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ART VAN: Counsel Did Not Violate Wells Fargo Waiver, Court Says

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Chief Bankruptcy Judge Christopher S. Sontchi overrules the objection of the United States Trustee to the retention application of Benesch, Friedlander, Coplan & Aronoff LLP as bankruptcy counsel to Debtors Art Van Furniture, LLC and its affiliates.

At issue is whether the Court should deny the application under Bankruptcy Code Section 327. The U.S. Trustee argued that Benesch violated its conflicts waiver with Wells Fargo, N.A. when, after the Debtors defaulted under the Interim Cash Collateral Order, Benesch worked with Wells Fargo to develop “post-suspension restructuring alternatives.” Benesch opposed the Objection on the grounds that its post-default efforts and all necessary aspects of the Chapter 11 proceeding fell within the scope of its conflicts waiver.

On March 4, 2020, four days before the Debtors’ bankruptcy filing, Benesch received a $250,000 retainer from the Debtors. That same day, Wells Fargo granted specific consent for Benesch to represent Art Van Furniture in connection with the bankruptcy proceedings. On March 11, the Court entered the Interim Order (I) Authorizing the Debtors to Use Cash Collateral, (II) Granting Adequate Protection to the Prepetition Secured Parties, (III) Modifying the Automatic Stay, (IV) Scheduling a Final Hearing, and (V) Granting Related Relief.

On March 16, 2020, the Debtors submitted an application for entry of an order authorizing the employment and retention of Benesch as bankruptcy counsel to the Debtors. On the same day, Benesch filed the Declaration of Jennifer Hoover in support of the Application and disclosed Wells Fargo as a current client of Benesch and the existence of the Waiver. On March 19, pursuant to paragraph 21 of the Interim Cash Collateral Order, Wells Fargo issued a Notice of Events of Default, which terminated the Debtors’ right to use Cash Collateral, other than as permitted during the Remedies Notice Period (which expired on April 6). Following these events, Benesch continued to work with advisors for Wells Fargo and the Official Committee of Unsecured Creditors to develop “post-suspension restructuring alternatives.” These efforts were unsuccessful and on April 3, the Debtors filed a motion to convert the Chapter 11 cases to cases under Chapter 7 of the Bankruptcy Code.

On April 6, 2020, the U.S. Trustee filed an objection to the Debtors’ Application for approval of Benesch’s hiring. On this same day, Benesch filed a supplemental declaration in which the Debtors disclosed additional conflict waivers obtained from PNC and KKR. The Court also entered an order on April 6 converting the Debtors’ cases to Chapter 7.

On April 24, 2020, Benesch filed a reply and a second supplemental declaration of Ms. Hoover in support of the Application. On May 29, 2020, the Debtors filed a third supplemental declaration of Ms. Hoover along with the declaration of Michael J. Barrie in support of the Applications.

On June 3, 2020, the Court held a hearing in connection with the Application. The U.S. Trustee is the only party that objected to the Application.

At all relevant times, Benesch represented the Debtors in these Chapter 11 cases and Wells Fargo, the Debtors’ ABL Lender, in unrelated matters. As a result, Benesch obtained conflict waivers from both the Debtors and Wells Fargo. Paragraphs three and four of the Wells Fargo Waiver form the core of the disagreement between the parties. These paragraphs contain the terms “Dispute” and “Transaction,” which have been defined in and expressly incorporated from the Wells Fargo Conflicts Policy.

Wells Fargo’s Conflicts Policy defines “Dispute” as “[a] pending, threatened, or likely litigation, arbitration, bankruptcy, adversary proceeding, contested motion, discovery, discovery, alternative dispute resolution process or loan workout, including without limitation, any foreclosure or collection action.” It defines “Transaction” as “[a]ny matter which is not a Dispute.”

The U.S. Trustee contends Benesch represented the Debtors in workout or restructuring efforts following the Debtors’ March 19 default under the Interim Cash Collateral Order. The U.S. Trustee argues that this representation is beyond the scope of the Waiver, which purportedly “appears not to allow Benesch to represent the Debtors in a dispute arising out of a transaction . . . or in a workout or restructuring of any related transaction in the context of a default.”

