Retail Bankruptcies Leave Consumers Paying Thousands for Nothing

April 30, 2020, 10:30 AM

Rebecca Breckner hoped that letting her six children pick out their own bedroom sets would give them something to look forward to after the trauma of watching their suburban Cleveland home burn down last year.

But a few weeks after the 38-year-old registered nurse wrote a check for $21,000 worth of replacement furniture, the store’s parent company, Art Van Furniture LLC, declared bankruptcy. With the company now in a Chapter 7 liquidation after Covid-19 froze its business, Breckner is “very doubtful” she’ll ever see her furniture—or get her money back.

“It’s a nightmare,” said Breckner, who is now ordering new furniture from other stores and paying out of pocket. “You’re telling me that $21,000 worth of stuff is just gone? You don’t get anything? It’s not normal.”

Frustrated Art Van customers like Breckner could be a harbinger of what’s to come if the pandemic forces more retailers into liquidation unexpectedly, leaving customers surprised to find the goods they purchased, but haven’t yet received, are now frozen in a bankruptcy estate.

Plans Upended

Art Van held an estimated $35.2 million in customer deposits for items on layaway or furniture that was paid-in-full but not yet delivered at the time the company filed for Chapter 11 bankruptcy protection in Delaware March 8.

Normally, customers of a retailer that files for Chapter 11 may not even notice if the company keeps operating while it restructures.

Art Van had planned to liquidate inventory at most of its 169 locations and sell its Wolf- and Levin-branded stores back to their previous owner, Robert Levin. The 44-store deal included Levin Furniture in Middleburg Heights, Ohio, where the Breckner family shopped.

The company expected to deliver furniture and provide exchanges or refunds for customer deposits as it wound down the business, according to its court filings. About $16.9 million of the customer deposit obligations would transfer to the new owner of the Wolf-Levin stores.

But that never happened.

Instead, just days after getting court permission to start going-out-of-business sales, shelter-in-place orders forced Art Van to abruptly close showrooms and halt deliveries. The Wolf-Levin buyer backed out, the bank refused more financing, and Art Van’s plans to reorganize fell apart. The case converted to a Chapter 7 liquidation April 7.

‘You Can’t Call Anybody’

The pandemic has made an already confusing Chapter 7 process even more difficult for most customers.

“You can’t call anybody,” said Georgia Hardwick, a 58-year-old insurance agent and Levin Furniture customer from Pittsburgh. “There wasn’t even a customer service rep to field any of their questions.”

Hardwick paid in full for $2,371 worth of patio furniture March 14. When she heard on the news that stores would close before her scheduled delivery, she rented a flat-bed truck and drove more than an hour to a warehouse in Smithton, Pa., only to find it closed.

She called the state police and said her furniture had been stolen.

“They said, ‘That’s a civil case,’” Hardwick recalled. “And I said, ‘It’s kind of criminal if you ask me.’”

The Pennsylvania Office of Attorney General received “hundreds of complaints” from customers who paid for furniture they never got, said Mark Shade, a spokesman for the office.

Attorneys general in the seven other states where Art Van operates also got complaints, and are demanding information about the status of customer deposits, furniture warranties, gift cards, and store credit card charge-backs, according to Bradford J. Sandler of Pachulski Stang Ziehl & Jones LLP, an attorney for Art Van’s Chapter 7 Trustee.

“We have been flooded by calls from consumers,” Sandler told the bankruptcy court at a hearing April 27. “The consumers, frankly, they don’t understand the bankruptcy process, but they want somebody to talk to.”

Seventh in Hierarchy

When a company goes into Chapter 7, its affairs are handed over to a trustee, who gathers company assets and liquidates the estate to pay off creditors. Customers who put down deposits or who paid in full for merchandise before the bankruptcy filing become unsecured creditors of the company’s estate.

Under Chapter 7’s hierarchy, such customers are ranked seventh on the list to get their money back.

They will get priority on claims of up to $3,025, but other costs such as attorney fees, employee wages, and benefit plans must get paid out first. If there isn’t enough to repay in full, customers like the Breckner family might get only a percentage of what they are owed.

“If you run out of money before you hit that group of people who have so-called deposit claims, well, then they are just out of luck,” Anne Lawton, a law professor who teaches bankruptcy at Michigan State University, told Bloomberg Law.

Customers like Hardwick, who bought furniture after the Chapter 11 filing but before the Chapter 7 conversion, fall into a different category, said Brook E. Gotberg, a law professor who teaches bankruptcy at the University of Missouri School of Law.

Those purchases get wrapped up into the estate’s Chapter 11 administrative claims, and are number two in line to be paid back, just after the Chapter 7 Trustee gets paid.

That means most post-petition claims like Hardwick’s will likely get paid back, Gotberg said. “Either it’s going to be reimbursed or they’ll get their furniture delivered,” she said.

Locked Up Inventory

Until Art Van reopens stores, most of the company’s assets are tied up in furniture it can’t sell. Art Van has $90 million dollars worth of inventory locked up stores and warehouses, Sandler told the court.

There are also 59 shipping containers full of furniture that are languishing at various ports, racking up more than $24,000 per day in storage fees, according to the company’s shipper, Kuehne + Nagel Inc.

The logistics company is seeking court permission to abandon or liquidate the shipments to cover the $1.17 million in fees that have accrued through the end of April.

Sandler said he hopes to restart Art Van’s going-out-of-business sales in June. The Trustee is still working out the “mechanics” of getting suspended furniture orders delivered, he said.

If Art Van can manage to reopen its stores before rent, security payments, storage costs, and other fees eat away its collateral, the company might be able to turn its inventory back into cash and pay back its customers.

Breckner isn’t counting on it. She’s already found duplicates of the furniture her kids wanted and put in orders at other stores. She has mattresses lined up so everyone can sleep on the floor if those orders get delayed.

The family hopes to move back home in July.

To contact the reporter on this story: Leslie A. Pappas in Wilmington, Del. at lpappas@bloomberglaw.com

To contact the editors responsible for this story: Laura D. Francis at lfrancis@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com

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