MESA, Ariz. -- Megafoods here last week received approval to exit Chapter 11, possibly by late September, after the U.S. Bankruptcy Court in Phoenix accepted a settlement between the chain and Fleming Cos.
onvoting stake in Megafoods' ownership plus other considerations. The settlement was conditionally accepted by the court last week, pending a 20-day period for objections by any unsecured creditors. The court had previously accepted Megafoods' reorganization plan.
However, the bankruptcy judge may require Megafoods to resubmit the reorganization plan to unsecured creditors, William J. White, Megafoods president and chief executive officer, told SN. If the judge does not require that, he is likely to confirm the reorganization plan on Sept. 16, with Megafoods emerging from Chapter 11 a week later, White said. If a revote is required, Megafoods would exit Chapter 11 in mid-October, barring any unforeseen problems, he added.
David Almond, Fleming's senior vice president and general counsel, said in a statement that the settlement terms "are in the best interests of Fleming's shareholders, and we will avoid the expense of further litigation. Fleming shareholders receive more value from this settlement than if Fleming had prevailed in court and Megafoods did not reorganize."
Highlights of the settlement included the following:
Fleming will retain Megafoods' $11 million deposit, which the retailer had sought to have returned.
Fleming, Megafoods' only secured creditor, will waive its secured and unsecured claims and pay Megafoods' creditors $2.5 million in exchange for furniture, fixtures and equipment from 17 Megafoods and Handy Andy stores and two warehouses. In return, Megafoods and Handy Andy agreed to lease back the furniture, fixtures and equipment in 14 of the stores, with Fleming getting 10% of the chain's common stock (but no voting rights) in the reorganized Megafoods. The rights to an additional $1.12 million -- from the sale of inventory by Kroger Co., Cincinnati, which formerly owned one of the Handy Andy stores -- are still in dispute, a Fleming spokesperson told SN last week. Although White said Fleming would be paying that sum to Megafoods, the Fleming spokesperson said the distributor has given up claim to the money, and it will be up to the bankruptcy court to decide whether Megafoods, Kroger or a creditor is entitled to receive it.
Fleming will be fully released from all liability plus any other claims or litigation. Pending litigation by Megafoods against Fleming will be dismissed with prejudice.
Fleming demanded and retained the right to pursue legal claims alleging fraud and negligent misrepresentation against Dean Miller, Megafoods' founder and former chairman and president, and Jack Walker, its former chief financial officer, and in any other nondebtor third-party litigation that could arise. Almond said Fleming plans to "vigorously pursue" its claims against Miller and Walker as well as "to continue to defend against the remaining wrongful and spurious allegations in their lawsuit against Fleming." Walker told SN last week the suit is expected to come to trial early next year in Arizona Superior Court.
Fleming's lease obligations for certain Megafoods stores will be protected by an irrevocable letter of credit.
Fleming will take a charge of about $2 million related to the settlement -- "a small amount relative to the costs of continued litigation," Almond said. After last week's court hearing, Fleming said it did not trigger Megafoods' financial collapse. "Fleming was not the cause of Megafoods' bankruptcy, and this settlement agreement does not change this position. We accept no responsibility for Megafoods' bankruptcy," Almond stated.