Fees, Liability at Issue in Southeastern Bankruptcy Case

Having received unanimous support from voting creditors, Southeastern Grocers is hurtling toward a lickety-split exit from Chapter 11 bankruptcy protection but still faces a handful of potential snags, including objections from the Securities and Exchange Commission (SEC) and the federal trustee overseeing the case.

The SEC and U.S. trustee objections are among 20 separate grievances expected to be considered in a confirmation hearing next week before Judge Mary F. Walrath in Wilmington, Del.

In a court filing this week, Southeastern—parent of the Winn-Dixie, Bi-Lo, Harveys and Fresco Y Mas banners—said “only a handful of issues remain contested” with respect to its plan, and that many of those are limited objections by landlords that may be adjourned or resolved prior to the hearing.

The company may face a more considerable hurdle from the SEC and Trustee objections, however.

Both the trustee, Andrew R. Vara, and the SEC separately argued that the plan too broadly exculpates and releases liability for certain nondebtors in violation of the U.S. Bankruptcy Code. The trustee further argued the plan does not adequately provide for unsecured claims and that it awards professional fees for various associated parties—including Southeastern and its parent company, Lone Star Holdings—“without a predicate showing of substantial contribution.”

Related:Southeastern Files Chapter 11

“Unless these problems are addressed in the confirmation order, confirmation should be denied,” Vara said in a filing.

Southeastern filed a “prepackaged” Chapter 11 case March 27 with the goal of having a reorganization plan confirmed within 90 days. The plan would transfer about half of the the chain’s $1 billion in debt to new equity to be taken over by current noteholders. Southeastern negotiated the agreement prior to filing and said this week that 100% of its debtholders agreed to the plan.

It argued in a filing this week that the SEC and trustee objections be overruled.

Burt P. Flickinger III, managing director of Strategic Resource Group, has been an outspoken critic of the the handling of recent retail bankruptcies, including a prior Chapter 11 of Bi-Lo Holdings, a predecessor of Southeastern also controlled by Lone Star.

In general, Flickinger told WGB, surviving entities are left weaker than necessary following the Chapter 11 in part due to high professional fees. The Southeastern case, he said, “was a continuation of the same cast of characters and the same old playbook. No one is fixing anything.”