (“Debtor”,
“company” or “DIP”), William F. Davis and I. William Cohen for
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Page 2 of 15
the Unsecured Creditor Committee (“UCC” or “Committee”), Paul
M. Fish for Heller Financial as lender and as agent for other
secured creditors, Ronald Andazola for the United States
Trustee (“UST”), Jennie Deden Behles for Metropolitan Life
Insurance Company, and Mr. Craddock from Desert Feather, Inc.,
a New Mexico corporation and a creditor. In addition, Michael
J. Cadigan filed a brief in opposition to the retention motion
on behalf of New Mexico Beverage Company, Inc., Southern Wine
& Spirits of New Mexico, Inc. and National Distributing, Inc.
This Court has jurisdiction of the parties and the
subject matter pursuant to 28 U.S.C. §§1334 and 157, this is a
core proceeding pursuant to 28 U.S.C. §157(b)(2)(A), and these
are findings of fact and conclusions of law entered pursuant
to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
The Golleher and Mays portion of the retention motion
seeks to approve compensation arrangements to have Golleher
and Mays essentially take over and continue with direct
management of the DIP, and the Dahlen portion seeks to approve
compensation arrangements in view of his leaving the DIP. The
Court will approve the motions for the most part in the form
proposed to the Court.
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2 In fact, in In re Patriot Aviation Services, Inc., No.
11-98-16029 SR (United States Bankruptcy Court, D.N.M.), this
Court distinguished how the business judgment rule functions
outside a chapter 11 reorganization (examination of the
decision-making process) versus inside the reorganization
(examination of the decision-making process plus the probable
effect on the chapter 11 case). Findings of Fact, Conclusions
of Law, and Memorandum Opinion in Support of Order Denying
Debtor’s Motion to Assume Contract with Kiwi International
Page 3 of 15
BUSINESS JUDGMENT RULE
By ruling on the Golleher, Mays and Dahlen motions, the
Court is not denying the DIP’s position that these
arrangements are ordinary course of business and therefore do
not need Court approval; rather, the Court is simply bypassing
that question and moving to the “merits” of the contracts and
the business judgment rule.
With respect to all these motions, including the
Golleher, Mays and Dahlen motions, the DIP argues that the
“business judgment” rule is applicable, in either version as
articulated by the DIP: (a) the “Delaware” formulation of the
rule that says that the substance of the action cannot be
challenged as long as the corporation went through the normal
and appropriate decision-making process, and (b) the
formulation that on the merits these agreements are well
within the ordinary range of decisions management is allowed
to make in bankruptcy cases. The Court questions whether the
“Delaware rule” is appropriate in the bankruptcy context.2 As
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Holdings, Inc. and Ordering Rejection of Contract (doc. 91),
at 6-7, entered February 5, 1999. The Court’s opinion is
available on the Court’s chambers website at
www.nmcourt.fed.us.
3 Lubrizol Enterprises, Inc. v. Richmond Metal Finishers,
Inc. (In re Richmond Metal Finishers, Inc.), 756 F.2d 1043,
1047 (4th Cir. 1985), cert. den. sub nom. Lubrizol Enterprises,
Inc. v. Canfield, 475 U.S. 1057 (1986) (upholding DIP’s
rejection of contract). In fact, this “other” standard is
little different than the standard as articulated by the
Delaware Supreme Court; e.g., Cheff v. Mathes, 199 A.2d. 548,
555, 41 Del. Ch. 494, 506 (1964) (citation omitted) (“It is
important to remember that the directors satisfy their burden
by showing good faith and reasonable investigation; the
directors will not be penalized for an honest mistake of
judgment if the judgment appeared reasonable at the time the
decision was made.”); Sinclair Oil Corporation v. Levien, 280
A.2d 717, 720 (Del. 1971) (“A board of directors enjoys a
presumption of sound business judgment, and its decisions will
not be disturbed if they can be attributed to any rational
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orally argued by the DIP, the rule is that once the board of
directors has followed the appropriate procedures for making a
decision (including assuring that none of the directors making
the decision has an personal interest in the decision being
made), the decision is not subject to question. The “other”
version (or perhaps merely another version) of the business
judgment rule, more commonly used in bankruptcy cases and (at
least marginally) more demanding on the debtor in possession,
requires the Court to approve the DIP’s contract decision
unless it is “so manifestly unreasonable that it could not be
based on sound business judgment, but only on bad faith, or
whim or caprice.”3 Without ruling on which standard is more
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business purpose. A court under such circumstances will not
substitute its own notions of what is or is not sound business
judgment.”) Compare Unsecured Creditors Committee v. General
Homes Corporation (In re General Homes Corporation), 199 B.R.
