October 22, 2021 – The Debtors filed a motion to induce dismiss their Chapter 11 cases, arguing that “there are insufficient funds available to confirm a plan of liquidation” although they do anticipate that "approximately $3.9 million [will be available] for distribution to their creditors" [Docket No. 1142]. The Debtors, who are now into the third year…and seventh exclusivity period…of their bankruptcy, insist that they have been busy in the 22 months since the Court approved a $50.0mn sale of their assets; noting that they have corralled several small amounts (eg, a workers' comp letter of credit, the release of collateral relating to a CBP surety bond and the liquidation of miscellaneous assets, see below). Those funds, the Debtors argue, should not be further eroded by the expenses associated with a Chapter 7 Trustee and get distributed to holders of secured and administrative claims as soon as possible.
On October 21, 2019, Destination Maternity Corporation and two affiliated Debtors (Nasdaq: “DEST,” “Destination Maternity” or the “Debtors”) filed for Chapter 11 protection with estimated assets of $260.2mn and estimated liabilities of $244.0mn. As detailed in the impressive list of shortcomings below, at filing the Debtors' noted that “a multitude of factors led to the commencement of these chapter 11 cases.” Amongst several of our favorites were (i) a general shift towards looser fitting clothing which makes a special maternity wardrobe superfluous and (ii) leadership turnover that occurred faster than most pregnancies (in the 2014-to-filing period, the Debtors had “five separate management teams, each with a different business plan and execution strategy,” with this turnover ultimately leading to a proxy battle where the entire slate of directors was replaced (only one of the new directors remaining at filing).
The Debtors' dismissal motion states, “The Debtors initiated these chapter 11 cases to maximize the value of their estates through the sale of substantially all of their assets. Following a robust marketing and sale process the Debtors accomplished that objective. On December 13, 2019, the Court entered the Sale Order authorizing the sale of substantially all of the Debtors’ assets to Marquee Brands, LLC (the ‘Buyer’) pursuant to the APA for a cash purchase price of $50 million, subject to certain adjustments, as further detailed in the APA (the ‘Sale’). The Sale, which closed on December 20, 2019 (the ‘Closing’), was successful given the retail climate, and preserved the Debtors’ e-commerce platform and iconic brands while providing the proceeds needed to pay down all of their senior secured debt obligations in advance of the milestone required by the Cash Collateral Order.
In the months following the Closing, the Debtors and their advisors focused their efforts in large part on (a) completing going out of business sales at their brick-and-mortar store locations, (b) assisting the Buyer in operating the business through June 30, 2020, pursuant to the Transition Services Agreement, (c) completing a comprehensive contract assignment and rejection process in cooperation with the Buyer, (d) reconciling their inventory in accordance with the process set forth in the APA, (e) filing federal and state taxes for the 2019 tax year, (f) decreasing go-forward operating expenses, including limiting professional fees and use of independent contractors, and (g) negotiating with certain administrative claimants, culminating in the entry of an order approving settlements with certain claimants to reduce Administrative Claims (as defined herein) by approximately $3 million. These tasks took substantial time and effort, particularly due to the onset of the global pandemic in March 2020, which severely disrupted ordinary course business operations and delayed necessary communications with third parties.
Concurrent with pursuing this suite of post-Sale tasks, the Debtors and their advisors also focused on administering their estates in preparation for concluding the chapter 11 cases, including by, among other things, (a) identifying and pursuing potential sources of cash for distribution to creditors, (b) reconciling claims (as defined in section 101(5) of the Bankruptcy Code, the ‘Claims’) filed in these chapter 11 cases, and (c) ultimately, determining how to bring about a value-maximizing culmination of these chapter 11 cases for the benefit of their creditors.
The Debtors and their advisors undertook a review of their remaining assets to determine whether any could be monetized. The Debtors identified and recovered, or are in the process of recovering, cash for distribution to creditors on account of the following assets.
- Workers’ Compensation Letter of Credit. The Debtors maintain a letter of credit with Travelers Indemnity Company (‘Travelers’) as collateral for unpaid workers’ compensation claims. The Debtors negotiated with Travelers to release the letter of credit on a substantially expedited timeline, and expect to receive the remaining approximately $1 million by the end of November 2021.
- Customs Surety Bond. The Debtors maintain a customs surety bond to secure the payment or performance of certain obligations to the United States Customs and Border Protection Agency (‘CBP’) on account of merchandise imported from foreign countries. The Debtors negotiated with CBP to release the remaining collateral securing the customs surety bond by mid-November, returning approximately $900,000 to the estate.
