Business

Southern Season’s former executives not guilty of fraud, a federal judge rules

Former Southern Season executives Clay Hamner and Brian Fauver won a federal lawsuit accusing them of financial fraud stemming from the company’s 2016 bankruptcy. The flagship store in Chapel Hill has since been purchased by Calvert Retail and is under new ownership.
Former Southern Season executives Clay Hamner and Brian Fauver won a federal lawsuit accusing them of financial fraud stemming from the company’s 2016 bankruptcy. The flagship store in Chapel Hill has since been purchased by Calvert Retail and is under new ownership. News & Observer file photo

Fourteen months after they were sued for fraud in connection to the bankruptcy of Chapel Hill’s iconic Southern Season food store, two former company executives have been cleared by a federal court of financial improprieties.

A federal judge in Virginia ruled Monday that former Southern Season CEO W. Clay Hamner and former chief financial officer Brian Fauver did not defraud GGC Associates, the Virginia landlord that lost $150,000 trying to keep Southern Season’s struggling Richmond store afloat before it was closed in 2016.

The decision ends another chapter in the business drama that drove the specialty food emporium into bankruptcy after its expansion into Richmond and South Carolina. Fauver was the company’s CEO from 2013 through 2016, and Hamner was chairman and CEO from 2011 through 2016, the year the company sought bankruptcy protection.

U.S. Magistrate Judge Roderick Young wrote that GGC Associates failed to demonstrate the two executives did anything illegal. GGC was asking for $450,000 to recover its financial investment and in punitive damages. The landlord had accused the two Chapel Hill businessmen of concealing vital information to lure GGC to bail out Southern Season when its financial situation was worsening. The judge issued his opinion nearly five months after a one-day trial in March.

Edward Everett Bagnell, Jr., the Richmond lawyer who defended Hamner and Fauver, said this was not a typical business dispute because the two executives were accused of fraud. Hamner and Fauver could not be reached for comment Tuesday.

“The judge found that Hamner and Fauver disclosed all the information they knew in this case,” Bagnell said.

Shortly after it filed for bankruptcy in 2016, Southern Season was acquired for $3.5 million by Calvert Retail, which became the third owner of Southern Season since it opened in 1975. The flagship food and kitchenware store in Chapel Hill today employs 140 people. It also operates the Weathervane Restaurant.

Southern Season has also bought a 50,000-square foot building for a new distribution center in Graham which includes the company’s custom gift assembly operation, said marketing director Lynnette Montgomery.

Separate from Southern Season’s rehabilitation under new owners, the remnants of Southern Season entered bankruptcy owing $18.3 million, a legal matter that is still unresolved in federal bankruptcy court. Hamner told The N&O last year that in 2015 the company’s Richmond store, which opened to great fanfare in 2014, was losing more than $1 million a year, and the financial prospects deteriorated in 2016.

The fraud case against Hamner and Fauver hinged on a letter of credit.

GGC invested $150,000 in rent reduction and cash contributions in exchange for stock in the company, but its financial support was contingent on Southern Season having a valid letter of credit for $550,000 from its bank as a security deposit for the Richmond store’s lease.

But Southern Season’s bank sold the company’s $4.3 million loan in September 2015 to another bank, and the letter of credit wasn’t renewed by the new bank. The lapse wasn’t discovered until about six months later, and on May 3, 2016, Southern Season paid GGC a $443,033.67 cash deposit as a security deposit, which GGC accepted in lieu of the letter of credit.

Southern Season closed its Richmond store on April 24, 2016, filed for bankruptcy on June 24, 2016. The landlord filed suit last year accusing Hamner and Fauver of deliberately failing to disclose material information by fraudulently concealing that the letter of credit had expired.

“When discussions about GGC’s equity investment in Southern Season began [in 2013], the letter of credit was still in place,” Judge Young wrote in his 23-page order. “Hamner and Fauver did not utter any false statements regarding the status of the letter of credit while negotiating the terms of the Letter Agreement because both sides believed the letter of credit remained in place at the time.”

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