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.