Swoozie’s, Inc. (“Swoozie’s” or the “Debtor”) filed a petition on March 2, 2010 in the Bankruptcy Court for the Northern District of Georgia (case number 10-66316) for relief under Chapter 11 of Title 11 of the United States Code. The case has been assigned to Judge C. Ray Mullins. The bankruptcy petition was signed by Kelly Plank-Dworkin as President and Chief Financial Officer of the Debtor. The Debtor’s bankruptcy counsel is Wendy R. Reiss of the firm of Alston & Bird LLP of Atlanta, Georgia.
Background of the Debtor
Swoozie’s is headquartered in Atlanta, Georgia. Swoozie’s First Day Motions included the following description of its business:
Debtor is a specialty retailer focusing on the art of giving, home entertaining and life celebrations. Debtor offers a broad combination of products and services ranging from invitations and custom printing to housewares and party goods. Founded in 1999 and based in Atlanta, Georgia, Debtor employs 350 employees in 43 stores and a corporate headquarters. Debtor opened its first store in February 2001 and now operates stores in 14 states across the Southeast, Northeast, Texas and California.
Trade Debt; Secured Debt Picture
The petition’s “Statistical/Administrative Information” estimates that there are from 200-999 creditors, the Debtor has assets of $1,000,001 to $10,000,000 and liabilities of $10,000,001 to $50 Million.
Consistent with its retail business, the Swoozie’s list of top 40 unsecured creditors is heavily populated with trade debt and leases. Out of the Swoozie’s 40 largest unsecured creditors, 35 are listed as trade creditors and 4 are listed as landlords. (Yes, that adds up to 39; the Debtor’s list of 40 as filed is one short.) See complete list of the “Top 40 Unsecured Creditors” below.
The secured debt picture shows a relatively small amount of secured debt. The sole prepetition secured lender is Wells Fargo Capital Finance, LLC (“Well Fargo”). Wells Fargo is owed approximately $3,100,000 on a revolving credit loan secured by a blanket lien on all the Debtor’s personal property. Contrast the amount owed to Wells Fargo with the more than $5 million owed to just the top 40 trade creditors.
One trade creditor, Crane & Co., Inc. (“Crane”) was able to get subordinated security under a promissory note in the principal sum of $196,000 plus interests, fees and costs.
With this low secured debt position, the first thought is that this might finally be a case where asserting reclamation claims will make sense. But reclamation claims only apply to goods received by the debtor within the 45 days prior to bankruptcy and the Debtor has said that it quit making orders for new merchandise in December, 2009. So once more reclamation claims are all dressed up with no where to go.
Objective of the Bankruptcy – 363 Sale
The affidavit filed by the Debtor in support of its first day motions (the “First Day Affidavit”) describes a prolonged effort to find a buyer that started in 2009. That effort was unsuccessful.
The Debtor, in December 2009, started preparing for a potential 363 sale in bankruptcy. The First Day Affidavit explains:
After discussions with its professionals and lenders, Debtor ultimately determined that a quick sale of its assets, pursuant to the applicable provisions of the Bankruptcy Code, was in the best interests of Debtor and its creditors. As a result, in December 2009, Debtor began preparing for such a scenario. For example, Debtor stopped taking special orders from customers and stopped purchasing new inventory except for inventory needed to fulfill outstanding, pre-paid in full, orders for customers.[Emphasis not in original.]
Swoozie’s engaged Clear Thinking Group, LLC (“CTG”) to assist in an analysis of a sale or liquidation. CTG contacted over 40 going concern purchasers and liquidators. This effort lead the Debtor to conclude:
Based on the responses to marketing efforts to date, Debtor believes it is likely that Debtor’s assets will be sold to either a going concern bidder or a bidder or bidders that may seek to conduct Going Out of Business Sales at Debtor’s stores and to purchase designation rights for Debtor’s leases. As described below, upon the closing of the sale of Debtor’s assets, Debtor would realize an immediate and dramatic reduction of Debtor’s carrying costs preserving significant value for Debtor’s estate and its creditors.
How quickly is a 363 sale likely to occur? Very, very quickly. The inventory is dwindling. The employees are leaving. The Debtor bluntly states: “Debtor can no longer operate its stores for a sustained period.”
