(Bloomberg) -- Cornell Capital LLC is disputing a lawsuit that accuses the private equity firm of helping drive its former portfolio company Instant Brands into bankruptcy.
A $345 million dividend and other transactions targeted in a civil lawsuit filed earlier this month were independently reviewed and permitted by lenders, firm founder Henry Cornell said in a Monday letter to employees that was reviewed by Bloomberg News. Other allegations that serve as the basis for the suit are also false and will be defeated in court, Cornell said.
The letter provides Cornell Capital’s first detailed response to a complaint filed in Texas bankruptcy court earlier this month by Alan Halperin, a trustee who is seeking at least $400 million for Instant Brands creditors who suffered losses after the firm filed Chapter 11 in 2023. The lawsuit pins the former Instant Pot maker’s bankruptcy primarily on the 2021 dividend.
But Cornell cited a sworn statement by Instant Brands’ former chief restructuring officer that attributed the company’s financial troubles to high interest rates, supply-chain problems and other uncontrollable macroeconomic events as opposed to the dividend.
“We intend to bring to the court’s attention that the trustee has not only determined to pursue these meritless claims, but has failed to avail itself of critical, readily available facts that undermine the allegations in the lawsuit,” Cornell said in the letter. “We shall vigorously defend against these baseless attacks.”
Lawyers for Halperin didn’t immediately return a message Monday seeking comment.
Information disclosed
Cornell Capital acquired Instant Brands in 2019 but later determined it had overpaid after the company acknowledged that it overstated a key measure of earnings for 2018, according to the lawsuit. The private equity firm threatened to sue Instant Brands’ co-founder but instead entered into a restructuring agreement that resulted in a major reduction in the purchase price, the lawsuit claims.
Contrary to allegations in the complaint, Cornell said in Monday’s letter that lenders were aware of the restructuring arrangement “including through their diligence process and through the credit agreement that the lenders signed.”
The $450 million term loan credit agreement used to fund the dividend also specifically listed the dividend as one of the proposed transactions pursuant to the loan, Cornell said. Lenders were therefore aware and exercised their independent judgment in agreeing to fund it, he said.
The dividend was also independently reviewed by Moody’s. The ratings agency said in March 2021 that it expected the company to maintain good liquidity and said Instant Brands lacked any near term debt maturities. Cornell said “far from asserting that the transaction would render Instant Brands insolvent,” Moody’s assigned a Ba3 rating to the $450 million term loan, which was due in 2028.
Cornell also denied other claims, including that Instant Brands undertook a debt restructuring in January 2023 to delay a Chapter 11 filing. The transaction transferred substantially all of Instant Brands’ tangible assets from existing lenders’ collateral pool into new subsidiaries, which pledged the assets to Cornell Capital, according to the complaint. In exchange, the private equity firm lent Instant Brands $55 million.
Instant Brands explored options for raising incremental liquidity before it shifted to exploring a comprehensive restructuring and later bridge financing, Cornell said. The bridge financing and Cornell’s participation in it was approved by Instant Brands’ independent directors, he said.
Most of Instant Brands’ assets were sold to Centre Lane Partners after the company filed Chapter 11. Roughly $391 million was outstanding under the term loan at the time the company filed bankruptcy.
Lenders recovered between seven cents on the dollar and nine cents on the dollar, resulting in a collective loss of about $360 million, according to the complaint.
The case is Halperin v. Cornell Capital LLC, 23-90716, US Bankruptcy Court, Southern District of Texas (Houston).
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