UPDATE: Court approves sale of 1800mattress.com to Sleepy's

Price set at $25 million

Larry Thomas -- Furniture Today, June 26, 2009

NEW YORK — A U.S. Bankruptcy Court judge has approved the sale of bankrupt retailer 1800mattress.com to one-time rival Sleepy's for $25 million.

In ruling that the bid from Sleepy's was the "highest and best offer" received at a court-supervised auction in late May, Judge Dennis Milton also allowed Sleepy's to reject 1800mattress.com's two franchise agreements.

"The Court's independent review confirms that rejection of the franchise agreements benefits the estate and that the decision to conduct an auction sale is a proper business judgment," Milton said in his 19-page ruling.

The ruling noted that the Court had earlier approved an $11.4 million damage claim for the franchisees if their agreements were ultimately rejected. It will be added to the other claims from unsecured creditors.

Milton said the Sleepy's bid would allow unsecured creditors to be paid 85% of what they were owed when 1800mattress.com filed for Chapter 11 protection in March.

Franchisee Consolidated Group, which operates in all or parts of Massachusetts, Vermont, Rhode Island, New Jersey, Pennsylvania, Delaware and Florida, had strenuously objected to the Sleepy's proposal, arguing that it violated a fundamental purpose of bankruptcy law because it wouldn't allow 1800mattress.com to preserve its business.

Consolidated also argued that Dial-A-Mattress International, the 1800mattress.com unit that holds the franchise agreements, is a financially viable company.

Milton rejected those arguments, even though his ruling acknowledged "the rejection of the franchise agreements could have devastating effects on the franchisees and involve complicated litigation."

Consolidated was one of five unsuccessful bidders for the bankrupt retailer.

"There was a spirited auction with seven rounds of bidding that ended with the (Sleepy's) bid in the amount of $25 million," Milton wrote. "The bid was $320,000 greater than the second highest bid, and substantially greater than the original stalking horse bid of $2.1 million."

Sleepy's, which was ranked No. 11 on Furniture/Today's most recent list of the Top 100 U.S. furniture stores, has indicated it will close the remaining bricks-and-mortar stores operated by 1800mattress.com, but keep its warehouse and headquarters building in Long Island City.

Sleepy's operates nearly 700 bedding specialty stores in 11 states and had estimated revenues of $831 million in 2008.

Founded in 1976 as Dial-A-Mattress by Napoleon Barragan, 1800mattress.com pioneered the sale of mattresses over the phone, and later, the Internet.