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Chapter 11 is becoming synonymous with GOB

Larry Thomas, Business editor -- Furniture Today, March 9, 2009

During the past several months, I've had the misfortune of writing dozens of stories about bankruptcies. So many, in fact, that a reader told me recently he cringes every time he sees a “breaking news” item from Furniture/Today in his in-box. “I always wonder who's going out of business today,” he said.

His comment was perceptive on two fronts. First, the wave of bankruptcy filings by furniture retailers and manufacturers in 2008 and 2009 has been unprecedented. But perhaps more importantly, he equated “bankruptcy” with “going out of business.”

Bankruptcy, at least the Chapter 11 filings most commonly used by troubled companies, isn't supposed to be the beginning of the end. It is supposed to keep creditors at bay while the debtor reorganizes its business.

But that hasn't been the norm with the recent spate of furniture industry filings. Many debtors have opted to liquidate their assets rather quickly, pay creditors a small portion of what they're owed, and disappear. That's what is happening with Wickes, Domain, Sofa Express, Bombay, D.D. Huber and Fortunoff's on the retail side, as well as Douglas and Collezione Europa on the manufacturing side.

An article in Business Week last summer blamed the trend on changes to bankruptcy laws back in 2005 that made it harder for a debtor to drag out a Chapter 11 proceeding for years (think Heilig-Meyers and Macy's). During such elongated proceedings, the argument went, bankruptcy attorneys and accountants kept collecting fees while empty-handed creditors and landlords stewed on the sidelines. While there probably is merit to that argument, many others (especially unsecured creditors) contend that secured creditors are to blame by pressuring the court to get their money quickly and ignoring the needs of unsecured creditors.

That's precisely the argument that unsecured creditors made last month in the Fortunoff case, which has been moving at warp speed since the home furnishings and jewelry retailer made its Chapter 11 filing on Feb. 5. Exactly three weeks after the initial filing, the retailer began a court-approved GOB sale.

The unsecured creditors committee filed an emergency motion for a four-week extension of the asset auction and sale process, but it was dismissed Feb. 25 and the GOB sale ordered to begin the following day. The committee's objection said, in part, that Fortunoff's made virtually no effort to sell the business as a going concern.

“In sum, the marketing and sales process is incomplete and deficient,” the committee said in its court filing. “Clearly, marketing and selling the assets in less than 30 days is a disservice to (the unsecured creditors.)”

Sadly, the unsecured creditors are not likely to receive any proceeds from the GOB sale — the same amount they received from Fortunoff's last bankruptcy filing a little more than a year earlier.

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