At a hearing conducted on July 7, 2016, the bankruptcy court in Delaware presiding over the chapter 11 case of Sports Authority (SA) approved a monumental settlement between consignment vendors, SA, and SA’s Term Loan Agent (TLA). Approximately 75 consignment vendors signed on to the settlement. The settlement resolves extensive litigation and pending appeals (as well as likely future appeals) that otherwise would have continued for years.
The consignment vendors were led by SulmeyerKupetz client Agron, Inc., a provider of Adidas-branded products, by ASICS, and by Castlewood Apparel. Despite efforts by Agron prior to SA’s chapter 11 case, SA did not adequately address consignment issues before filing for chapter 11 relief on March 2, 2016. On that same day, SA filed a “first day” motion regarding consignment goods that proposed to allow SA to sell the goods without paying the vendors, by placing the vendor’s portion of the sale proceeds in escrow and allowing the vendors to later fight with the TLA and SA over entitlement to the vendor’s portion of the sale proceeds. That same day, SulmeyerKupetz filed Agron’s objection to the SA’s consignment goods motion.
David Kupetz of SulmeyerKupetz appeared for Agron at the first day hearing, held in Delaware on March 3, 2016, and argued in opposition to the relief sought by SA in the consignment motion. While SA’s other first day motions were relatively routine and went quickly and smoothly, the initial hearing on the consignment motion lasted the entire day. As pointed out by Kupetz at the hearing and in the objection filed by Agron, without the consignment vendors’ consent, SA was not entitled to the relief sought in the consignment motion.
The consignment agreements provided that the goods were owned by the vendor until sold to the retail customer. Further, SulmeyerKupetz emphasized that in a 2008 decision (Whitehall Jewelers), a Delaware bankruptcy court had ruled that consignment goods could not be sold as property of the bankruptcy estate under Bankruptcy Code section 363, absent the vendor’s consent, without determining in the first place whether the goods are even property of the estate. Moreover, as the court ruled in Whitehall Jewelers, this determination could only be made through a full-blown lawsuit (adversary proceeding) in the bankruptcy court which would likely take many months, if not longer, to conclude.
At the initial hearing and at multiple subsequent hearings conducted over the next 3 months, the court consistently rejected the arguments presented by the TLA and SA, and agreed with the position asserted by SulmeyerKupetz for consignment vendors. The court denied the relief requested by SA under section 363 and ruled that the consigned goods could only be sold pursuant to Bankruptcy Code section 365 governing executory contracts; this required that SA fully comply with the contracts in order to sell the goods. This compliance included paying the vendors in accordance with the contract terms (and not placing sale proceeds in escrow) and complying with all discounting limitations held by vendors.
The TLA and SA filed appeals from the bankruptcy court’s orders and also unsuccessfully made multiple attempts to obtain stays of the orders from both the bankruptcy court and the district court. Additionally, SA and the TLA filed adversary proceedings in the bankruptcy court against all the consignment vendors seeking, among other things, to claw back all payments received by the consignment vendors. The TLA argued that its blanket security interest on SA’s assets was senior to any rights of the consignment vendors in their goods, since virtually none of the vendors had taken action to perfect an interest under the Uniform Commercial Code.
The settlement was achieved after four months of constant litigation, involving many court hearings, extensive briefing and some discovery, as well as three days of mediation supervised by a Magistrate Judge of the Delaware District Court followed by seven days of intense negotiation. The settlement was opposed by the unsecured creditors’ committee on a limited basis. The committee, however, said that it did not want to stand in the way of the resolution of what it characterized as the monumental litigation that had been at the center of SA’s case for four months. Rather, the committee was seeking concessions from the TLA.
Overruling the committee’s objection, the bankruptcy court approved the settlement, stating that based on the complexity of the litigation (both legally and factually), the hard fought nature of the litigation to date, and the fact that otherwise litigation and appeals would continue for years, the settlement was “a perfect settlement,” with no party getting everything that it wanted. Without the consignment vendors effectively asserting and fighting to protect their rights, there would have been no settlement. If SA’s consignment motion had been granted, there would have been a substantial risk that the vendors would have received nothing from the sale of their goods. Under the settlement, the consignment vendors receive a significant recovery and eliminate the expense and risk of litigation that otherwise would have lasted for years.
The SulmeyerKupetz attorneys primarily involved in the firm’s representation of Agron in the Sports Authority case are David Kupetz and Jessica Vogel. Other attorneys at the firm providing significant services include David Richardson, Jeffrey Pomerance, and Asa Hami. SulmeyerKupetz also represented consignment vendor Rip Curl, Inc., in this case.
Also read Law360 article discussing emergency hearing conducted on June 17, 2016, where the court rejected SA’s attempt to abandon consigned goods of Agron, ASICS, and Castlewood, subject to clawback claims.