The Debtor plainly outlines the intended 363 sale process:
Debtor intends to file a motion seeking approval of a stalking horse bid and setting a date for a hearing to approve the sale of Debtor’s assets (the “S ale Motion”) within the first day or two of the Chapter 11 filing. Debtor will seek to expedite the final sale hearing (the “Sale Hearing”) in order to finalize, in a timely manner, the multi-track strategy Debtor has commenced involving an auction for all types of bids (each, a “Bid”) for substantially all of the assets of its estate (collectively, the “Offered Assets”) including, but not limited to, Bids for: (a) Debtor’s leasehold interests (collectively, the “Leases”) or designation rights for particular Leases; (b) equipment; and (c) goods and merchandise or agency rights for the disposition of such merchandise; and/or (d) the right to augment Debtor’s inventory. Debtor will seek entry of an Order expediting the Sale Hearing and scheduling it for no later than March 26, 2010 to consider entry of the final sale order.
Events Leading to the Bankruptcy Filing
The initial filings identify 3 main causes for the slide into bankruptcy.
First, in February 2009, Swoozie’s entered the Northeast market through its purchase out of bankruptcy of 13 Blue Tulip stores. Blue Tulip was a chain of stores specializing in similar gift and social stationery consumer segments. The sales assumptions based on this acquisition were not achieved by a wide margin. Swoozie’s explained that ” The assumptions for Debtor’s 2009 sales plan predicted that sales in the Northeast would reach an estimated $12.8 Million, however, actual resulting sales figures were approximately $8.5 Million, missing the target numbers by over $4 Million.”
Swoozie’s further explained that a second reason for its decline “was a seismic shift in the economy which was especially felt in Debtor’s industry. Consumer behavior drastically changed as consumers pulled back on spending associated with paper.”
Finally, Swoozie explained that there had been a delay in additional funding originally anticipated in the third quarter of 2009. ” [B]ecause the capital infusion was delayed, Debtor was unable to purchase new inventory or timely pay its vendors for delivered product. As a result, Debtor’s sales missed targets by $2.2 Million.”
Exposure to Bankruptcy Preference Claims
This looks like a classic consumer, brick and mortar retailer bankruptcy. The closest fit to a recent bankruptcy in terms of business model, goods sold and post-petition plan would be the Linens ‘n Things bankruptcy. That bankruptcy recently spawned over 50 adversary proceedings to recover avoidable transfers under Bankruptcy Code Section 547.
Ironically, the Linens ‘n Things bankruptcy recently converted from a Chapter 11 to a Chapter 7. A primary reason given by the debtors for their failure to consummate a plan of liquidation was the under recovery of bankruptcy preferences.
Unlike Linens ‘n Things and Circuit City, this case will not be a big 503(b)(9) case. Again, 503(b)(9) administrative expense claims only reach goods received by the debtor 20 days pre-petition. The Debtor indicates that it really was not taking in new merchandise during this period.
So the preference claims are likely to be serious, and one of the biggest negotiation offsets, 503(b)(9) claims are MIA. On top of that, the Debtor comments that the late funding in the 3rd and 4th quarters of 2009 meant that the suppliers could not be paid timely. The mix is a bankruptcy preference nightmare for suppliers.
Top 40 Unsecured Swoozie’s Creditors
Swoozie’s has listed the following creditors as being its top “40” largest unsecured creditors. Actually, the list as filed only contains 39 creditors, but this will likely be corrected promptly by an amended list.
A surprisingly large number of the trade debt claims are listed as disputed or subject to setoff. The following list also does not include any creditor contact information that may have been included by the Debtor.
|Name of creditor||Nature of claim (trade debt, bank loan, government contract, etc.)||Indicate if claim is contingent, unliquidated, disputed, or subject to setoff||Amount of claim [if secured, also state value of security]|
Stone Mountain, GA 30083
|Trade Debt||Disputed Subject to Setoff||$865,852.71|
|Design Design Inc.
Grand Rapids, MI 49 50 1-2 26 6
|Trade Debt||Disputed Subject to Setoff||$352,268.51|
|Fed Ex – Corporate
PALATINE, IL 60094-4515
|Heart Strings Enterprises
Auburn, AL 36832
Greensboro, NC 27420
|Trade Debt||Disputed Subject to Setoff||$234,283.84|
|Crane & Co.,Inc
Dalton, MA 0 12 27-02 58
|Trade Debt||Disputed Subject to Setoff||$227,856.38|
|Innovative Packaging Grp, Inc.
