Family Christian Stores has withdrawn a proposal for a controversial bankruptcy plan criticized by debtors for ties between the seller and buyer that were too close for comfort.
The company gave no reason for the move, but it seems likely the Christian retailer will pursue another form of Chapter 11 restructuring. According to documents filed with a Michigan bankruptcy court last month, Family Christian Stores (FCS) owes $57 million to banks and another $40 million to publishers and vendors for inventory it bought on credit. Add in miscellaneous debts, including unpaid taxes and utility bills, and it has a total of about $107 million in liabilities.
Its suppliers, mostly Christian publishers, want the company to survive, but along with the company’s creditors, they raised concerns about how it planned to do so.
Under the original proposal, FCS wanted to pay about $28 million of the $57 million it owes to banks and walk away from the rest of its debts, including its unsettled accounts with publishers. It promised to keep all of its stores open and all of its workers employed. A spokesperson for FCS said the company would not comment on the bankruptcy while it was in progress.
FCS had proposed selling all its assets to a single buyer to raise money to pay off its creditors. That move, known in bankruptcy law as a Section 363 sale, or simply a “363,” is quicker than writing a traditional restructuring plan and is subject to less oversight from creditors, said Steve Ware, a professor at the University of Kansas School of Law who specializes in bankruptcy. In one of the most famous 363 sales in bankruptcy history, General Motors sold the bulk of its assets to a newly formed company in which the U.S. government was a majority stockholder.
FCS wanted to do something similar. Under the umbrella of its non-profit organization, Family Christian Resource Centers, it formed a new company called FCS Acquisition that would have bought the stores and their assets for $28 million cash and assumed many of the stores’ leases. The total value of the sale would have been about $74 million, but only the $28 million cash would have been available to pay off creditors, and FCS would have walked away from the rest of its debt.
Ware said the fact the company wanted to buy itself should have given creditors pause. The arrangement raised the question of whether FCS would do its best to minimize creditors’ losses by getting a good price.
“The president of the debtor ought to be thinking, like a seller, ‘I want to get as high a price as possible,’” Ware said. “But if he is also the buyer, than he’s conflicted, and he won’t want the seller to get as high a price as possible.”
Adding to creditors’ concerns was the fact that the senior secured creditor—the one first in line to get paid after the sale—is backed by Richard Jackson, the president of the board of Family Christian Resource Centers. Attorneys at an initial bankruptcy hearing on Feb. 17 said FCS owes Jackson $23 million through FC Special Funding, Publisher’s Weekly reported.
Jennifer Hagle, a lawyer for Credit Suisse, the creditor in line for $34 million behind FC Special Funding, said at the Feb. 17 initial bankruptcy hearing that the case has a “significant issue of transparency,” according to local news site MLive.
U.S. bankruptcy attorney Michael Maggio agreed.
“In essence, at the moment, it would appear we’re only moving this case for the benefit of Mr. Jackson,” he said. Neither Hagle nor Maggio returned requests for interviews for this article.
Jackson did not respond to an interview request made via Jackson Healthcare, the healthcare staffing company he founded and operates in Atlanta.
A review of records from bankruptcy court and the IRS showed the company’s sales have declined by about 25 percent since 2008. In 2013, its expenses exceeded its revenue by about $4.7 million. The company attributes the decline to the Great Recession and a customer shift away from shopping in brick-and-mortar stores. FCS argues it can maintain its important role in the market for Christian books and gifts if it can get some debt relief.
“The basic idea of business bankruptcy … is to distinguish a company that’s been going downhill and it’s going to keep going downhill, from a company that’s been going downhill but it has a good chance of rebounding,” Ware said. Chapter 11 of the bankruptcy code allows a company to present a plan to its creditors to reorganize into a profitable business. Meanwhile, the courts protect the company’s assets from creditors until the plan is approved.
Most of the companies to which FCS is in debt said they don’t want to see the company go out of business.
“Obviously, we are disappointed that we and all the other trade vendors will take a huge loss in this process,” said Mark Taylor, president of Tyndale House Publishers, in an email statement. “But we hope Family Christian can survive as a chain of stores. Our industry needs them. We hope other suppliers will recognize this.”
FCS owes Tyndale about $2.2 million.
Mark Kuyper, president of the Evangelical Christian Publishers Association, said the FCS bankruptcy puts publishers in competing positions as both creditors and suppliers.
“None of our publishers want to lose 260 outlets for Christian resources, particularly because those stores are focused on Christian retail and carry more breadth than a general market retailer might,” he said.
Publishers also have taken issue with the FCS plan to include inventory it holds on consignment in the bankruptcy sale. A group of publishers and other suppliers filed a lawsuit over the consignment inventory earlier this month.
Now that it’s withdrawn its initial bankruptcy proposal, FCS must go back to the drawing board. Though the details are still being hammered out, Kuyper said the bankruptcy will undoubtedly leave a long-lasting mark on the Christian publishing industry.
“You can see … when you look at the initial data in the filing that it’s a lot of money, and there’s no way to minimize that impact,” Kuyper said, adding later, “Regardless of how it ultimately goes, it will be a hardship for publishers. It is just a question of how much.”
— by Lynde Langdon