weekly feature | Oct 25, 2023 |
When companies collapse, what happens to the furniture?

Here’s a mystery: Right now, as you read this, there’s a logistics warehouse in High Point, North Carolina, that is filled with furniture made by Mitchell Gold + Bob Williams. Roughly 1,300 pieces—hundreds of thousands of dollars’ worth of upholstery and case goods—were all left stranded in transit in the wake of the company’s abrupt collapse. So, who owns all that furniture?

There are more suspects than you might imagine.

First would be the customers, who bought all of it in the first place. Many have paid in full—including shipping—and have been waiting, sofaless, for updates on their orders. Then there’s the bank, PNC, which says it’s owed $11 million. Technically speaking, all of MG+BW’s property, including its inventory, was collateral on the retailer’s line of credit. Liquidating all that furniture would go at least some ways toward repaying the debt.

Then there’s the logistics firm that put the pieces in the warehouse in the first place. Founded by ex-Facebook employee Hunter Durham, Furniture USA Distribution was one of the retailer’s primary shipping agents for online orders. As MG+BW careened into financial distress earlier this year, the company fell behind in its bills. By the time it shut down, it owed Durham roughly $500,000—money that could hypothetically be recouped by liquidating those 1,300 pieces.

There’s a tragic twist. The blow to Furniture USA’s balance sheet when MG+BW failed to pay its bills was fatal, and Durham was forced to shut his company down last month. As a result, he stopped paying rent to the warehouse where the furniture is currently languishing. That suggests yet another possibility: Does the landlord own all those sofas?

Durham lives in Puerto Rico with his wife and three young children. He says he’ll likely have to go into bankruptcy after personally securing the SBA loans required to get his company up and running. But despite a series of brutal setbacks, he’s remarkably philosophical about the experience. He chuckled grimly when asked who owns the 1,300 pieces: “Nobody really knows, to be completely honest with you.”

Depressingly, puzzles like these are not uncommon amid the tumult that follows a sudden bankruptcy. For customers, the effect can be jarring, especially if the company’s struggles weren’t widely known. One day, a business is humming along, posting on Instagram and selling sofas. The next, all that remains is a court-appointed trustee, bad press and a flurry of legal jargon.

Behind the scenes, a total realignment of incentives has occurred. When a business is working, everyone involved—from employees to credit card processors to shipping agents—is pushing toward the same goal: to keep the customer happy and make a profit along the way. When the music stops, the objectives shift as each player scrambles to recover as much money as possible and get out. Customers often feel betrayed when they find out they’re now at the back of the line.

Furniture bankruptcies in particular are notoriously chaotic. Mostly, it’s a byproduct of the simple fact that manufacturing takes time, and the lag between deposit and delivery creates a danger zone for customers. (By contrast, when an ice cream brand goes Chapter 7, not a lot of merchandise is caught up in limbo.)

“Furniture cases can be especially difficult,” says Maura Russell, an attorney who specializes in corporate bankruptcy and restructuring. “A customer placed an order for a couch, a loveseat and a chair—and [after the company shuts down], the chair’s available, but not the loveseat. What happens? The customer gets to cancel the whole order, or does the customer get those two pieces and their money back? Or do they have to buy something else? There are a whole lot of variables and permutations.”

There’s another, slightly more emotional wrinkle to furniture bankruptcy cases. The amount of money most customers spend on furniture tends to fall into a kind of reverse Goldilocks zone: Just enough to be extremely painful, but not enough to make it worthwhile to hire a lawyer to try to claw it back. As a result, customers often find themselves caught in a hellish state of maximum annoyance, minimal ability to do anything about it.

Not all bankruptcies are the same. In some cases, furniture absolutely does end up in the hands of those who originally paid for it—especially if a company has enough cash on hand to keep operating during the process, or there’s a new buyer that is invested in preserving the brand’s good name. But if it’s forced to shut down suddenly and no white knight emerges, all bets are off. Liquidation, a process in which the assets of a distressed company are sold off piecemeal to generate money to pay back creditors, is common.

