C & K Market DIP loan fee claim denied administrative expense status

By Caroline Salls

Pittsburgh, April 9 - C & K Market, Inc. lender Sunstone Business Finance, LLC's motion for allowing its $250,000 break-up fee related to a debtor-in-possession financing agreement as an administrative expense was denied Tuesday by the U.S. Bankruptcy Court for the District of Oregon.

The court also denied objections to Sunstone's break-up fee claim filed by the company's mezzanine lenders and official committee of unsecured creditors.

Anticipating the need for reorganization, the opinion filed Tuesday said C & K began negotiations in the summer of 2013 with pre-bankruptcy lender US Bank for a financing package to be put in place when it filed Chapter 11 bankruptcy.

By fall 2013, the company determined that it needed to develop an alternative source of post-bankruptcy financing, and approached several other lenders.

C &K's chief executive officer Edward Hostmann argued that development of an additional source for DIP financing was necessary because the company wanted an alternative lender in order to gain leverage in its negotiations with US Bank, and the company felt it should have a source of funds to operate in bankruptcy if it was forced to file Chapter 11 without a deal in place with US Bank.

One of the terms of the financing deal worked out with Sunstone was payment of a $250,000 break-up fee if the loan facility was not closed because of C & K's election to seek other financing.

US Bank negotiations

By the time the Sunstone term sheet was signed, C & K said it had made substantial progress in negotiations with US Bank, including establishing an interest rate well below the one to be provided by Sunstone.

C & K told US Bank it had already entered into a term sheet with another lender, but did not reveal the terms of that agreement.

According to the order, US Bank said unless C & K went with its DIP facility, the company would be required to obtain a court order subordinating US Bank's lien to that of the new lender and an order allowing the company to use US Bank's cash collateral, or both.

"[US Bank] made it clear that the attempt would be hotly contested, at great expense to all concerned," the opinion said.

C & K subsequently received court approval to obtain DIP financing from US Bank, and the break-up fee came due when the final order was entered.

Sunstone filed a claim and a motion to allow the $250,000 claim as an administrative expense. The committee, mezzanine lenders and US Bank objected, both to the administrative treatment and the claim itself.

Court ruling

"The term sheet represents an enforceable contract subject to a condition subsequent that the bankruptcy court either approve the Sunstone DIP facility, in which case Sunstone would lend debtor up to $7 million on the terms approved by the court, or enter an order approving a DIP facility from another lender, in which case the break-up fee would be due," judge Frank R. Allen III said in Tuesday's ruling.

"The break-up fee is a prepetition claim against the estate."

Allen also said the Bankruptcy Code allows as an administrative expense to a creditor "the actual, necessary expenses" incurred by the creditor in making a substantial contribution in a bankruptcy case, but the break-up fee is not an actual expense of Sunstone and is not an expense at all.

The judge said Sunstone's actual expenditures were repaid before the bankruptcy filing.

Even if he could find that costs associated with pre-bankruptcy services by a creditor that make a substantial contribution in a later-filed bankruptcy could be given administrative expense priority, Allen said it would not help Sunstone in this instance.

"Any benefit provided by Sunstone, if any, was too indirect and intangible to qualify for priority treatment," the judge said.

C & K, a Brookings, Ore.-based supermarket company, filed for bankruptcy on Nov. 19. The Chapter 11 case number is 13-64561.

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