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US alleges fraud in Friendly’s case

Officials say owner Sun Capital hid pension assets to maintain control

Jonathan Wiggs/Globe Staff

The Friendly’s restaurant chain filed for Chapter 11 in October and closed more than 60 stores and laid off about 1,200 workers, half of them in Massachusetts. The ice cream chain said it was a victim of a tough economy.

A federal agency that insures company pension plans is accusing Sun Capital Partners, the owner of Friendly Ice Cream Corp., of fraudulently moving assets so that its affiliates could retain control of the Wilbraham business and avoid paying retirement benefits to nearly 6,000 workers and retirees.

Sun Capital Partners, a Florida private equity firm, illegally transferred assets from the ice cream chain and its parent company responsible for the pension plans to another Sun affiliate shortly before the October bankruptcy filing, according to allegations in court records filed by the Pension Benefit Guaranty Corp.

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These assets are now being used by another Sun affiliate to bid on Friendly’s as it reorganizes in bankruptcy court, the federal agency says. Such a move could artificially inflate the auction price and chill other potential bidders.

If Sun Capital and its affiliates are successful, it will allow them to shed more than $100 million in pension liabilities, yet retain control of the ice cream business, according to the agency.

“Sun Capital Partners Inc., through its subsidiaries acting in various roles, has structured the transactions in these cases in such a way as to leave the pension plan abandoned and seriously underfunded, while depriving PBGC - the agency that will protect the pensioners abandoned by Sun Capital - of any meaningful recovery for its loss,’’ the agency wrote in an objection filed last week with the US Bankruptcy Court in Delaware.

A spokeswoman for Friendly referred all questions to Sun Capital, and officials representing the equity firm declined to comment. In court records, Sun Capital says the transfer involved debt, or a subordinated note, and not equity, as alleged by the pension agency.

“There is nothing nefarious about selling a business in a bankruptcy auction without compelling a buyer to assume a pension plan, nor is there any Bankruptcy Code provision mandating the assumption of any pension plan or pension liabilities - and such a requirement would dramatically limit a debtor’s efforts to reorganize,’’ affiliates of Sun Capital said in their response filed yesterday evening.

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Friendly’s filed for Chapter 11 in early October and abruptly shut down more than 60 stores and laid off about 1,200 workers, half of them in the Bay State.

The ice cream chain, founded during the height of the Great Depression, said it was a victim of a tough economy, high supply costs, and changing consumer tastes.

The Pension Benefit Guaranty Corp., which is responsible for protecting workers’ pension benefits, plans to challenge the transfer of assets to these affiliates during a hearing on Thursday.

“This is a fairly unusual move for the cases we are usually involved in,’’ said Marc Hopkins, a PBGC spokesman.

“This is a bad case in that we’re going to have to take in a pension plan from a company that is going to essentially continue. We always strive to avoid that outcome,’’ Hopkins said.

The agency also intends to file claims for unfunded benefit liabilities, employer contributions due to the pension plan, and unpaid premiums.

The Friendly’s plan has $76.4 million in assets, $181.4 million in liabilities, and $105 million in underfunding.

Edward Neiger, a partner at Neiger LLP, a New York bankruptcy law firm, who is not involved in the case, said the circumstances around the Sun Capital transaction could raise concerns.

“The fact that the transfer happened immediately prior to the bankruptcy to an affiliate of Sun Capital as opposed to an independent third party doesn’t pass the smell test. It was an insider transaction that goes against good faith,’’ Neiger said. “People will be watching this closely to see if Friendly’s is successful in pulling off what it is trying to do.’’

Friendly’s has detailed its reorganization plan in bankruptcy court.

Under the proposal, nearly all of Friendly’s assets would be sold to an affiliate of Sun Capital, which would not assume the company’s liabilities, including the pension plan.

The pension liabilities would remain with the old Friendly’s, which would be left with few or no assets.

An auction for Friendly’s assets is scheduled for Dec. 22.

Jenn Abelson can be reached at abelson@globe.com. Follow her on Twitter @jennabelson.

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