Court records filed in the wake of last Friday’s auction for San Diego craft brewery Modern Times give a closer look at bidding play-by-play, and the tension between qualified bidders MTD Asset Acquisition and BX MT BAMF LLC.
Earlier this week, MTD (the group referred to during the auction as North Carolina brewery Tru Colors), whose $20.1 million bid was not accepted as the winning bid, filed an objection to the sale of Modern Times to BX MT (an affiliate of Brewery X in Anaheim), and submitted a new bid of $21 million. MTD claims priority was given to Brewery X’s bid due to its inclusion of a shorter closing period, despite what it believes was a previous guarantee that such conditions would not be weighted in choosing a winning bid. Those efforts caused a federal judge to table a hearing Monday set to confirm the sale of the brewery.
Two declarations in support of MTD’s objection include partial auction transcripts, which show MTD’s attorney arguing Modern Times’ receiver, Thomas C. Hebrank, was attempting a “change of rules in the middle of the auction.”
During the auction process, Hebrank was asked to clarify the weight of shorter closing timelines by Bernie Kornberg, an attorney for Live Oak Bank, according to a transcript submitted by Jonathan Randolph in a declaration in support of the MTD objection, filed in Orange County Superior Court Monday. Randolph is a senior practice assistant for K&L Gates LLP, which represents MTD.
An expedited closing date was first offered by Jeff Reisner, the auction representative for Brewery X, when he submitted a bid for $13 million with a 30-day close in the 12th round of bids, according to the transcript. The bid was followed by a $13.1 million bid by MTD representative Michael Lubic, which did not mention a shorter closing period.
“The prior bid had a 30-day close added,” Kornberg said, according to the transcript. “Mr. Lubic didn’t address that. In the next bid … I think we should have some clarification to the extent that terms are being modified exactly that is going on.”
Hebrank responded that he would give “no additional consideration to the time closing.” A person identified in the transcript as a “BX business person” responded: “He just fucking screwed us.”
Asked to further clarify indifference to the closing date, Hebrank added that the maximum closing date is 120 days, “but if you do it sooner, it is fine by us.”
On June 15, Hebrank circulated general auction information and protocol guidelines to qualified bidders. Within that document – included as an exhibit in Lubic’s objection filing – under requirements for winning and back-up bids, it is noted that a closing date must be no later than 120 days following the court’s sale approval, and that “closing may occur earlier, but no weight is being assigned to a shorter closing period.”
After Hebrank’s clarification during the auction, Reisner asked Michael Fletcher, an attorney for Zions Bank, if he was “indifferent to when you get paid.” Fletcher noted that while Hebrank may be forgoing any weight to a shorter closing period, “the receiver is going to consult with MTD and Live Oak and Zions about what the evaluation is and who’s got the best bid” after the closing of the auction.
According to the auction guidelines, Hebrank may “determine, in his business judgment, which qualified bid, if any, is the highest or otherwise best qualified bid.” Additionally, he may, using “reasonable discretion,” “reject at any time before entry of an order of the Court approving a qualified bid” if the bid is “contrary to the best interests of the receivership estate and its creditors.”
A heated debate between Lubic and Reisner followed, according to Randolph’s transcript:
Lubic: “Except that the receiver in the auction instructions said that the timing of the close would not be considered. We had also attempted to gain a bidding advantage to closing sooner and the receiver said that he is not going to consider that so that timing of the closing is off the table.”
Reisner: “Mr. Lubic, I mean as much as I love you, you don’t speak to the receiver right and he’s got his own counsel when you say…”
Lubic: “Yes, he’s put this in writing, and I have communications with counsel about it, so it would be a change of rules in the middle of the auction contrary to all the representations. The receiver can exercise his judgment of to what is the best and highest deal.”
Reisner: “Except to do that he’s got to consider timing so Mr. Hebrank…”
Lubic: “He’s already considered and that’s not something he’s going to take into account.”
Steptoe: “So Mr. Hebrank, when did you engage Mr. Lubic as your counsel?”
Lubic: “Oh come on… If you want us to keep bidding, we would like to resume the auction.”
A transcript of the end of the auction was included in an additional declaration of support of the objection, filed by Lubic on Monday. According to the transcript, Hebrank closed the auction following and acknowledging MTD’s “high bid” of $20,100,000, which included a bankruptcy filing request, and a 120-day close. Hebrank then asked for a break to consult with Modern Times and representatives from Live Oak and Zions Bank, and said they would “be back to announce final results as soon as concludes that discussion.”
