The Twists and Turns of Roomstore’s Chapter 11 Bankruptcy
RoomStore, a Top 100 retailer, filed for Chapter 11 bankruptcy in December 2011. The case was shifted from Chapter 11 to Chapter 7 bankruptcy on 24 July, 2012, thereby ending the retailer’s attempts to stay afloat in business.
A conversion from Chapter 11 bankruptcy to Chapter 7 can be very painful – because Chapter 11 allows a business some time to restructure its operations and then continue as a normal entity thereafter, while Chapter 7 liquidates the business. Here is why Roomstore’s case got converted:
1. Roomstore’s creditors’ committee and its management were at an impasse.
Both parties accused each other of mismanagement. The creditors’ committee accused Roomstore’s management of financially ruining the company while the restructuring process (Chapter 11 bankruptcy) was on. The committee specifically accused Roomstore of failing to pay $2 million in sales taxes collected while the restructuring process was on. The creditors also accused the company of not complying with a court order that directed it to sell its 65% stake in Mattress Discounters. The company was also accused of accepting orders it could not fulfill and of burning $10 million of operating cash.
2. Roomstore accused Salus Capital Partners, which had a stake in the company, of acting in concert with the creditors and terminating its debtor-in- possession financing.
The company also accused Salus and the creditors’ committee of trying to sell its 65% stake in Mattress Discounters behind its back. Roomstore now wanted the case to be converted from Chapter 11 to Chapter 7 bankruptcy.
3. The company further accused Salus Capital Partners of setting aside the sales tax money and appropriating it towards their loan.
4. Roomstore blamed the creditors’ committee of devising a faulty and ineffective advertising and marketing campaign that added to its losses.
Matters reached such a head that Roomstore argued for converting the case from Chapter 11 to Chapter 7. The judge, after considering all the arguments, felt that it was best that the company’s case was converted into a Chapter 7.
So, what lessons does this case teach us? It teaches us:
(a) To hammer out a strong restructuring plan that is practical and doable.
(b) That when outsiders operate the business, it could lead to financial ruin, and therefore Chapter 11 bankruptcy, in which the business owner is robbed of many critical controls. This can be a very risky affair.
(c) That every advertising campaign must be tested before launch. An A/B split test must be planned and money should be spent after conducting a market survey.
(d) That it is best to file for Chapter 11 business bankruptcy after evaluating all the pros and cons, and after exploring all other options.
If you are a member of a business that has fallen behind with creditors, you may very well be thinking about filing for bankruptcy (which is not always that easy to do). There are some other possiblities to take into consideration, like, business debt consolidation and debt management counselling. Stop by http://www.business-bankruptcy.com for more information and facts regarding how to prevent business bankruptcy.
