Furniture Brands chose fast, controversial path

A traditional bankruptcy would allow more transparency, legal expert says
Sep. 15, 2013 @ 08:33 AM

The type of bankruptcy reorganization that Furniture Brands International is using is fast-moving and one that has garnered criticism and controversy lately, a law professor said.

In a traditional Chapter 11 bankruptcy filing, the company filing for bankruptcy protection would either file with a restructuring plan already in place or would create the plan during the court process, with cases taking up to five years to complete. That would include a great deal of public disclosures and review of details of the restructuring plans, said Melissa Jacoby, who teaches commercial and bankruptcy law at the University of North Carolina at Chapel Hill.

But Furniture Brands filed under section 363, which means the filing could be resolved in as little as 30 days -- in a court hearing last week, the deadline mentioned to complete the sale was about four months -- with far less disclosure and no firm restructing plan in place, Jacoby said.

Sometimes in a 363 bankruptcy, the terms reached with the original buyer are so expensive that it discourages other bidders, Jacoby said, and the speed of the process doesn’t allow enough time for other bidders to learn enough about the company to put together a bid that can prevail.

In the case of Furniture Brands, Oaktree Capital Management, a Los Angeles-based investment management firm, agreed to acquire all of the company’s assets except the Lane brand. On Wednesday, KPS Capital Partners, a New York-based private equity firm, presented a competing offer to buy all of Furniture Brands, including Lane. KPS focuses on turning around troubled manufacturers and has experience with furniture manufacturing.

Once these and any other bids are finalized, Furniture Brands, the bidders and the creditors’ committee -- which will be appointed by the U.S. bankruptcy trustee, a Department of Justice official who serves as supervisor for the case -- will meet with the court, hash out the details, and the court will decide which bid is best for the future of the creditors and the company, according to a chapter on bankruptcies on United States Courts website, uscourts.gov.

Employee layoffs, the funding of pensions plans, closing of plants and changes in management are all dependent upon which bid is accepted, and what the new owner of the company sees as the best course forward, Jacoby said.

“In general, the more that a sale order puts those details in, the more that people might complain that process should have been done through a traditional Chapter 11 process,” Jacoby said, adding that employees are “right to wonder” about the future of the company.

In a traditional Chapter 11 reorganization, there would be large disclosures filed, detailing exactly what the intentions were for the future of the company and leaving room for input from creditors and stakeholders, Jacoby said.

According to the United States Courts website, the creditors committee ordinarily consists of the seven largest unsecured creditors. Unsecured creditors are at the back of the line to be paid what they are owed, so they have a particular interest in selecting the bid that best assures the bankrupt company's ability to repay its debts.

As example of a secured creditor is a bank, which lends a company money and gets a legal claim to company property in the event that the company can't repay the debt. Unsecured creditors, which include most ordinary business customers or vendors, have no such assurance on the money they are owed.

Secured creditors get paid first, no matter the outcome of the Chapter 11 proceedings, Jacoby said, and unsecured creditors may end up getting nothing at all, or sharing the leftovers with all other unsecured creditors.

In the list of unsecured creditors in Furniture Brands' bankruptcy filing, no North Carolina firms were among the seven largest. Hickory-based Hickory Springs Manufacturing Co. is 16th on the list and owed $589,044, and Culp Inc., a High-Point based fabric supplier with operations in Hickory, is 18th on the list and owed $596,454.

The top seven unsecured creditors are owed a combined $11.6 million.