Stein Mart, Inc. – Following Store Closings and Sale of E-Commerce Assets to Retail Ecommerce Ventures, Court Confirms Off-Price Retailer’s Plan of Liquidation (Minus Exculpation Clause)

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April 13, 2021 – The Court hearing the Stein Mart cases confirmed the Debtors’ Plan of Liquidation [Docket No. [1010].

On August 12, 2020, Stein Mart, Inc. and two affiliated Debtors (NASDAQ: SMRT; “Stein Mart” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Middle District of Florida, lead case number 20-02387 (Judge Funk). At filing, the Debtors, an omni off-price retailer with 281 stores across 30 states, noted estimated assets of $757,539,000 and estimated liabilities of $791,248,000.

The Debtors' Plan confirmation hearing began on March 8th, with Judge Funk refusing to confirm the Plan citing exculpation provisions which, unlike the third party release provisions, were not viewed as consensual and thus failed the four-part Dow Corning test (Judge Funk provides a useful walk through of his analysis at Docket No. 987). Judge Funk found the third party releases, although "exceptionally broad in scope" to be consensual "because the Opt-Out Form meets the elements of acceptance under Florida law."

As a result, the Court's present confirmation order now notes: "The exculpation provisions set forth in Article VIII.E of the Plan are deleted from the Plan, as a modification of the Plan provided by this Confirmation Order."

Plan Overview

The Debtors memorandum of law in support of Plan confirmation (the "Memorandum") [Docket No. 945].provides: “On August 12, 2020 (the ‘Petition Date’), facing significant liquidity constraints, the Debtors commenced these bankruptcy cases (the ‘Chapter 11 Cases’) by each filing a voluntary petition under Chapter 11 of the Bankruptcy Code. After exploring out-of-court strategic alternatives, the Debtors concluded that they were unable to reorganize and that the best way to maximize value for the benefit of all stakeholders was through a wind down and court approved sale process.

Following a successful sale process, the Debtors now seek confirmation of the Plan….The Plan is the culmination of the Debtors’ substantial efforts over the past several months to bring these Chapter 11 Cases to a value maximizing close following a successful sale of substantially all of the Debtors’ assets. The Plan provides for the liquidation and conversion of all of the Debtors’ remaining assets to cash and the distribution of the net proceeds realized therefrom, along with existing cash, to creditors holding Allowed Claims in accordance with the relative priorities established in the Bankruptcy Code.

The Plan is supported by the Debtors’ key stakeholders, including the Debtors’ secured creditors and the Official Committee of Unsecured Creditors (the ‘Committee’) and represents a consensual, comprehensive resolution of all disputes and issues relating to the Debtors and responsible final closure for all the interested constituents. In addition, the Holders of Claims in Class 6 (General Unsecured Claims), the only class entitled to vote, overwhelmingly voted to accept the Plan.

In advance of filing the Plan, the Debtors received informal comments from the Office of the United States Trustee (the ‘U.S. Trustee’), although the U.S. Trustee still filed an objection to certain provisions of the Plan. The Securities and Exchange Commission (the ‘SEC’) also filed an objection to certain provisions of the Plan. However, these parties-in-interest do not hold any economic stake in the outcome of these cases, whereas the statutorily sanctioned Committee, representing more than $288 million in creditors, and the secured creditors that waived portions of their claims, have blessed the Plan, including the release and exculpatory provisions.”

The Disclosure Statement [Docket No. 849] notes, “The Plan contemplates that Brad Boe of Advisory Trust Group, LLC will be appointed as the Plan Administrator on the Effective Date to finalize the wind down of the Debtors’ estates, monetize any remaining assets and make distributions to creditors in accordance with the Plan….

Under the terms of the Plan, Holders of Claims and Interests will receive the following treatment in full and final satisfaction, compromise, settlement, release and in exchange for such Holders’ Claims and Interests:

