Live Oak Bank filed an objection today in the Orange County Superior Court of California, contesting the jurisdiction of the court to relieve debts owed by Modern Times Beer to Live Oak, as well as the sale of assets at Modern Times’ flagship Anaheim location, as part of the sale of the San Diego craft brewery.
Modern Times is in the midst of a sale process through a court-ordered receivership, initiated by its lender bank, California Bank & Trust (Zions Bancorporation), following the brewery defaulting on three loans totaling $12.9 million issued April 1, 2019, according to an investor notice.
Last week, Kihei, Hawaii-based Maui Brewing Company announced its stalking horse bid for the company – the bid which sets the bar for the auction of Modern Times – had been accepted by Modern Times’ court-appointed receiver, Thomas Hebrank. Maui’s parent company Aumakua Holdings Inc., bid $7.62 million, according to an asset purchase agreement included in court filings.
According to Live Oak’s objection filing, Modern Times’ application for “an order approving bidding procedures and setting hearing on approval of sale and auction” included language stating that “the sale of the purchased assets will be free and clear of all indebtedness,” “liens” and “liabilities.”
Additionally, the application stated there is “no known opposition” to the filing, and “all relief sought in the application is consented-to by all affected parties in interest.”
“This statement is false,” Live Oak wrote in its objection.
Live Oak claims the suggested process would “modify Live Oak’s rights,” and that the company was “not given notice of this application,” filed May 26, and “only discovered it from the court docket” on May 27.
According to Live Oak’s filing, the bank issued three of its own loans to Modern Times beginning March 2019, totalling $3.5 million, intended for the “lead and build out of its flagship Anaheim location, along with additional working capital.” On February 1, Live Oak sent a demand letter to Modern Times notifying the company it had defaulted on its loans, and the total balance had reached $7,508,612.61.
“Live Oak did not receive any payments from Modern Times anytime thereafter,” the bank wrote.
Live Oak then entered a subordination agreement with Zions, agreeing that Live Oak’s “loan and security interests in Modern Times are generally subordinate to that of Zions Bank.” However, the agreement noted, given “the purchase money nature of Live Oak’s loan,” the bank’s collateral “is senior to that of Zion Bank as to the ‘furniture, fixtures, and equipment acquired with the proceeds’ of Live Oak’s loan.”
As such, Live Oak said it has “first position lien against all most or all of the goods” at Modern Times’ Anaheim location, with a fair market value estimated between “one to two million dollars.”
“As Live Oak is not a party to this proceeding, nor was Live Oak provided notice of this application, this court lacks jurisdiction to modify Live Oak’s lien rights by selling the proposed property free and clear of Live Oak’s first position liens,” Live Oak wrote. “Belatedly sending a notice to Live Oak (and any other creditors) just nine days before a proposed hearing on the sale will not cure this jurisdictional defect.
“In any regular sale of Modern Times, if the buyer did not pay the Live Oak loans in full at closing, the buyer would take the Live Oak collateral subject to Live Oak’s liens,” the bank continued. “But that is not what the application proposes.”
Live Oak’s filing is a potential wrench in the sale of Modern Times. According to a court filing last week, Zions and Modern Times are slated to appear in court today (May 31) on a joint ex parte application for the proposed order approving bidding procedures and setting a hearing on the approval of the sale and auction of the San Diego brewery.
Maui Brewing parent company Aumakua Holdings, court-appointed receiver Hebrank and Modern Times filed an application on May 22 to set forth the bidding procedures and a hearing on approval of the sale and auction of the San Diego craft brewery. Four days later, those parties filed the joint ex parte application, which Live Oak disputes. The filing states repeatedly that Zions may face “irreparable harm” “due to the dire and imminent insolvency of Modern Times and the over $8 million in default loan obligations to the bank.”
In a separate filing on the same day, receiver Hebrank echoed those sentiments, adding that Modern Times “is not currently operating in a positive cash flow manner, and has been dependent upon a pre-determined funding amount from the bank during the short receivership sale process.”
“Unless ex parte relief is granted, the receivership estate will suffer irreparable harm because Modern requires further temporary financing from the buyer, and if this process is delayed, the operations of Modern may suffer to the extent that the sale may not close and significant ‘going concern’ value to the estate may be lost,” Hebrank continued.
If approved, the auction for Modern Times would take place over Zoom (or a similar platform) at 9 a.m. PT on June 9. Following the auction, a confirmation hearing on the sale is slated to take place via Zoom at 1:30 p.m. PT that same day.
At auction, Hebrank, in consultation with Zions and Modern Times, will determine the highest bidder and a backup bidder. Among the terms set forth were:
- Bids are due in writing by 5 p.m. PT two business days prior to the sale hearing;
- The purchase price must exceed Maui’s $7.62 million stalking horse bid;
- The purchasers must also pay up to $250,000 to cover the maximum breakup fee ($150,000 on June 9 and $25,000 each week the auction is delayed after), and another $250,000;
- Provide a signed asset purchase agreement;
- Make a $500,000 good faith deposit and proof of available funds sufficient in the receiver’s discretion.
UPDATE: June 1: Zions, Modern Times, Hebrank and Maui made a joint filing on Tuesday, May 31, to withdraw its application for an ex parte application for an order approving bidding procedures and setting a hearing on the approval of the sale and auction of Modern Times. The filing also vacated a hearing set for May 31. Included in the service list was Bernard Kornberg, an attorney representing Live Oak Bank.