148, 151-52 (S.D. Tx. 1996) (business judgment rule applies to
solvent corporations but “has no consequence in the context of
a conservatorship.”) While the facts of the General Homes case
may well have justified the court’s refusal to approve the
DIP’s compensation agreements with its officers, see below at
page 7, the blanket statement about the inapplicability of the
business judgment rule to bankruptcy cases is simply
incorrect.
Page 5 of 15
appropriate, the Court finds that the decisions to contract
with Golleher, Mays and Dahlen under the proposed terms are
not manifestly unreasonable – indeed, are well within the
bounds of reasonableness -- and therefore should be approved
essentially as proposed.
GOLLEHER AND MAYS
The retention motion as amended sought approval for
agreements with George Golleher (Debtor’s Exhibit 2) and
Gregory Mays (Debtor’s Exhibit 3). The fees to be paid
pursuant to these agreements are in addition to the fees paid
to Golleher and Mays as board members. (They had been serving
as board members for some months prior to the filing of the
petition. Board members receive $16,000/year, plus $1,000 for
each board meeting they attend. Board meetings are held about
once a month.)
The Golleher agreement provides for a signing bonus of
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4 Debtor’s brief in support of the motion filed May 4,
2001, at 3 (doc. 424) says that a $125,000 signing bonus will
be shared by the two of them; the agreements themselves say
that each will receive $125,000 on signing. An errata notice
(doc. 435) corrects the error in the brief.
Page 6 of 15
$125,0004, a monthly “service fee” (for services rendered;
Golleher is not an employee of the Debtor) of $25,000,
reimbursement of expenses, indemnification and a “Success
Bonus” (1/3 of the success Bonus goes to Mays) of a minimum of
$750,000 and a maximum of somewhere in the neighborhood of
$5,000,000. Note: the $750,000 essentially constitutes
compensation that is paid at the end of the process rather
than at the start of the engagement; and to the extent that
the Success Bonus approaches $5,000,000, it means that there
will have been a substantial return for the unsecured
creditors.
The Mays agreement provides for a signing bonus of
$125,000, a monthly “service fee” (for services rendered; Mays
also is not an employee of the Debtor) of $25,000,
reimbursement of expenses, indemnification and a “Success
Bonus” (2/3 of which goes to Golleher) of a minimum of
$750,000 and a maximum of somewhere in the neighborhood of
$5,000,000.
The UST argues that the approval of Golleher and Mays
implicates §327. The DIP argues otherwise. Although the
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5 In re Seatrain Lines, Inc., 13 B.R. 980 (Bankr. S.D.N.Y.
1981); In re Park Ave. Partners Ltd. Partnership, 95 B.R. 605
(Bankr. E.D. Wis. 1988); In re D’Lites of America, Inc., 108
B.R. 352 (Bankr. N.D. Ga. 1989).
Page 7 of 15
Court does not find altogether persuasive the various
rationales employed in the three cases cited by the DIP5, the
Court does not believe that Golleher and Mays need to meet the
requirements of §327. The DIP needs to be able to “say who it
is”, and it does that by saying who is going to make the
decisions for it and give the orders to the professionals. (A
corollary is that courts usually do not interfere in contests
to determine the make up of the board of directors who are the
ones who appoint management.) In other words, the DIP gets to
determine who will be its executive officers even if they are
called “crisis managers”. Note that the DIP brief describes
the duties of Golleher and Mays as to “serve, jointly, as the
debtor’s chief executive” (although they are called “Non
Executive Chairman” and “Non Executive Vice Chairman”
respectively in their contracts).
