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.
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.”