Benesch insists that it is compliant with the Bankruptcy Code Section 327′s requirements for the retention of professionals. The firm asserts that it neither holds nor represents an interest adverse to the Debtors or their estates. Benesch asserts that at no point during the process of obtaining consent did Wells Fargo ever indicate “that the waiver would not encompass the adverse representation of the Debtors during their chapter 11 cases in matters relating to the Debtors’ access to and use of cash collateral or other matters likely to arise in the course of Benesch’s representation of the Debtors as their general bankruptcy counsel.” Benesch contends that the Waiver encompassed “all necessary aspects” of the Art Van engagement, which the Waiver defined as “a liquidation of [Art Van Furniture Inc.], including a potential Chapter 11 Bankruptcy Proceeding. As such, it argues that, under the Waiver, its post-default cash collateral negotiations are a “Dispute” and, therefore, that the final sentence of paragraph three — which concerns “the Transaction” — is inapplicable. In the alternative, the firm argues that even if the “Art Van Liquidation” qualified as “the Transaction,” the broad definition of its engagement “necessarily includes everything involved ‘in a potential Chapter 11 Bankruptcy Proceeding.’”

The Court does not find that the U.S. Trustee has met its burden in connection with its objection to Benesch’S hiring as bankruptcy counsel to the Debtors. The Court does not find that Benesch violated the Waiver when, after the Debtors defaulted under the Interim Cash Collateral Order, Benesch negotiated with Wells Fargo and other parties in interest to develop “post-suspension restructuring alternatives.” More generally, the Court does not find sufficient evidence in the record of either an actual conflict or a potential conflict that would require the disqualification of Benesch’s Application. Consequently, Benesch’s retention application will be granted. Benesch is directed to submit a proposed form of order under certification of counsel.

The bankruptcy case is in re: ART VAN FURNITURE, LLC, et al., Chapter 11, Debtors, Case No. 20-10553 (CSS) (Bankr. D. Del.).

A copy of the Court’s Opinion dated July 21, 2020 is available at https://bit.ly/39AvyWC from Leagle.com.

BENESCH, FRIEDLANDER, COPLAN & ARONOFF LLP Gregory W. Werkheiser — gwerkheiser@beneschlaw.com — Michael J. Barrie — mbarrie@beneschlaw.com — Jennifer R. Hoover — jhoover@beneschlaw.com — Kevin M. Capuzzi — kcapuzzi@beneschlaw.com — Kate Harmon , John C. Gentile , Wilmington, DE.

ANDREW R. VARA , UNITED STATES TRUSTEE, Linda R. Richenderfer Trial Attorney Office of the United States Trustee, Wilmington, DE.

About Art Van Furniture

Art Van Furniture, LLC, and 12 affiliates sought Chapter 11 protection (Bankr. D. Del. Lead Case No. 20-10553) on March 8, 2020. Art Van was estimated to have $100 million to $500 million in assets and liabilities as of the bankruptcy filing.

Art Van was a brick-and-mortar furniture and mattress retailer headquartered in Warren, Michigan. At the time of filing, the Company operated 169 locations, including 92 furniture and mattress showrooms and 77 freestanding mattress and specialty locations. The Company did business under brand names, including Art Van Furniture, Pure Sleep, Scott Shuptrine Interiors, Levin Furniture, Levin Mattress, and Wolf Furniture.

The Company was founded in 1959 and was owned by its founder, Art Van Elslander, until it was sold to funds affiliated with Thomas H. Lee Partners, L.P. in March 2017. As part of this transaction, THL acquired the operating assets of the Company and certain real estate investment trusts, who closed the transaction alongside THL, acquired the owned real estate portfolio of the Company, and entered into long-term leases with Art Van. The proceeds from the sale-leaseback transaction were used to fund the purchase price paid to the selling shareholders.

The Hon. Laurie Selber Silverstein is the case judge.

The Debtors tapped Benesch, Friedlander, Coplan & Aronoff LLP as counsel. Kurtzman Carson Consultants LLC served as the claims agent.

At the Debtors’ behest, the Bankruptcy Court entered an order on April 6, 2020, converting the Debtors’ cases to Chapter 7.

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