Aside from the §327 issue, it does make sense for the DIP
to seek approval of these agreements with Golleher and Mays
since it is certainly possible that a DIP could abuse the
process of compensating its executives. See, e.g., Unsecured
Creditors Committee v. General Homes Corporation (In re
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Page 8 of 15
General Homes Corporation), 199 B.R. 148 (S.D. Tx. 1996)
(during “gap” period following filing of involuntary petition
and entry of order for relief, board members substantially
increased their compensation as officers without justification
and without complying with corporate requirements). If a DIP
does not seek approval, the creditors may be left only with
drastic remedies such moving to convert or appoint a trustee.
Limiting creditors to those remedies is not an efficient way
to run the system.
The roles of Golleher and Mays, especially the former who
has the duty, among others, of seeking buyers for the company,
do not duplicate Solomon’s role, if for no other reason than
there is a distinction between the professional, who offers
advice but ultimately is charged with obedience, and the
client (in this case, Golleher speaking for the corporation),
who gives the instructions or orders. And this is the fact
despite the characterization of Golleher and Mays as “crisis
managers”.
Given the evidence presented at the hearing, it would be
hard to argue that employing the services of Golleher and Mays
is not one of the better decisions the DIP has made. Both of
them have substantial successful experience in the retail
grocery business and in rescuing insolvent and cash-flow
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starved companies. Upon their taking the helm for the DIP,
they discovered that the company had exhausted its post
petition DIP financing and was continuing to lose money, and
had no strategy to change that situation. Golleher and Mays
immediately changed management’s operational focus from one
that was “business as normal” (the court’s description, not
the one used by the witnesses) for a solvent company with a
three-year plan that included potential expansion, to a focus
on reversing the negative cash flow of the company, repairing
the company’s damaged credibility with its secured and
unsecured creditors, and trying to salvage and add value to
the company for a potential sale (more likely) or
reorganization (less likely). A measure of their success so
far is that even though the company is in default of five of
the DIP financing covenants, the secured creditors have not
enforced whatever rights they have to put the company’s assets
up for auction. (Of course, the Court assumes that the
secured lenders have determined that it is in their own best
interest not to put the company’s assets up for auction
despite the violation of the five covenants, so that the
Debtor’s continued retention of its assets so far is not due
solely to the charisma of Messrs Golleher and Mays or the
benevolence of the lenders.)
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Page 10 of 15
DAHLEN
The retention motion as amended also asked to pay Dahlen
a total of $30,000 at $5,000 per week for 6 weeks (immediately
following his resignation on April 6, 2001), and to release
Dahlen from the non-compete agreement contained in his
contract of February 9, 2001. The $30,000 (negotiated by
Thomas Sikorski for the board down from $130,000) and the
release are for transition consulting as needed by DIP and for
not recruiting any of DIP’s management to leave. The
Transition Agreement between Thomas Dahlen and Furr’s
Supermarkets, Inc. dated March 26, 2001 (Debtor’s Exhibit 1)
(two days before Golleher and Mays took over on March 28)
provides that he be available, not that he necessarily be
consulted. The testimony was that he had been available
albeit he was consulted very little.
However, as UCC counsel elicited on cross examination,
there is nothing in Debtor’s Exhibit 1 which talks about not
recruiting the Debtor’s management people, and the written
agreement has an integration paragraph. The Debtor’s
testimony (presented through board member Sikorski) was that
the non-recruit agreement was part of the deal, although
Sikorski could not say how long the non-recruit portion of the
deal was to last. Golleher and/or Mays testified that there
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Page 11 of 15
were good upper and mid-level management people in place at
Furr’s, so this provision is of some importance. Dahlen was
not at the hearing to aid in the prosecution of the motion
(the Court assumes however that he continues to be in favor of
the agreement) or to fill in any details. Contract law in New
Mexico provides that oral testimony can be supplied not only
to clarify ambiguities (although not to change the terms of
the contract), but also to confirm that the contract as
written correctly reflects what the agreement of the parties
was. C.R. Anthony Company v. Loretto Mall Partners, 112 N.M.