- Miscellaneous Assets. The Debtors have liquidated, or are in the process of liquidating, other assets totaling approximately $740,000, consisting of: (a) various insurance deposits totaling approximately $190,000, (b) repatriation of cash from their Canadian operations totaling approximately $230,000, and (c) a litigation reserve with Wells Fargo totaling approximately $250,000 and a treasury reserve with Wells Fargo totaling approximately $70,000.
Upon determining that certain of the foregoing unliquidated assets would take a significant amount of time to monetize, the Debtors undertook an informal marketing process in the spring and summer of 2020 to assess whether they could sell such assets for upfront cash, thereby accelerating potential distributions to their creditors. The Debtors received little-to-no interest from third parties in acquiring any of their remaining assets and received no value-maximizing offers. Accordingly, the Debtors proceeded with monetization of the long-term assets and undertook measures to minimize go-forward expenses during that process.
With the necessary time now expired to monetize their remaining assets, the Debtors believe that all of their material assets have been or will be liquidated upon dismissal, and anticipate that they will have approximately $3.9 million for distribution to their creditors (the ‘Distributable Cash’).
In connection with the dismissal, the Debtors have also undertaken a Claims reconciliation process to assist with the projection of potential recoveries and determination of the best path to culmination of these chapter 11 cases. The Debtors continue to analyze the Secured Claims, Administrative Claims, and Priority Claims filed in these chapter 11 cases and have filed and will file various objections to Claims on a number of substantive and procedural grounds. The Debtors anticipate that such objections will result in materially higher distributions to holders of valid Secured Claims and Administrative Claims, subject to the Court’s resolution of the objections and entry of the Proposed Order.
With an understanding of the anticipated Distributable Cash and allowed Claims, the Debtors and their advisors, in consultation with the Committee, determined that there are insufficient funds available to confirm a plan of liquidation.
After considering all potential alternatives, the Debtors have determined that a dismissal of these chapter 11 cases is the most expeditious and cost-effective process to wind down the Debtors’ affairs and maximize recoveries for holders of allowed Secured Claims and Administrative Claims. A dismissal will result in greater recoveries for such holders by ensuring a faster and less costly completion of these chapter 11 cases as compared to a conversion to chapter 7. The fees and commissions incurred by a chapter 7 trustee and its professionals alone justify dismissal of these cases. Moreover, conversion to chapter 7 would further delay distributions to holders of allowed Secured Claims and Administrative Claims, as a chapter 7 trustee and its professionals would need to spend time familiarizing themselves with these cases.
Because these chapter 11 cases have been substantially fully administered, and the procedures contemplated herein will provide for the full administration of the cases and distribution of all Distributable Cash available to the Debtors’ estates, conversion to chapter 7 is unnecessary and likely only to detract value. The few corporate actions that remain outstanding— filing final tax returns, collecting and distributing estate assets, and dissolving the Debtors’ corporate existence (or analogous limited liability company actions)—do not require a chapter 7 trustee’s oversight. Therefore, conversion to chapter 7 cases will merely add another layer of unnecessary administrative expenses, which would need to be paid in full before any holders of allowed Secured Claims or allowed Administrative Claims could receive any recovery on account of their Claims.”
The Court scheduled the hearing to consider the motion for November 22, 2021, with objections due by November 5, 2021.
Background
In an October 2019 press release announcing the filing, the Debtors stated that they had filed for Chapter 11 protection: “to facilitate and continue a marketing process begun in early September that has already yielded indications of interest from several credible bidders….
To help fund and protect its operations during the chapter 11 process, Destination Maternity obtained consent to use cash collateral from all of its prepetition secured lenders. The Company believes that this access to liquidity will be sufficient to pay suppliers and other business partners and vendors for authorized goods and services provided post-filing and during the chapter 11 process.”
Not noted in the press release, but discussed further below, is that the Debtors failed to pay October rent in respect of any of their 436 stores and have pre-petition “significantly curtailed payments to the vast majority of their vendors, suppliers, service providers, and other trade creditors," ie turned necessary business partners into unsecured general creditors.The Debtors also expect to begin store closings in respect of a further 148 stores this week and have signalled that they will be looking to renegotiate leases that they do not otherwise intend to reject.
Store Closings
The Gavales Declaration (defined below) [Docket No. 17] makes clear that (i) the Debtors intend the total of closed, closing and to be closed stores to exceed 170 and (ii) that landlords need to be worried. The Gavales Declaration states: “The Debtors believe a substantial number of their leases bear higher than-market rents compared to other retailers and would benefit from rent reductions. To that end, as discussed further below, the Debtors will continue the process of closing underperforming stores over the coming weeks [NB: bit of a disconnect between store closings and rent reductions, but we get the message].
