by WILMINGTON, Del. — The much-anticipated bankruptcy of American Signature looks straightforward, and it has been reported as such. A company that boomed during Covid — but that has gone a bit bust since — cited in its Chapter 11 bankruptcy declaration a litany of usual suspects as cause: a crap housing market and cost pressures due to rising inflation, high interest rates, tariffs and a post-pandemic slowdown in consumer demand.
I say “much-anticipated” because rumors of this bankruptcy were among those widely circulated at the High Point Market in October whenever industry tea was spilled in showrooms.
A deeper dive into the 100-plus motions and court filings, several of them in the hundreds of pages, reveals that this bankruptcy is, in fact, at least a little bit different, particularly with respect to family ties that span wide and run deep. In fact, the debtors refer to the stalking horse bidder as an “insider.”
The Nov. 22 bankruptcy filing itself is orthodox, as is the now well-rehearsed script of hiring legal representation, consultants and restructuring officers, lining up funding with which to liquidate “in the best interests of creditors, stakeholders, etc.,” and filing a raft of a hundred or so motions seeking relief for this, that and the other. Included in this raft is a lengthy motion asking the bankruptcy judge to fast-track the sale of basically all assets, laying the groundwork for a quick, sweeping liquidation.
It’s usually more useful to read the declarations, and this bankruptcy docket is no exception. In the declaration filed by Rudy Morando, a managing director with Berkeley Research Group and one of the two co-chief restructuring officers (Stephen Coulombe, also with BRG, is the other), he reveals interesting details that likely will make this bankruptcy deviate from the norm.
The bankruptcy filing was made in the U.S. Bankruptcy Court for the District of Delaware, where the Franchise Group debacle is being litigated. American Signature is a family-founded residential furniture company operating across Value City Furniture and American Signature Furniture retail brands, operating more than 120 stores across 17 states and employing approximately 3,000. The company’s owner is Schottenstein Stores Corp.
Convenient stalking horse
Already designated for closure are 33 stores, part of the process of “optimizing its retail footprint,” as a well-worn euphemism of bankruptcy-speak puts it. This means, “We are running out of money.”
Liquidation sales have already begun, especially in Nashville, Tennessee, where the American Furniture side of the business began in retail in 2003. The company announced in October plans to leave the Music City, an announcement that spawned the Chapter 11 rumors at market.
One of the nuggets in Morando’s filing is that he “anticipates very shortly entering into a stalking horse asset purchase agreement” with an affiliate of American Signature’s equity holders, an agreement subject first to an auction. This stalking horse is a company formed expressly for the purchase, ASI Purchaser, which has made a $5 million deposit payment. The guarantor of the acquisition is SEI. Both ASI Purchaser and SEI are “directly or indirectly, wholly owned by the Schottenstein family,” according to Morando, which is the family that already owns American Signature and Value City, therefore making them “insiders.”
Value City is a 77-year-old, Columbus, Ohio-based furniture retail brand. American Signature was launched in 1995, first as a line of furniture sold in Value City stores and later relaunched as a separate retail chain. The parent company of both is owned by Jay L. Schottenstein. American Signature became the parent company of Value City Furniture in 2002.
So, provided that I’m following Morando’s disclosures accurately, if the stalking horse bid is successful, a Schottenstein-controlled company will sell its real estate assets, intellectual property, leases, etc., to a Schottenstein-controlled company with the help of another Schottenstein-controlled company already contracted to liquidate the 33 stores. If the stalking horse bid is successful, as Morando’s declaration predicts, this third party will liquidate more stores, according to the declaration, and probably all of them.
To facilitate all of this, the company said it has secured about $50 million in debtor-in-possession financing from Second Avenue Capital Partners, which, no surprise here, is a Schottenstein-controlled company. Subject to court approval, “this financing will support certain operations and the company’s efforts to maximize value through the Chapter 11 cases and sale process.”
