In Re Riodizio, Inc.

Facts

P filed chapter 11 on August 19, 1996. It owns and operates a Brazilian grill restaurant. Pand its two shareholders, Alan Berfas and Frank Ferraro, entered into numerous agreements with Riodizio Company, LLC (D) to secure financing and equipment for the restaurant. These included a Loan and Lease Agreement, dated June 1, 1995, a Shareholders Agreement, dated June 23, 1995, and an undated stock option (Warrant) that P granted to D. Under the Loan and Lease, D advanced $ 200.000.00 to the debtor to operate the business. The terms of the loan, as evidenced by a promissory note, called for 15% interest, with principal and interest payable in 42 monthly installments. As security P gave D a priority security interest in all office equipment including, without limitation, computer equipment, kitchen equipment, fixtures, mailing lists, bank accounts, Transmedia agreements and proceeds, and accounts receivable. Berfas and Ferraro also provided a limited guaranty by depositing into escrow, in favor of D, their respective shares in P, general stock powers, and their resignations as officers, directors, and employees. D would purchase and then lease kitchen and other equipment valued at $150,000.00 to P. The Court denied P's motion to reject this equipment lease. P also executed the Warrant. P hereby granted to the holder of this warrant the right to purchase all or part of an aggregate of 93 common shares of the Corporation for the consideration of one dollar ($ 1.00) per share. The warrant may be exercised for a period of twenty-five years. The Warrant was signed on behalf of P by Berfas and Ferraro, each of whom own 33 shares of P's common stock. If D exercises its warrant (and P delivers the shares), D will own approximately 60% of the debtor's outstanding shares based upon an additional investment of only $93.00. D, Berfas, Ferraro, and P entered into the Shareholders Agreement. D was made a party 'solely for the purpose of granting D the legal and equitable right to sue for the enforcement of the agreement and/or seek damages for the breach of this Agreement; and to protect the value of the warrants.' The Shareholders Agreement protects D's financial stake in the debtor, or otherwise benefits it, in several ways. It requires Berfas and Ferraro to establish a four-person board of directors which will include two D nominees in addition to themselves. It requires a two-thirds shareholder's vote to take certain 'extraordinary' actions. If D exercises its warrants and controls nearly 60% of the outstanding stock, it will be able to veto these 'extraordinary' actions. If the shareholders open a different type of restaurant, they must first offer D the right to participate in the venture. Berfas and Ferraro cannot open a similarly-styled restaurant within ten miles of any restaurant operated by P unless P gives its written consent. They must first offer P the right to participate in the venture. P must purchase Key Man Life Insurance on the lives of the individual shareholders. P sought to reject a stock option agreement and a shareholders agreement as executory contracts under 11 U.S.C.S. § 365(a).

Issues

Rule of Law

Holding and Decision

Legal Analysis

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