On their own, the Debtors closed eleven stores prepetition in August and September, and are in the process of closing four additional stores this month. Following these closings, the Gordon Brothers’ process started in earnest on October 3, 2019, with the commencement of 12 “Phase 1” store closing sales. The Debtors have identified an additional 148 locations where they will commence store closing sales this week, subject to Court approval, and expect to complete such closings (and vacate such premises) by the end of this calendar year."
Pre-Petition Marketing Efforts
The Gavales Declaration states: "The Debtors, through their advisors, launched a robust but accelerated marketing process in early September that requested indications of interest by mid-October. In the ensuing weeks, the Debtors and their advisors provided substantial due diligence to, and participated in telephonic or in-person meetings with, parties that signed confidentiality agreements. The Debtors received non-binding written proposals for a going-concern sale of the Company’s businesses from several credible third parties, including proposals that contemplate a price that would provide a meaningful recovery to unsecured creditors among other constituencies. The Debtors intend to continue and complete the marketing process during these chapter 11 cases."
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Gavales Declaration”), Lisa Gavales, the Chair of Debtors’ Office of the CEO, detailed the events leading to the Debtors’ Chapter 11 filing [NB Ms. Gavales, is no stranger to managing retail operations in their run-up towards bankruptcies, having served as CEO of Things Remembered and as a Director for Forever 21, Inc.]. The Gavales Declaration offers that “a multitude of factors led to the commencement of these chapter 11 cases” and that is most certainly true. Those factors, boring down from the macro top towards a very unfortunate micro bottom, include:
- the general shift in retail consumer preferences away from brick-and-mortar stores,
- industry specific factors—including increased competition in maternity apparel from already-established brands, ranging from high-end fashion to cost-cutting box stores; a decrease in birth rates; and internet specialist retailers,
- a general shift towards looser fitting clothing which makes a special maternity wardrobe superfluous,
- leadership turnover that occurred faster than most pregnancies (since 2014, “five separate management teams, each with a different business plan and execution strategy,” with this turnover ultimately leading to a proxy battle where the entire slate of directors was replaced (only one of the new directors now remains),
- a $20.5mn drop in six month net sales ($199.6mn in 2018 to $179.1mn in 2019) leading to ABL facility lenders increasing discretionary reserves, further constraining already tightening liquidity,
- a laundry list of needed operational improvements, including rightsizing the brick-and-mortar store footprint; tweaking customers’ online experience' and capitalizing on opportunities to streamline and consolidate the business,
- a rent bill that the Debtors believe is considerably above market and
- what the debtors call “landlord and vendor issues," namely being the response of (a) landlords to the Debtors' failure to pay October rent on any of their 436 stores (cure periods in respect of 152 stores already expired, so locks were about to go on) and (b) third party contractors when the Debtors “significantly curtailed payments to the vast majority of their vendors, suppliers, service providers, and other trade creditors.”
Key Equity Holders
- Yeled Invest S.A.: 13.4%
- Disciplined Growth Investors, Inc.: 8.9%
- Nathan G. Miller: 6.6%
- Royce and Associates, LP: 5.4%
- Renaissance Technologies LLC: 5.1%
About the Debtors
The Debtors are "a leading designer and omni-channel retailer of maternity apparel in the United States, with the only nationwide chain of maternity apparel specialty stores, as well as a deep and expansive assortment available through multiple online distribution points, including our three brand-specific websites. As of February 2, 2019, we operate 1,012 retail locations, including 458 stores in the United States, Canada and Puerto Rico, and 554 leased departments located within department stores and baby specialty stores throughout the United States and in Puerto Rico. We also sell our merchandise on the Internet, primarily through our Motherhood.com, APeaInThePod.com and DestinationMaternity.com websites. We also sell our merchandise through our Canadian website, MotherhoodCanada.ca, through Amazon.com in the United States, and through websites of certain of our retail partners, including Macys.com. Our 458 stores operate under three retail nameplates: Motherhood Maternity®, A Pea in the Pod® and Destination Maternity®. We also operate 554 leased departments within leading retailers such as Macy’s®, buybuy BABY® and Boscov’s®. Generally, we are the exclusive maternity apparel provider in our leased department locations.
We maintain our leading position through our two key brands, which enable us to reach a broad range of maternity customers. Through our stores and certain of our leased departments, we offer maternity apparel under one or both of our two primary brands, Motherhood Maternity ('Motherhood' or 'Motherhood Maternity') at value prices and A Pea in the Pod ('Pea' or 'A Pea in the Pod') at both contemporary and premium prices. Our A Pea in the Pod Collection® (“Pea Collection”) is the distinctive premier maternity apparel line within the A Pea in the Pod brand, featuring exclusive designer label product at premium prices."
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