World wide web
In September, American Signature retained SB360 as a consultant in connection with conducting store closing sales at five stores. In November, SB360 was asked to liquidate an additional 28 stores. SB360 Holdings owns SACP, a lender to American Signature to the tune of $39 million before the proposed DIP financing. Specifically, SB360 Holdings is 60% owned by the Schottenstein family “through various trusts,” according to Morando’s declaration.
Is there just a teensy-weensy conflict of interest here? Well, have no fear, because on Nov. 19, a conflicts committee comprising exactly one member was established with “full power and authority to negotiate, review, approve and ratify all related party transactions,” a committee constituted “in order to, among other things, avoid any potential conflict of interest as a result of the relationship between the debtors and its affiliated transaction counter-parties.”
Adam Zalev is this appointed conflicts committee, making it easy to schedule meetings. He is the cofounder of Reflect, a boutique financial advisory and restructuring practice. He was involved in administrating the Hudson’s Bay bankruptcy, as well.
In addition to the above, “certain of the debtors’ leased stores and distribution centers are owned by entities affiliated with the Schottenstein family,” according to Morando’s declaration, and “additional transaction counter-parties with the debtors are beneficially owned by, or affiliated with, the Schottenstein family.”
All of this is above-board and disclosed in the many filings. Fiduciary duty with respect to the bankruptcy is up to U.S. bankruptcy court Judge J. Kate Stickles, who will preside over the first hearing in the case at 11 a.m., Dec. 9. Objections are due by Dec. 7, and I expect one to come from Man Wah Furniture.
Motion on motion
A motion from the DIP seeks to cancel an exclusive and key supply agreement with Man Wah, one of the company’s biggest vendors and its single largest unsecured creditor. The Hong Kong trading company is owed $15 million, according to the filed disclosures.
Man Wah has been American Signature’s exclusive supplier of motion upholstery, an exclusivity that “no longer provides any benefit” to its operations and, if left in place, would impose ongoing costs on the estate, according to the DIP motion. Under Section 365 of the U.S. Bankruptcy Code, debtors may reject “executory contracts,” or ongoing agreements where performance remains due, if doing so is a sound business decision that benefits the bankruptcy estate.
American Signature has not indicated whether it plans to pursue new suppliers for motion upholstery or shift its merchandising strategy altogether. Judge Stickles will determine whether the proposed contract rejection meets the business-judgment standard and is in the best interests of the bankruptcy estate.
As of the petition date, American Signature had just under $2 million in cash, according to its filing, and it estimates that it owes approximately $236 million in unsecured claims, an amount that does not include lease liabilities.
One last Schottenstein link to report: Value City Arena, where Ohio State University plays its basketball and hockey games, is part of the Jerome Schottenstein Center complex in Columbus. No word on what will happen to the arena’s naming rights.
Ending a century in retail
Ephraim Schottenstein, a traveling salesman in central Ohio, opened the first Value City in 1917 as an off-price department store. In 1948, son Alvin Schottenstein took over. In 1976, Jay Schottenstein joined Value City Furniture and was named company president in 1984.
In addition to his roles as chairman of the board and CEO of Schottenstein Stores Corp., the parent of Value City Furniture and American Signature, Jay Schottenstein is also CEO at American Eagle Outfitters and chairman of the board of DSW, a leading footwear and accessories retailer.
Ironic is the fact that, among all of these high-profile C-suite roles, Schottenstein also became a liquidator along the way, liquidating such entities as Korvette’s department stores, Halle Brothers, Ames Department Stores and DeLorean. Not all of the liquidations went as planned, however. Schottenstein and other investors and company officials agreed in 1991 to pay a $11.7 million settlement of a lawsuit over the handling of the Chapter 7 bankruptcy of Chicago-based Wieboldt department stores in 1986.
The auction for American Signature/Value City has been proposed by the debtors for 10 a.m., Jan. 5, with bids due on Dec. 30. If the stalking horse bid is accepted, this bankruptcy could be done and dusted in 35 days. The judge has already granted the DIP motion to shorten notice and expedite the hearing.
One last note: Columbus is also home to Big Lots, another big chain that declared bankruptcy, doing so in September last year.
