January 23, 2020 − SFP Franchise Corp. and one affiliated Debtor (d/b/a Schurman Fine Papers, together with SFP Franchise Corp. “Schurman” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10134. The Debtors, a stationery, greeting card, gifts, and paper products company based in Fairfied, California, are represented by Matthew B. McGuire of Landis Rath & Cobb LLP. Further board-authorized engagements include (i) Craig M. Boucher of Mackinac Partners LLC ("Mackinac") as the Debtors' Chief Restructuring Officer and (ii) Omni Claims Solutions as claims agent.
The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $50.0mn and $100.0mn. In documents filed with the Court, the Debtors refine those figures, noting assets of approximately $39.4mn and liabilities of approximately $54.9mn. The Debtors' lead Petition further lists the Debtors’ three largest unsecured creditors as (i) Jean Cultural & Creative Co. LTD ($1.7mn trade debt), (ii) Crane & Co. Inc ($930k trade debt) and (iii) UPS ($447k trade debt).
Objectives of the Chapter 11
In documents filed with the Court, the Debtors state: "Ultimately, following its evaluation of all available options, the Company determined… [that]…pursuing an orderly liquidation of its assets in a controlled, court-supervised environment (the ‘Liquidation’) is the best available option to maximize value for the Company and its stakeholders."
Store Closings and Consulting Agreement
The Declaration (defined below) states: “Prior to the Petition Date, the Debtors solicited bids from four (4) leading national liquidation firms. To initiate the closing of Debtors' store locations in the United States (the ‘Store Closings’), the Debtors entered into the consultant agreement dated as of January 17, 2020, (the ‘Consulting Agreement’) by and between the Debtors (the ‘Merchant’), and a joint venture with Gordon Brothers Retail Partners, LLC and Hilco Merchant Resources, LLC (together, the ‘Consultant’). The Debtors intend to utilize the services of the Consultant to liquidate all of their remaining inventory and close all of their stores."
The Debtors attach a list of 259 stores to be closed at Exhibit A of the Consulting Agreement [Docket No. 21]. The store closing process is to be quick, with the Debtors looking to wrap up the process "on or before February 29, 2020."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Declaration”), Craig M. Boucher, the Debtors' Chief Restructuring Officer detailed the events leading to the Debtors' Chapter 11 filing. The Declaration srtates: "In addition to the general downturn in the brick-and-mortar retail industry, the Debtors have suffered an erosion in their profitability due to unique operational and performance issues including (a) the capital costs incurred in refurbishing or closing a large number of old and underperforming stores acquired in 2009; (b) the renegotiation of certain agreements which reduced the fees payable to the Debtors under those agreements; and (c) increased cost of products and pricing issues for products in both the United States and Canada that resulted in a decline in revenues.
The Debtors and American Greetings [see below for description of the Debtors' relationship with American Greetings] worked cooperatively to address the operational and financial issues facing the Debtors and find a mutually beneficial path forward. In early 2019, the Company's management approached American Greetings to address the receivable owing to American Greetings and provide greater security on a go forward basis. To that end, pursuant to the Junior Security Agreement, the Debtors agreed to give security to American Greetings in the property of the Debtors, which security was to rank subordinate to the security held by the Senior Lenders.
During fall 2019, the Debtors also actively engaged with potential strategic partners to sell and/or re-capitalize the Debtors balance sheet. However, before the Debtors were able to consummate a transaction or otherwise identify a viable path forward, on December 5, 2019, American Greetings notified the Debtors that it was immediately terminating the American Greetings Agreements, subject to a cure period, purportedly on the basis that the Debtors were in default under those agreements. American Greetings ceased providing product to the Debtors at the same time, which had an immediate negative impact on the Debtors' business operations.
The termination of the American Greetings Agreements by American Greetings constituted events of default under the Senior Loan Agreement. As a result, the Senior Lenders have the right to cease making any advances and to cease issuing any additional letters of credit to the Debtors, to demand immediate payment of all outstanding obligations under the Senior Loan Agreement and to exercise the rights and remedies available to the Senior Lenders, including foreclosure upon any collateral securing the outstanding obligations. While the Senior Lenders have not chosen to exercise any of these rights or remedies, it has expressly reserved all rights and remedies under the Senior Loan Agreement.
Ultimately, following its evaluation of all available options, the Company determined that filing for Chapter 11 protection, utilizing cash collateral (with the consent of the Senior Agent, Senior Lenders and American Greetings, in its capacity as Subordinated Creditor) and pursuing an orderly liquidation of its assets in a controlled, court-supervised environment (the ‘Liquidation’) is the best available option to maximize value for the Company and its stakeholders. The Debtors believe that the Chapter 11 process, including the proposed Liquidation, consisting of substantially all of their assets, will provide the greatest recovery for their creditors.
Relationship with American Greetings
In April 2009, the Debtors entered into a transaction with American Greetings Corporation and its affiliates (“American Greetings") that fundamentally transformed the Debtors’ business. Under a Purchase and Sale Agreement, the Company sold its wholesale business and the Papyrus brand and related trademarks to American Greetings and at the same time, the Debtors acquired the retail business previously operated by American Greetings in Canada and the United States. As a result of this transformation, the Debtors became the retail operator of over 500 stores in both the United States and Canada.
In conjunction with the Sale Agreement, the Debtors and American Greetings entered into several ancillary agreements (together, the "American Greetings Agreements") , including (i) a Supply Agreement, (ii) a Trademark License Agreement, (iii) a Marketing Services Agreement and (iv) a POS Data Services. As a result of these agreements, the Company became increasingly integrated with and highly dependent on American Greetings. In particular, the Company relied on American Greetings for significant portions of the goods it sold under the Papyrus and Carlton Cards/Cartes Carlton names and for the trademarks it required to operate its business under the Papyrus and Carlton Cards/Cartes Carlton names.
About the Debtors
Across North America, Schurman Retail Group, through its retail brands, offers an ever-expanding array of products including curated and exclusive gift collections, greeting cards, gift wrap, stationery ranges, notecards, back to school stationery, journals, products for entertaining, diaries and a full range of custom printed announcements, stationery, invitations and personalized gifts.
As of the Petition Date, the Debtors own and operate 254 retail stores in the United States and Canada and is headquartered in Goodlettsville, Tennessee. The Debtors operate retail locations under four (4) brands: Papyrus, AmericanGreetings, Carlton Card and Paper Destiny. The Trademarks used in the Papyrus, American Greetings and Carlton Card retail locations were licensed from American Greetings pursuant to a trademark agreement. The Debtors own four of their own brands: Paper Destiny, Marcel Schurman, NIQUEA.D and XOXO, Dominique.
As of the Petition Date, the Debtors have approximately 1,100 salaried and hourly employees (in the U.S.), the vast majority of whom work in the Company's retail locations and are employed by, and on the payroll of, Debtor Schurman Fine Papers. The Company has no unionized employees and is not party to any collective bargaining agreements. On a consolidated basis, the Debtors reported $157.5mn in revenues for fiscal year 2019 and generated EBITDA of $700k for that same period.
Corporate Structure Chart
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The post SFP Franchise Corp. – Citing Retail Downturn and Dispute with American Greetings, Owner of Retail Stationery Chain “Papyrus” Files Chapter 11, Looks to Close 259 Stores by End of February appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.