By Vince Sullivan

Law360 (April 14, 2020, 10:32 PM EDT) -- The proposed bidding and sale procedures of bankrupt salon chain Rudy's Barbershop failed to pass muster Tuesday when a Delaware judge said more time was needed for potential bidders to formulate offers and challenge a stalking horse bidder.

During a hearing conducted over telephone and video conference, U.S. Bankruptcy Judge Laurie Selber Silverstein said a May 1 deadline to close on a sale of the chain's 25 locations was too rapid a milestone to allow for a full marketing of its assets.

She agreed with those that objected to the proposed procedures on the grounds that a "digital data room" set up to provide access to financial documents for interested bidders has not yet been fully populated with the information necessary to formulate a competing offer.

"This is as tight of schedule as I've ever seen," Judge Silverstein said. "We still are not certain of all the cure amounts and other things people need to know to really be able to put in a bid or, more importantly, go to a financier and say, 'Here are the operations and here are the finances.'"

The court pushed a sale hearing in the case from the originally proposed date of April 30 back to May 11, with a new bid deadline of May 5. The judge said this will allow prospective buyers time to properly prepare an offer that will compete with the $2 million stalking horse bid by debtor-in-possession lender RBS Salon Holdings Inc.

Judge Silverstein said the timeline was too tight given the challenges created by the global outbreak of COVID-19, which have lengthened the amount of time it takes to get most things done in recent weeks.

The objections were spearheaded by two of the three founders of Rudy's Barbershop — David Petersen and Wade Weigel — who sold the business in 2014 to its current venture capital owners. At the time, the two men received small equity stakes in it and promissory notes worth $324,000 and $558,000, respectively.

The focus of their objection was on the lack of critical information in the data room and the proposed timeline. In their court filings, the pair said the best outcome for Rudy's would be for it to return to their control, but the compressed sale schedule didn't provide enough time for them to pull financing together to make a competitive bid.

Debtor attorney William E. Chipman Jr. of Chipman Brown Cicero & Cole LLP said the former owners' complaints irritated the debtor because the objectors should have more knowledge than any other party about the operations of the company, and that they waited too long to get their bidding efforts going to now complain about the timeline.

But Judge Silverstein granted the extension of the timeline given the exigencies created by the pandemic.

She also trimmed the proposed bidding protections that would become payable to the stalking horse bidder if another party wins the auction for the assets. Originally envisioned as a 4% breakup fee of $80,000 and $250,000 expense reimbursement, the court cut that down to a combined $100,000, which equates to about 5% of the stalking horse proposal. She further reduced a proposed bid increment of $50,000 to $30,000, saying those figures were more appropriate given the $2 million floor bid.

With a May 1 sale deadline as a condition of the DIP financing, Judge Silverstein acknowledged that the lenders may no longer be interested in funding the case, but said she was trying to give all parties sufficient opportunity to participate in the process.

"The DIP lender will have to decide what it wants to do with respect to that," the judge said. "I'm trying to balance here the entirety of this case and the effect of COVID-19 not only on this debtor but on all the parties trying to participate in this case and to make sure we have some meaningful participation."

Chipman said he would confer with the DIP lenders to find out about its intentions given the court's rulings.

Rudy's opened in Seattle in 1993 and has since expanded to 25 locations in Seattle, Portland, Los Angeles, New York City and Atlanta. Venture capital firm Northwood Ventures LLC owns 43% of it and private equity firm Partnership Capital Growth LLC owns 34%, according to the filings.

At the time of filing, the company had about $3.1 million in secured debt, owed $1.5 million on an unsecured note to the company's founders, and had about $940,000 in trade and other unsecured claims, according to its filings.

In the Chapter 11 declaration, CEO Kathleen Trent said the company had a $2.3 million net loss for 2018 and a $2.1 million net loss for 2019.

Already struggling in recent years, the company said government-mandated shutdowns in response to the COVID-19 outbreak forced it to lay off all but two of its employees.

Rudy's is represented by Mark L. Desgrosseilliers, William E. Chipman Jr. and Mark D. Olivere of Chipman Brown Cicero & Cole LLP.

Weigel and Petersen are represented by Ronald J. Drescher of Drescher & Associates PA, and Craig S. Sternberg of Sternberg Thomson Okrent & Scher PLLC.

The case is In re: Rudy's Barbershop Holdings LLC et al., case number 20-10746, in the U.S. Bankruptcy Court for the District of Delaware.

--Additional reporting by Rick Archer. Editing by Adam LoBelia.

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