504, 507, 511, 817 P.2d 238, 241, 245 (1991). In this case,
the only testimony about what the contract was supposed to
provide came from the Debtor (through Sikorski), who stated
that part of the deal was the non-recruit provision. In
consequence, the Court makes its decision based on the
assumption that the agreement was intended to include a non-
recruit provision, albeit without making any determination of
how long the provision was to be effective. (Given that the
intention is to have the Debtor reorganized by the end of the
year, the provision would presumably last at least that long,
but the Court makes no ruling on this point.) Based on this
assumption, the Court approves the contract with Dahlen,
including the payment to Dahlen of the $30,000. Having Dahlen
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Page 12 of 15
available during the transition to provide information and
other guidance as needed, as Golleher and Mays had to hit the
ground running, is a legitimate purpose for the corporation to
spend money, even when it is short of cash as it is in this
chapter 11 proceeding. The same goes for a non-recruit
position, especially when the DIP apparently needs all the
experienced management it can retain. These purposes and
expenditures are clearly within the realm of the board’s
business judgment to which this Court should defer.
Mr. Craddock from Desert Feather, Inc. raises a
legitimate concern: why are these people getting paid a lot of
money when the unsecured creditors are currently going unpaid,
and in fact may not get paid anything at all and may
themselves end up in bankruptcy as a result? The basic answer
is that the only hope for the unsecured creditors to get paid
anything is if the debtor survives long enough either to
reorganize itself or, as appears more likely, to sell
sufficient assets for enough money to pay some percentage of
the unsecured claims. Golleher and Mays testified that their
task in good part is to get the company back to a positive
cash flow and at the same time put together a deal that will
result in as much going to the unsecured creditors as is
possible within the constraints imposed by the current
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Page 13 of 15
situation in which the Debtor finds itself; their. So the
hiring of Golleher and Mays works directly to the benefit of
the unsecured creditors. Their hiring is necessary because
the company continues to find itself in a difficult position,
as the testimony made clear, although it also appears from the
testimony that it is better off than it was when Golleher and
Mays took the helm on March 28. In any event, the money spent
currently on Golleher and Mays would not go to paying
unsecured debt.
With respect to the Dahlen agreement, as frustrating as
it may be for the unsecured creditors to see Dahlen receive
payment after what they may consider to be a turn at the helm
that plunged this Debtor into the difficulties it is now
experiencing, it is still the case that the board determined
that there was some value to having Dahlen available for
information, consultation, etc., and to ensure that he would
not take members of the Debtor’s management with him. Even
assuming for purposes of argument that Dahlen was responsible
for the Debtor’s near demise (and the Court is not making that
assumption in fact), that is essentially “water under the
bridge”, and the Debtor apparently has recognized that fact
and is moving forward. The Court should not and will not
overrule that judgment. It is important to note as well that
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Page 14 of 15
while the amount involved, $30,000, is a lot of money for a
small business, in the larger scheme of this case it is a
relatively small amount, and it is important to let the board
make the decisions it needs to in order to keep the Debtor on
the track to improving financial health and ultimate payment
to the creditors.
CONCLUSION
For the foregoing reasons, the agreements between the DIP and
(1) Golleher and Mays, and (2) Dahlen are approved. Any
objections not in accord with this ruling are overruled. The
Court will enter an order in conformity with this opinion.
James S. Starzynski
United States Bankruptcy Judge
I hereby certify that on June 1, 2001, a true and correct copy
of the foregoing was either electronically transmitted, faxed,
delivered, or mailed to the following:
Robert H. Jacobvitz
500 Marquette NW #650
Albuquerque, NM 87102
Richard Levin
300 South Grand Avenue
Los Angeles, CA 90071-3144
William F. Davis
PO Box 6
Albuquerque, NM 87103
I. William Cohen
100 Renaissance Center #3600
Detroit, MI 48243
Paul M. Fish
P. O. Box 2168
Albuquerque, NM 87103
Ronald Andazola
Assistant U.S. Trustee
PO Box 608
Albuquerque, NM 87103-0608
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Page 15 of 15
Jennie D. Behles
PO Box 849
Albuquerque, NM 87103
Michael J. Cadigan
6400 Uptown Blvd. Suite 570W
Albuquerque, NM 87110
Mark S. Craddock
Desert Feather, Inc.
P.O. Box 1565
Artesia, NM 88211-1565
Mary B. Anderson
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