Delaware Bankruptcy Litigation : Delaware Bankruptcy Lawyer & Attorney : Fox Rothschild Law Firm : Financial Restructuring & Bankruptcy Litigation

Background on the Bankruptcy Filing

On October 26, 2008, Value City Department Stores filed chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the Southern District of New York. According to information contained in the Debtor’s first day motions (read here), Value City’s slide into bankruptcy began following the decline in the housing market and the tightening of credit markets. The increased cost of gas, compounded by rising unemployment, reduced consumer spending. Value City’s position worsened even more when the liquidity crisis in the financial markets interrupted its ability to properly stock its stores and service its debt.

Value City's efforts to reorganize began almost one year prior to filing for bankruptcy. In late 2007, the retailer assigned and subleased 24 of its store locations to Burlington Coat Factory for $25 million. The majority of stores subleased to Burlington underwent “going out of business sales” and then ceased operations. In addition to the stores subleased to Burlington, Value City conducted going out of business sales at an additional 50 stores prior to filing bankruptcy.

Although the subleases and store closing generated considerable revenue for Value City, in September of 2008 it entered into a forbearance agreement with its pre-petition lenders. Under the forbearance agreement, Value City agreed to close an additional 29 stores and submit to a budget. Despite these arrangements, Value City’s revenues continued to drop in the third quarter of 2008. Its lenders issued a notice of default on the forbearance agreement on October 13, 2008. Thirteen days later, Value City filed for Bankruptcy.

A Summary of Value City’s Business

Based out of Columbus, Ohio, Value City describes itself as a “full-line, value priced retailer carrying men’s, women’s and children’s apparel, accessories, shoes, home fashions, electronics and seasonal items.” The Debtor operates stores from New Jersey to Georgia, and as far west as Missouri. In business for over 80 years, Value City employed 4,500 employees at the time it filed for bankruptcy.

From January 1 to August 31, 2008, Value City recorded sales in excess of $288 million and losses of $70 million. Before bankruptcy, Value City purchased inventory from over 1,000 vendors. Approximately one week prior to filing bankruptcy, Value City had an outstanding balance of $26 million under a revolving pre-petition loan, and $10.5 million under a pre-petition letter of credit.

Primary Objectives In Bankruptcy

After defaulting under the pre-petition credit agreements, Value City was left with no form of credit by which to purchase merchandise and generate revenue. Given the lack of options, the Debtor decided to conduct going out of business sales at the majority of its remaining stores. Additionally, Value City intends to assume and assign leases pursuant to expedited procedures (assuming its motion for expedited procedures is granted), and reject those leases that it deems “burdensome”  to the Debtor and its estate.

A day after it filed for bankruptcy, Value City filed a motion with the Bankruptcy Court seeking “streamlined procedures” for the assumption or rejection of various leases, as well as a motion seeking authority to honor various pre-petition customer programs. The procedures motion, if granted in its present form, will allow the Debtor to reject “unfavorable” leases and abandon, at Value City’s discretion, personal property and fixtures arising from the rejected leases. Value City currently has approximately 100 unexpired leases. The motion to continue various customer programs (i.e. gift cards, store credits and warranty programs) is intended to reassure customers that Value City will fulfill all prior obligations. Value City filed the customer programs motion in order to maintain customer satisfaction during upcoming going out of business sales.
 

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The United States Bankruptcy Court for the District of Delaware recently approved a Trade Vendor Payment Program (the “Vendor Program” or “Program”) in the Linens N Things Center, Inc., et al.(“Linens”), bankruptcy . According to Linens' Motion to Approve Trade Vendor Payment Program, Linens created the Program in order to encourage trade creditors to extend credit to Linens with terms that were “no fewer than 45 days after receipt of goods.”  In return for 45 day creditor terms, creditors would receive the benefit of a letter of credit funded up to $100 million. The Vendor Program reflected a willingness by Linens’ committee of unsecured creditors to provide better trade terms, in exchange for better creditor protection.

Why Linens Filed and Why It Needed a Vendor Program

In 2006, Linens tried unsuccessfully to restructure and improve profitability. By 2007, Linens’ sales reached $2.8 billion, yet it was operating at a net loss of $191 million. Linens’ troubles were due in part to a poor housing market, resulting in lower sales and tighter credit. These conditions worsened during the beginning of 2008, resulting in Linens filing for chapter 11 bankruptcy protection in May of 2008.

As the second largest specialty retailer of products for the home (from bedding and towels, to cookware and small appliances), Linens deals with over 1,000 suppliers. In order to properly reorganize, Linens needed to maintain, and possibly improve, its supplier relationships. As a result, less than two months after filing for bankruptcy, Linens filed its Motion to Approve the Trade Vendor Payment Program.

During the hearing to consider the Vendor Program, counsel for the committee of unsecured creditors stated that the Program was critical to the success of the case. Without the Vendor Program, Linens’ trade creditors would continue to restrict trade credit, in turn limiting Linens’ cash flow. The creditors’ committee wanted to avoid a situation common in past retail bankruptcies where the debtor’s secured debt became so large that it diluted the administrative claims of trade vendors. Instead, the parties sought to institute a program that would provide vendors with creditor protections sufficient to continue the supplier relationships, plus provide more favorable payment terms to Linens.

The Design of the Vendor Program

Under the Vendor Program, participating creditors received the benefit of a letter of credit funded by Linens, up to $100 million. Vendors, in turn, agreed to 45 day terms, plus agree to “meet normal industry standards for performance regarding timing and completion levels of fill rates…”

The Vendor Program imposed limitations on both the participating creditors and Linens. Linens’ “Aggregate Approved Trade Creditors Account Balance” could not exceed twice the amount of the letter of credit. This provision, in essence, extended Linens’ trade to $200 million. Creditors who signed a confidentiality agreement would receive weekly reports of the aggregate amounts of Linens’ vendor account balance.

The Vendor Program also required concessions from the trade creditors. For example, individual creditors were not the direct beneficiaries of the letter of credit. Instead, a trustee, working under a “Collateral Trust Agreement” was designated as the beneficiary of the letter of credit. The trustee serves at the direction of a board of disinterested creditors (consisting of creditors who did not participate in the Vendor Program). The board of disinterred creditors, not the creditors as a whole, would decide when to draw on the letter of credit.

Recent reports indicate that more than 40 of Linens largest vendors have signed up for the Vendor Program. Suppliers participating in the Vendor Program include Springs Global US, the Yankee Candle Company, Croscill Home Fashions and M. Block & Sons. Such vendor support plays a prominent role in the success of Linens’ bankruptcy reorganization.

Conclusion

It remains to be seen whether the Linens’ Vendor Program provides trade creditors with the protections that are often lacking in other retail bankruptcies. Ideally, Linens will not “default” under the Vendor Program and the trustee’s duties and responsibilities under the Trust Agreement will never come into play. Regardless, the Vendor Program serves as example of parties in a bankruptcy proceeding working together to create innovative solutions with mutual benefit.

Finally, it should be noted that the motion approving the Vendor Program went uncontested during the bankruptcy court hearing. This, by itself, is remarkable given that even routine bankruptcy motions often receive “limited objections” from creditors seeking to reserve their rights or make clarifications on the record. Instead of opposing Linens’ motion, counsel for the committee of unsecured creditors spoke at length regarding the virtues of the Vendor Program. Hearing the evidence, and considering the comments from counsel, Judge Christopher S. Sontchi approved the motion and signed the order authorizing the Program. In doing so, the Court observed that the Linens’ Vendor Program was “more than a reasonable exercise of the debtors’ business judgment.”
 

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