08 April 2015

Family Christian Stores Back on the Block

I previously posted here and here about the Chapter 11 bankruptcy of Family Christian Stores. FCS does not propose to reorganize its debts; rather, it plans to sell virtually all of its assets to a new entity who will continue business as usual albeit with a much smaller debt load.

Many of the creditors objected to the proposed sale because the "stalking horse" buyer initially proposed at the outset of the bankruptcy case was controlled by the same fellow, Richard L. Jackson, who had bought FCS in 2012 (and given it to a non-profit holding company) and who immediately before bankruptcy had purchased a large piece of the secured debt of FCS. Many of the same creditors argued that Jackson was wearing one or two hats too many and, on top of that, FCS didn't really own its inventory because the creditors had consigned it to the company. (Read the technical legal arguments about that issue here.)

All of this is a long way of saying that FCS eventually withdrew its motion to sell to Jackson.

. . . Only to file a new motion on March 30 to sell the company with, it is claimed, "significant support from interested parties." So, what happened?

First, Jackson is no longer the stalking horse bidder. All any potential buyer need do is fill in the blanks on the 75-page asset purchase agreement and the one with the highest number wins. Jackson may still be the highest bidder but he is no longer running on the inside track.

Second, Schedule 4.5 to the asset purchase agreement lists all of the asserted consignment interests in inventory. FCS is not agreeing that its inventory really is consigned but only that these many vendors claim to own the consigned inventory. For the reason noted below, the issues of whether there were "true" consignments or whether there were "consignments in the nature of security" or whether the creditors of FCS "generally knew" FCS was in the business of selling other people's stuff will be settled.

But, you might wonder, who would buy the assets of FCS if they don't know what those assets are? In other words, how much would anyone bid if around $20 million of inventory belongs to a variety of other folks? Or, from the perspective of the consignors, why would they permit FCS to sell their stuff to someone else?

In short, the consignors don't want their stuff back. They would prefer to have someone take over all the FCS stores and sell the books, gift items, and kitsch to retail customers. Sure, the consignors want to get paid in full for what they've delivered but they are, by and large, willing to work on that problem with the successful buyer. In fact, any possible buyer will work a deal with the most important consignment vendors before submitting a bid.

Settlement is in the air when commercial disputes come down to dividing a limited pot of money. I believe the consigning vendors would have had a stronger settlement posture had they filed the "cheap insurance" of a UCC-1 financial statement but that's water over the dam and now it's about sharing the pain. No one will get paid in full and hope in the recovery of print media businesses seems to spring eternal.

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