Six minutes later, Hebrank returned to announce that, using his “business judgment,” it was determined that “the highest and best bid” was Brewery X’s bid of $20 million, with funding in seven days and a 14-day close. He then asked MTD if they would like to be the backup bidder.
Lubic requested Hebrank enter a breakout room on the Zoom call to discuss the decision. Reisner objected, expressing concern that the conversation was an “attempt to change the statement on the record,” and threatening to “lodge an official objection” if done.
“OK and we’re gonna lodge an official objection too because you can’t conclude their bid is better,” Lubic said. “We bid more money, we followed the rules that say that the timing of closing is not going to be valued. We are willing to waive the bankruptcy contingency, we can close faster. … But this is just really inappropriate.”
The request to reopen the bid was declined, following objections from “representatives of the creditors in attendance,” as well as a “representative of the announced winning bidder, according to Hebrank’s declaration in support of the auction sale and results, filed with the court Monday.
According to the auction protocol document, “to facilitate deliberate and orderly consideration of the revised bids,” Hebrank “may recess, revise the bidding process if deemed necessary or adjourn the auction at any time and from time to time.”
In Hebrank’s post-auction declaration, he wrote the factor of the Chapter 11 filing, “among others” in the MTD offer, “increased risks” for the sale, concluding that the $20.1 million bid, “which was only $100,000 greater than the less risky BX MT bid, would subject the estate and its creditors to greater risk of delay and even a risk of not closing, compared to the BX MT bid of $20,000,000.”
The auction protocol notes that, “if the winning bidder deems that additional step to be required for its purposes,” Hebrank will “request that the receivership appointing order be amended to include sole authority for the receiver to file a Chapter 11 bankruptcy action,” during the court hearing process scheduled for Monday. According to the objection filed by MTD, the rules “did not state that this option was disfavored.”
Modern Times’ Expenses Illustrated in Court Filings
Modern Times owes a total of $222,938 in back rent across its nine open leases – which amounts to being almost two months behind on payments on average – according to a schedule of assumed leases and contracts included in MTD’s asset purchase agreement, which was included in Lubic’s declaration. Across all nine properties, Modern Times pays $140,836 in rent each month.
At $44,455 per month, the brewery’s Anaheim taproom location is its costliest single real estate expense per month, and with 186.3 months remaining on its lease, Modern Times will owe $8.28 million before it expires on December 1, 2037.
The brewery’s next largest monthly rent payment is $25,563 for a warehouse on Kurtz Street in San Diego, where Modern Times also leases three other warehouse and storage facilities, which total $32,243 in rent each month. Three of the four Kurtz Street properties are owned by Kenton Properties, with whom Modern Times has leases that end July 1, 2039, and carry a balance of $8.38 million.
Of all Modern Times’ leases, the one that ends the soonest is for its North Park taproom location, which runs through February 1, 2026. It is also the brewery’s least expensive taproom lease at $5,691. After Anaheim, Modern Times’ Encinitas taproom bears the second highest rent at $19,252 per month.
Although Modern Times is behind on rent payments to all of its real estate lessors, the company has almost no past due balances with other providers, except for $418 in back payments owed to Nissan on the lease of a cargo van. Leases for the company’s vehicle fleet will cost $431,841.20 over time.
Modern Times’ monthly vehicle expenses total $14,088 for trucks and vans and $3,703 for forklifts. Payments for other equipment – such as walk-in coolers, growler stations, scissor lifts and barrels – total $15,111 per month.
WestRock, which sold the brewery an autopacker in 2020, filed an objection to the sale because it argued the court “lacks jurisdiction to modify WestRock’s property rights by authorizing a sale of the WestRock collateral free and clear of its security interest.” Modern Times owes WestRock $306,417.50 for the autopacker, for which it makes monthly payments of $5,329, according to the purchase agreement.
The company was not notified of Modern Times’ receivership or its pending sale until June 13.
WestRock said it will consent to the sale of Modern Times so long as language stipulating that the buyer will assume the balance of the purchase agreement it entered into with Modern Times.
“WestRock was not aware of the proposed sale, is not a party to this case, and was not given any opportunity to participate in the formulation of the stipulation, the APA, or the proceedings leading up to the entry of the bidding procedures order,” it wrote.
It is not clear if other lenders will file similar objections.