$50M HHGregg lawsuit provides window into frenzied final months
A lawsuit quietly wending its way through a Marion County court zings former HHGregg CEO
The suit, which was filed by unsecured creditors of the appliance and electronics chain and seeks more than
The deposits represented the upfront payment for merchandise-either by cash or credit card-which was supposed to be followed by the swift delivery to shoppers' homes. The approach is standard in the retail industry but can turn problematic when a company rapidly loses liquidity, leaving it short of cash just as nervous suppliers begin to restrict shipments.
The continued acceptance of the deposits-which HHGregg was able to treat like interest-free loans-saddled the company "with tens of millions of dollars in unwarranted and unnecessary liabilities and recklessly caused the permanent destruction of the company's value as a going concern," according to the complaint.
The financial baggage scared away suitors that otherwise might have bought all or part of the company, according to the suit, which uses internal company documents to provide a blow-by-blow account of the chain's final months, as executives evolved from viewing financial struggles as temporary to concluding there was no way out.
Fighting for cash
Creditors filed the suit in an attempt to put a dent in their losses by accessing one of
The case was filed by the committee of unsecured creditors, a group appointed as part of
Attorneys at the
She seemed unsympathetic to defendants' argument that they merely were continuing to operate the business as normal when they accepted the customer deposits, calling that an "overly-simple characterization."
Riesbeck and
In another filing, the attorneys called the suit "farfetched" and "incredible," asserting that had HHGregg stopped accepting deposits by
"The board cannot be faulted for their desire to see HHGregg continue or their hope that the 2016 Christmas season would return HHGregg to profitability," the filing said.
Further, the attorneys argued, "The premise of the committee's claims-that consumers made deposits and never received either their merchandise or refunds-is false. Virtually, all of
But
He said the big losers were HHGregg and its lenders, which had to provide refunds once the company landed in bankruptcy, as well as the credit card companies, which reversed charges when deliveries did not occur. The provider of
When HHGregg sought bankruptcy protection in
A financial adviser for HHGregg found that, as of that month, the number of unfilled deposits was 69,882. And despite the chain's boasts of rapid delivery, 61 percent of those deposits had aged at least 30 days and 42 percent had aged at least 90 days, the suit says.
But attorneys for the HHGregg insiders said the level of deposits the company held when it filed for bankruptcy was entirely consistent with historical averages and did not represent a spike.
"Clearly, it was not the customer deposits, in isolation, that prevented a going concern sale of HHGregg," the attorneys wrote, adding that what killed the company "was its inability to adapt to changing consumer preferences and remain profitable in an exceedingly competitive environment."
Searching for buyer
The company in
The suit says one of the suitors was an investment group assembled by former HHGregg Executive Vice President
In mid-February, the Throgmartin group said it "could operate the company, reestablish supplier relationships, provide equity, and form a new banking relationship," the suit says.
But its tone shifted as it learned more about the customer deposits, and a month later it notified HHGregg it was pulling out, according to the suit.
"Gentleman-we have worked extremely hard to make the math make sense, but after the last report regarding customer deposits we see no way to have a go forward business. We are formally stepping out of the process and wish you luck."
Throgmartin, who is executive chairman and CEO of suburban
The suit says HHGregg management gave thought to the propriety of continuing to accept customer deposits as liquidity problems grew. It quotes Riesbeck at one point acknowledging an "ethical dilemma of putting consumers' cash at risk" and potential "expos[ure] from a D&O perspective or with [the] Attorney General," the state official charged with enforcing consumer protection laws.
Paying off debt
The plaintiffs seek damages based only on alleged breaches of fiduciary duty, but they also highlight a variety of other actions by company officials they consider misleading.
For example, they note that, as steep losses began piling up, the company went to extraordinary lengths to pay off its credit line at the end of every quarter so it could report to investors that it was debt-free.
The company had a
But by September of that year, the no-debt streak was in jeopardy. To keep it going, management negotiated a barter transaction with the
As
Meanwhile, because the credit line was collateralized by inventory and inventory was falling, the amount the company could borrow was plummeting. As of
In
According to the suit, on
In a filing, attorneys for the insiders deny the lawsuit's description of the salary discussion, but they don't provide specifics.
Pursuit ends in wreck, long list of offenses
Health care costs in Minn. projected to grow by 7.4 percent a year for years to come
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