Everyone in Massachusetts is a fan of Friendly’s Ice Cream. Founded in the 1930s, it has been a family establishment throughout the Bay State for generations. Now, however, the company is mired in federal bankruptcy court and the new owner stands accused of fraud regarding the treatment of their pension obligations.
Here’s what’s going on.
The current owner of the Friendly Ice Cream Corporation is a company based in Florida called Sun Capital Partners. They are a private equity firm. They filed a Chapter 11 bankruptcy www.neilburnslaw.com in October, 2011. This closed the remaining 60 stores and put over 1,200 workers into unemployment. Friendly’s lists $76.4 million in assets and $181.4 million in liabilities. $105 million of this is underfunded pension obligations.
In a bankruptcy court filing, the federal Pension Benefit Guarantee Corporation, filed an objection to the proceedings, claiming that Sun Capital Partners committed fraud in their transactions with respect to Friendly pensions. If not stopped, the FPGC says 6,000 former employees will lose pension rights. Here’s what they allege: before putting Friendly into Chapter 11 reorganization, the PBGC says Sun put the assets of Friendly’s into one corporate entity. Next, they filed bankruptcy, attempting to get rid of the obligations on the pensions. Then, another Sun entity made a bid for Friendly’s assets. If they win the bid, they will have bought their own company without the $100 million in pension obligations they owed before the bankruptcy!
The federal Pension Benefit Guarantee Corporation is looking at the fact that the transfers occurred just prior to filing for bankruptcy. Experts claim it does not pass the bankruptcy “smell” test, especially because different entities of Sun were involved.
We are not corporate bankruptcy specialists, however, we did represent one party in one aspect of another ice cream related Boston bankruptcy matter: Brigham’s.
The message here is to both plan for bankruptcy and to deal honestly with creditors before bankruptcy. The Chapter 7 personal bankruptcy rules are clear. For example, payments to creditors within a certain period of time prior to filing bankruptcy in Massachusetts are scrutinized. If you pay off a loan to your brother in law the week before you file for protection against other creditors, it will likely be cited as fraudulent. We work hard to teach all of our Boston bankruptcy clients to work within the rules.
Another common example is with respect to real estate. Too many folks do not understand joint ownership. When your parents put you on the deed to their home on the Cape, you now own the house. You can file a Petition to Partition and force the sale. You may be appalled at the notion of selling your parents home out from under them, but the fact that you have the right to do so gives the bankruptcy trustee the right to also. Thus, if your family did have this situation, you would have to plan for it before filing. We can help you do that. The good news, with respect to real estate, is that the Homestead Act can protect the equity in the home you live in, up to $500,000.
Finally, by way of further example, back to pensions and ice cream – most pensions are protected under the bankruptcy statute. Before we file, however, we check to be sure your pension is protected, and secure the proper documents to prove this to the bankruptcy trustee.