On June 26, 2011, clothing retailer Deb Shops, Inc. (“Deb”) and its related entities filed petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware. This post will look at why Deb filed for bankruptcy, the scope of the company’s business, as well as provide an update on the Deb bankruptcy proceedings in the Delaware Bankruptcy Court. Much of the information contained in this post comes from the Debtors’ Declaration in Support of First Day Motions (the “Declaration” or “Decl.”), filed in the Bankruptcy Court the same day Deb filed its petitions for bankruptcy. Portions of Deb’s Declaration are available here for review.
Reasons for Bankruptcy
It has been a long three years for retailers in the United States. According to Deb, beginning in 2008 U.S. retailers have faced a challenging market due to the foreclosure crisis, increased unemployment and the tightening of commercial credit. Decl. at *16. The recession in the U.S. has reduced discretionary consumer spending, which in turn led to poor operating performance by Deb. By January of 2009, Deb’s poor performance triggered a loan covenant violation with its lenders. Although the company was able to reach agreements with its lenders following the covenant breach, Deb continued to suffer from “liquidity issues” which made it difficult for the company to maintain proper inventory levels. Decl. at *17.
Deb’s Business Operations
Deb began as a single store in 1932 selling women’s apparel in the Philadelphia area. In the 1970s, the company expanded into the female teen apparel market. By the time Deb filed for bankruptcy in 2011, the company had grown to 318 stores in 44 states. Deb’s offering now include low priced women’s sportswear, dresses, accessories and shoes targeting consumers between the ages of 13 and 25. Decl. at *4
Going in to bankruptcy, Deb employs 880 full-time employees and 2,314 part-time employees in its stores and approximately 200 employees in its distribution center and corporate offices. Deb has relationships with approximately 250 vendors who provide it with merchandise which the company sells in its stores. As is common in the retail industry, Deb places its orders with vendors through factors. Factors generally purchase the vendor’s account receivable for Deb’s order. Deb will, in turn, pay the factor on the invoice for its order. Decl. at *5-6.
Prior to filing for bankruptcy, Deb explored putting together a consensual prepackaged chapter 11 plan of reorganization. Once the company realized a prepacked bankruptcy was not an option, it began focusing on a sale of substantially of its assets pursuant to section 363 of the Bankruptcy Code. On the same date that Deb filed its bankruptcy petitions, the company filed a motion requesting a bankruptcy auction and sale hearing. Decl. at 18. Days after filing for bankruptcy, Deb filed a notice with the Court scheduling a hearing on the auction and bid procedures for July 21st. Deb’s first lien lenders intend to submit a credit bid for the company’s assets for $75 million. Decl. at 18.
Deb’s bankruptcy proceeding is before the Honorable Kevin J. Carey. Judge Carey is the Chief Judge of the United States Bankruptcy Court for the District of Delaware. Deb’s Delaware counsel is Richards Layton & Finger, P.A.. The Bankruptcy Court is administering this proceeding under case no. 11-11941 (KJC).