Sports Authority Bankruptcy Moves to Liquidation

The Sports Authority, Inc. has relinquished all hope of reorganizing and leaving bankruptcy and has opted to convert its Chapter 11 into a liquidation.

The Sports Authority filed for bankruptcy protection on March 2 as it became burdened with more than $1.1 billion in debt. The original plan included selling off unprofitable stores, closing them down and reorganizing the remaining stores that could turn a profit, said commercial law and creditors’ rights attorney Wanda Borges, Esq., member of Borges & Associates LLC. Those plans were scuttled after the case became highly litigious, in part over the rights of the consignment vendors to the national retailer.
In March, The Sports Authority and some of its affiliates filed adversary complaints against about 160 trade vendors in the U.S. Bankruptcy Court for the District of Delaware in an effort to invalidate vendors’ purported consignment rights.

The Sports Authority and others argued that all but a few of the consignment vendors failed to follow Article 9 of the Uniform Commercial Code (UCC) when they took on the consignment business with the firm, thus failing to perfect their rights as consignment vendors, which relegated them to the status of unsecured creditors, Borges said. The vendors, on the other hand, have argued that they didn’t need to file a UCC financing statement or notify anyone about their consignment rights.

Meanwhile, an interim order from the court last week allows the consigned goods to be sold, but the proceeds have to be placed in a segregated account until it is determined how the proceeds will be divided, Borges said. The Sports Authority’s lenders have since appealed this interim order, and on May 2, the lenders and consignment vendors filed a letter with the court saying they are willing to enter mediation in the case over what should be done with the consigned goods.

A number of vendors terminated consignment agreements days to hours before the filing, seeking for their goods to be returned and proceeds of any sale of these goods to be earmarked for them (not Sports Authority lenders), said attorneys Thomas Fawkes, Esq. and Brian Jackiw, Esq. both of Goldstein & McClintock LLP.

For these vendors, the case presents triple the harm in that their products back have not been returned, they face losing money and the consigned products may now be sold outside the terms of the original consignment agreement (re: cheaper). The latter can damage the value of a brand in that products are being sold publicly at less than what is considered market value, said Fawkes and Jackiw.

All three attorneys agree that creditors who sold to The Sports Authority on consignment must pay close attention to and follow the law, including the Uniform Commercial Code, to perfect their consignment rights.

For more on how to perfect these consignment rights, read previous NACM blogs on the topic here and here, an extended eNews piece here and Borges’ article on consignment agreements in Business Credit Magazine on perfecting consignment rights here.

- Nicholas Stern, NACM editorial associate

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