$400M Case: Trustee Claims Instant Pot-Maker Defrauded Lenders
In a U.S. Southern District of Texas bankruptcy filing, the Instant Brands trustee accused Cornell Capital of plundering the company through fraudulent transfers.
November 14, 2024 at 04:15 PM
4 minute read
BankruptcyWhat You Need to Know
- The equity owner of Instant Brands is accused of fraudulently plundering company assets, forcing bankruptcy, to enrich itself and co-investors with millions in dividends.
The litigation trustee of The Instant Brands Litigation Trust for creditors who lost more than $400 million is suing the Instant Pot-maker's private equity owner, accusing it of plundering the company.
The lawsuit filed Wednesday, Alan D. Halperin, as Litigation Trustee of the Instant Brands Litigation Trust v. Cornell Capital LLC, will be heard before U.S. Bankruptcy Judge Marvin Isgur of the Southern District of Texas in Houston.
McKool Smith attorneys Kyle Lonergan, Josh Newcomer and James Smith represent the trustee.
"The trustee looks forward to prosecuting this case for the benefit of the unsecured creditors of Instant Brands," Lonergan said.
According to the lawsuit, fund founder Henry Cornell and associated defendants persistently misstated the company's worth and misled lenders to raise a $450 million term loan to illegally fund a $345 million dividend solely for the benefit of Cornell Capital and its investors.
The trustee is demanding a jury trial and asks the court to void the special dividend and other payments to defendants, and seeks recovery of the value of those transfers and an award of not less than $400 million.
Instant Brands and associated companies are represented by Houston-based Haynes Boone attorneys Charles A. Beckham Jr., Kourtney Pickens, Arsalann Muhammad and David A. Trausch. The Haynes Boone counsel have not responded to the complaint or to a request for comment.
Cornell acquired Instant Brands through a subsidiary in March 2019, but soon after found the company overstated its 2018 earnings before interest, taxes, depreciation, and amortization or EBITDA, distorting its valuation, which meant Cornell vastly overpaid for the acquisition, the complaint alleged.
Renegotiations occurred, and by February 2020 Cornell and the sellers of Instant Brand entered a restructuring agreement to reduce the purchase price.
Cornell's subsidiary then filed a claim under their representations and warranties policy alleging a $268 million loss due to Instant Brands' misstated financials, the suit claims.
"Neither the representations and warranties claim, nor the restructuring agreement, were disclosed to the lenders in March 2021 when Instant Brands went to the market to borrow money for a divident recapitalization," the lawsuit alleges.
"Instant Brands management knew there were 'potential issues with integrity of financials' used in the marketing process. Jeff Kist, then corporate controller, even referred to the financials as a 'goddman shit show,'" the suit alleges.
Having allegedly successfully misled investors, Cornell caused Instant Brands to take on the $450 million term loan in April 2021, the suit claims.
Cornell then allegedly used those funds and $100 million of Instant Brands' balance sheet cash, and had Instant Brands issue a $345 million dividend in the same month, it alleges.
Most of the money allegedly went to enrich Cornell and certain co-investors by $200 million, the Instant Brands sellers by $101 million, and the management team by $4 million, the trustee claims.
Halperin also claims there was no independent third party advisor providing a fairness or solvency opinion.
"Instead, after approving the divident, Cornell Capital had the CFO manufacture support in the form of a wholly inadequate and fatally flawed solvency memorandum, which the directors purportedly relied on in a subsequent 17-minuted scripted board meeting ... to re-approve the dividend," the suit alleges.
In the following months, Instant Brands missed all of its projections by a wide margin, yet its chief financial and operating officers allegedly produced unrealistic forecasts, the suit claims. Less than 21 months after the dividend was distributed, the company had allegedly run out of money.
"On January 18, 2023, in breach of its credit agreement, Cornell Capital instructed Instant Brands to transfer substantially all of its tangible assets out of its creditors’ collateral pool into unrestricted subsidiaries and to pledge those assets as collateral to Cornell Capital Partners LP in exchange for a $55 million liquidity infusion in the form of an unfavorable loan," the suit alleges.
That loan was entered into and structured that way because Cornell did not want to provide an equity infusion to an insolvent company, "nor did it want Instant Brands to file for bankruptcy less than two years after the $345 million dividend was issued, which would be voidable under the bankruptcy code’s two year look-back period," the trustee alleges.
Instant Brands filed for bankruptcy in June 2023.
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