Liquidation itself is a fascinating and often-overlooked corner of the home industry. It’s also a busy one. With a home retail business suffering from a post-boom hangover, store closures, bankruptcies and overstuffed warehouses are fueling a surge of activity among the handful of firms who compete to liquidate furniture brands.

“Think about [the rush of recent furniture bankruptcies], and then layer in Bed Bath & Beyond, which went bankrupt earlier this year,” says Timothy Shilling, an executive vice president at B. Riley, a company that specializes in retail liquidations. “[During the pandemic] there was a huge rush to buy things for your home, and all those sales that would have been spread out were accelerated, [so] you’re dealing with distress in the space.”

As if to prove the point, it was just announced this week that B. Riley had been hired to liquidate Z Gallerie’s 21 remaining stores. Meanwhile, another major firm, SB360, announced that it had been hired to dissolve the now-defunct Klaussner’s assets.

Large-scale liquidation firms are sophisticated corporate operations. They tend to take possession of everything from manufacturing equipment to intellectual property, then find a way to package and sell it to likely bidders. In some cases, large liquidation firms will work out deals to hold on to brands indefinitely, often co-running them with an outside operator. In that respect, they act more like investment banks than emergency retailers.

When it comes to the furniture itself, the simplest solution is often for liquidators to sell through the brand’s stores and websites. However, if the stores are locked up, the employees have been let go, and there’s no one left to share all the passwords, liquidators will move on to unloading the goods to off-price retailers.

That can lead to ironic outcomes. A sofa ordered and paid for by a customer in Manhattan may end up stuck in a North Carolina factory during a bankruptcy proceeding. A liquidator might then buy the sofa as part of a lump transaction and then turn around and resell it to a discount retailer in Brooklyn. The proceeds from the sale likely benefit only top creditors, so the customer might end up with nothing, having no idea their chesterfield is sitting on a showroom floor only a subway ride away.

“[In bankruptcy], everybody is trying to protect their rights and their interests,” says Russell. “Unfortunately, the result can seem very unfair—especially when you’re the individual consumer.”

The 1,300 pieces of Mitchell Gold + Bob Williams furniture stashed away in a High Point warehouse are only the tip of the iceberg. Another logistics provider, Ryder Last Mile, is sitting on 2,000 pieces. There’s also considerable inventory stuck in the MG+BW factories and now-shuttered retail locations. Documents filed in bankruptcy court suggest that roughly $24 million in merchandise is currently frozen in limbo while the company’s private equity owners, bank and a scrum of unsecured creditors duke it out in court over who gets what.

“There’s a lot of things up in the air—nothing is settled,” says Mitchell Gold, who has been fielding dozens of direct requests from customers looking for updates on their orders. Though he left as CEO in 2020, Gold returned to advise the brand earlier this year as part of an attempted turnaround, and has been involved in looking for white knight investors to rescue the company. “Every day, it changes, but it never seems to move forward and get resolved.”

Recent court filings demonstrate the logjam. Last week, Ryder—which says it’s spending thousands per day to store MG+BW inventory—reached an agreement to deliver the 2,000 pieces. There’s a twist: If customers want their orders, they have to pay shipping costs (again) to receive them.

Though this would be a bitter pill to swallow, it’s likely worth it for many, especially those who had large orders. However, mere hours later, an objection to the motion was filed by MG+BW’s credit card processors. Collectively, they argued that they had lost out on “tens of millions” in chargebacks, and that there was a danger that customers who had already received a refund would end up getting their orders as well. The judge has not yet ruled on the issue.

If there is a silver lining to the Mitchell Gold + Bob Williams collapse, it’s that many customers were able to receive a refund from their credit card provider. A homeowner in Houston says that after placing a $4,000 order with the brand in July, he found out that it was stuck in Furniture USA’s distribution center. After a series of frustrating communications, he ultimately decided to cancel the purchase. Holding out hope on the order, he says, would have risked “taking something that arrives broken from a company that no longer exists.” American Express issued a full refund in October.

Not everyone was so lucky. The court docket for MG+BW’s case is full of testimonials from customers left in the lurch, struggling to find a solution amid the fog of bankruptcy. One filed only yesterday comes from a Kansas couple in their 70s who ordered $36,000 worth of goods from the company in June and have thus far only received a lone framed print. The letter details their efforts to reach out to logistics providers, former employees, banks and their attorney general in an effort to get their furniture.