Dallas, TX 75354-0996
North Little Rock, AR 72117
|Trade Debt||Disputed Subject to Setoff||$204,394.85|
|Patience Brewster Inc.
Skaneateles, NY 13152
|Trade Debt||Disputed Subject to Setoff||$197,051.94|
|Peking Handicraft, Inc.
South San Francisco, CA 94080- 6501
|Trade Debt||Disputed Subject to Setoff||$176,200.39|
|Dennis East International
Yarmouthport, MA 02675
|Trade Debt||Disputed Subject to Setoff||$173,123.53|
Dallas, D( 75244
|Trade Debt||Disputed Subject to Setoff||$160,787.86|
Roswell, GA 30076
|Trade Debt||Disputed Subject to Setoff||$147,504.44|
West Kennebunk, ME 04094
|Trade Debt||Disputed Subject to Setoff||$129,746.20|
|Lifeguard Press Inc
NEW Bowling Green, KY 42101-2609
|Trade Debt||Disputed Subject to Setoff||$123,029.54|
|Hilco Real Estate, LLC
Northbrook, IL 60062
Dallas, TX 75265-0448
|MS. Dee, Inc.
Minnetonka, MN 55345
|Trade Debt||Disputed Subject to Setoff||$111,236.76|
Dallas, TX 75243
|Trade Debt||Disputed Subject to Setoff||$109,019.93|
|Downtown @ the Gardens #15
c/o Berman Enterprises
Rockville, MD 20852
Seymour, CT 06483
|Trade Debt||Disputed Subject to Setoff||$101,766.79|
|San Lori Design
Little Rock, AR 72204
|Trade Debt||Disputed Subject to Setoff||$98,955.98|
Atlanta, GA 30368
|Trade Debt||Disputed Subject to Setoff||$89,184.62|
|Lady Jayne Ltd
Cypress, CA 90630
|Trade Debt||Disputed Subject to Setoff||$81,023.02|
|Morgan & Company
Griffin, GA 30224
|Trade Debt||Disputed Subject to Setoff||$80,768.60|
|Recycled Paper Greetings
Chicago, IL 60674
|Trade Debt||Disputed Subject to Setoff||$73,871.05|
|Opus Real Estat IL VII#27 Rent
Chicago, IL 60674
|Prime Source/Room It Up
Dubuque, IA 52004-1601
|Trade Debt||Disputed Subject to Setoff||$63,643.37|
|Cov II DDR Trademark Mont. LLC#30
Dallas, TX 75267-4182
|Anna Griffin Invitation Design
Atlanta, GA 30318
|Trade Debt||Disputed Subject to Setoff||$62,451.89|
|ShopperTrak RCT Corp
Chicago, IL 60606
|Tri Coastal Design
New York City, NY 10164-0442
|Trade Debt||Disputed Subject to Setoff||$58,679.67|
|The Orb Factory Limited
Halifax, NS B3P 1L3
|Trade Debt||Disputed Subject to Setoff||$58,673.17|
Manlius, NY 13104
|Trade Debt||Disputed Subject to Setoff||$56,815.36|
|Hog Wild LLC
Portland, OR 97214
|Trade Debt||Disputed Subject to Setoff||$56,384.00|
San Francisco, CA 94139
|Trade Debt||Disputed Subject to Setoff||$55,953.85|
|Long Grove Confectionery Co.
Buffalo Grove, IL 60089-6542
|Trade Debt||Disputed Subject to Setoff||$53,082.11|
|Melissa & Doug, LLC
Westport, CT 06881
|Trade Debt||Disputed Subject to Setoff||$51,692.83|
Rowayton, CT 06853
|Trade Debt||Disputed Subject to Setoff||$49,025.08|
The Top Swoozie’s List does not include: (1) persons who come within the definition of “insider”; or (2) secured creditors, unless the value of the collateral is such that the unsecured deficiency places the creditor among the holders of the largest unsecured claims.
The Top Unsecured Creditor List is never to be considered a waiver of any defense to or “allowability” of a listed claim or an admission of the amount of any listed claim. It is common for the amount of the claims to shift and sometimes a claim that is initially is undisputed is later disputed. Creditors should always consult the official claims register.