“[We] donated both my [former] kitchen and dining room furniture and the family room couches and table to a church rebuilding a home in Mayfield, [Kentucky], destroyed the previous year by a tornado. … I don’t feel I’m able to replace that furniture until I realize what will happen with [my order]. Will it be delivered or will it be shipped back?” reads the letter. “I am going to put up a folding table and chairs until I learn of the court’s decision. … I heard that when Mitchell Gold closed its doors, there was $44,000,000 in customer deposits. That was a lot of people to be hurt.” (A depressing correction: Court documents suggest it was closer to $50 million in customer deposits.)

Many designers are caught up in the mess as well. Atlanta-based Niki Papadopoulos of Mark Williams Design, a longtime MG+BW customer, had an open order for 25 pieces of furniture earmarked for an upcoming project when she learned of the company’s abrupt collapse. Unfortunately, her firm had paid for the order by check.

“One Sunday morning, I woke up to the news that the factory had been shuttered. It’s just heartbreaking: Wait, what happened?” says Papadopoulos. For weeks, it was difficult to get credible information. Eventually, she was invited to Zoom in to an inconclusive bankruptcy hearing. Another call is scheduled for November, though communication from the court has been erratic.

“Fortunately, our client is really understanding, and they’ve said, ‘If time is your friend, take your time,’” the designer says. “I’m waiting to see if there’s some resolution, [whether] it’s a percentage of the money back, or if we can just come pick up the stuff ourselves, which we absolutely would do. … But it’s just such a mess.”

If she’s unable to secure the furniture or a refund, Papadopolous plans to foot the bill for replacement pieces. “The relationship with the client is more important than the dollar amount that I’m out,” she says. “I don’t want to take that hit, but I’ll do what I have to do to make my client whole. I’m fortunate to be in a position where I can do that. But if you’re a young designer and you’re out $50,000, that could ruin your firm.”

Very few people directly involved in the case responded to a request for comment from BOH. (Among the non-responses: attorneys for PNC, Ryder and George Miller, the trustee.) Industry watchers and those close to the issue were generally hesitant to make too definitive of a prediction about what might happen next. A familiar refrain: “That’s for the lawyers to figure out.”

But to roughly summarize their educated guesses, sources tended to divide up MG+BW’s inventory into two buckets: pieces that have been fully paid for, built, and placed in a box with an address label slapped on the outside—and everything else. There is a chance, they say, that some of the former will end up delivered to the customers who paid for it (or, maybe more likely, that customers will be permitted to go pick it up themselves).

Despite the fact that individual consumers rarely have high-powered lawyers representing them in court, they do hold some sway in a bankruptcy proceeding. It’s not unheard of for secured creditors to deliver to some customers simply to avoid bad press. “Customers are a sympathetic group of creditors,” says Russell, the bankruptcy attorney. “And it has been argued that if a customer pays in full for a piece of furniture and it has been earmarked for them, it’s technically their property and no longer subject to the bank’s lien.”

As for the rest of it (unboxed pieces, half-finished goods, anything that didn’t make it onto the line in the first place), the outlook is bleak. The most likely next step in the proceeding, sources say, is that the bank, PNC, will push through an expedient liquidation and use the proceeds to cover its own $11 million debt. Whatever is left over would go toward paying back the remaining creditors—on its initial bankruptcy filing, Mitchell Gold + Bob Williams listed anywhere from $50 million to $100 million in debt, owed to thousands of parties, from logistics firms to individual customers.

How much could be generated from an MG+BW fire sale? According to court filings, the last credible offer on the table was a bid from a joint venture of B. Riley and investment firm Tiger Capital, for a guarantee of $10 million plus a share of proceeds from the sale of inventory. That deal evaporated amid the bankruptcy back-and-forth.

There are no hard-and-fast rules in these matters. But as time goes by, liquidators generally have a tougher time moving inventory, meaning that the return on a sale will slowly creep down. The next offer will likely guarantee less than $10 million. And for every day that passes with motions flying around in court, the chance that there will be any money left over for customers gets slimmer and slimmer.

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