  • Holders of Allowed Other Secured Claims will receive: (a) payment in full in Cash of such Holder’s Allowed Other Secured Claim, (b) the collateral securing such Holder’s Allowed Other Secured Claim, or (c) such other treatment rendering such Holder’s Allowed Other Secured Claim Unimpaired.
  • Each Holder of an Allowed Administrative Expense Claim shall receive payment in full in Cash.
  • Each Holder of an Allowed Other Priority Claim shall receive payment in full in Cash, according to the priority scheme established by Section 507(a) of the Bankruptcy Code, to the extent sufficient Distributable Funds are available. The Debtor currently anticipates that Allowed Other Priority Claims will be paid in full, but there is no guaranty, and the final result will depend on the final, total amount of Allowed Other Priority Claims, the amount of tax refunds recovered, the expenses of the wind-down and other factors.
  • Each Holder of an Allowed Letter of Credit Claim shall receive payment in full in Cash of Holder’s Allowed Letter of Credit Claim from the Letter of Credit Reserve. The unused portion of the Letter of Credit Reserve shall be released and returned to the Wind-Down Debtors no later than five (5) business days after the day that the letters of credit to which the applicable portion of the Letter of Credit Reserve relates is drawn, cancelled, expired or replaced.
  • Any outstanding ABL Claims shall be deemed Allowed. To the extent any Allowed ABL Claims remain outstanding on the Effective Date, each Allowed ABL Claim shall receive payment in full.
  • Any outstanding Term Loan Claims shall be deemed Allowed. To the extent any Allowed Term Loan Claims remain outstanding on the Effective Date, each Allowed Term Loan Claim shall receive payment in full.
  • In full and final satisfaction, compromise, settlement, and release of and in exchange for each Allowed General Unsecured Claim, each Holder of an Allowed General Unsecured Claim shall receive its Pro Rata share of the General Unsecured Claims Recovery until paid in full. The Debtors estimate the total General Unsecured Claims will be between $217 million and $421 million and that the total Cash distributed to General Unsecured Claims will be between $0 and $15 million.
  • Each Allowed Intercompany Claim will be canceled and released.
  • Each Intercompany Interest shall be settled, canceled, released and extinguished as of the Effective Date and will be of no further force or effect, and Holders of Intercompany Interests will not receive any distribution on account of such Intercompany Interests.
  • Each Allowed Existing Interest in the Debtors shall be canceled, released and extinguished and will be of no further force or effect, and no Holder of Existing Interests in the Debtors shall be entitled to any recovery or distribution under the Plan on account of such Existing Interests.
  • Allowed Section 510(b) Claims, if any, shall be canceled, released and extinguished as of the Effective Date and will be of no further force or effect, and Holders of Allowed Section 510(b) Claims will not receive any distribution on account of such Allowed Section 510(b) Claims.

In addition, Holders of Administrative Claims, Priority Tax Claims, Postpetition WARN Act Claims, Other Priority Claims, Prepetition Secured Claims, Letter of Credit Claims, ABL Claims, Term Loan Claims and General Unsecured Claims that vote to accept or do not affirmatively opt out of the releases provided by the Plan by checking the box on the applicable form indicating that they opt not to provide the releases provided by the Plan or do not object to the releases contained in the Plan shall be deemed ‘Released Parties’ and will receive a release from the Debtors. The compromises and settlements to be implemented pursuant to the Plan preserve value by enabling the Debtors to swiftly and efficiently emerge from chapter 11.

The Debtors believe the Plan provides the best available alternative for the Debtors’ estates and creditor recoveries. If the Debtors’ business was liquidated in a chapter 7 process, important employees and the Debtors’ historical financial advisor, with important institutional knowledge, would be gone for good, leaving an extremely large and complex accounting, human resource and claims evaluation process to be managed by new hires unfamiliar with the Debtors’ business, creditors, tax returns and employee benefit plans. In addition, substantial delay in distributing funds to creditors and closing the estate would result from the need to bring in a new team to administer the chapter 7 process. The needless loss of value to creditors and the Debtors’ estates would be enormous. Creditors would receive lower recoveries in chapter 7 because the Debtors’ estates necessarily would bear additional costs associated with transitioning to chapter 7, retaining a chapter 7 trustee, counsel and advisors and administering a chapter 7 process.”

The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement):

  • Class 1 (“Other Secured Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 2 (“Other Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 3 (“Letter of Credit Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
  • Class 4 (“ABL Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Principal and interest due to ABL Lenders has been paid in full; ABL Lenders’ attorneys’ fees are likely to be only outstanding ABL Claim and are estimated to be less than $250,000.
  • Class 5 (“Term Loan Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan. Principal and interest due to Term Lenders has been paid in full; Term Lenders’ attorneys’ fees are likely to be the only outstanding Term Loan Claim and are estimated to be less than $250,000.
  • Class 6 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $217.0mn to $421.0mn and expected recovery is 0% to 8.3%. Each Holder of a General Unsecured Claim will receive its Pro Rata share of the General Unsecured Claims Recovery until such Holder is paid in full.
  • Class 7 (“Intercompany Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.
  • Class 8 (“Intercompany Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
  • Class 9 (“Existing Interests”) is impaired, deemed to reject and not entitled to vote on the Plan.
  • Class 10 (“Section 510(b) Claims”) is impaired, deemed to reject and not entitled to vote on the Plan.

Voting Results

On March 8, 2021, the Debtors' claims agent notified the Court of the Plan voting results [Docket No. 949], which were as follows:

  • Class 6 (“General Unsecured Claims”) 995 claim holders, representing $72,960,728.17 (or 96.64%) in amount and 91.03% in number, accepted the Plan. 98 claim holders, representing $2,535,071.06 (or 3.4%) in amount and 8.97% in number, rejected the Plan.

Store Closings

On September 17, 2020, the Court hearing the Stein Mart cases issued a final order (i) authorizing the Debtors to assume an August 11, 2020 store closing consultancy agreement with a joint venture comprised of Hilco Merchant Resources, LLC, Gordon Brothers Retail Partners, LLC, Great American Group, LLC, Tiger Capital Group, LLC, and SB360 Capital Partners, LLC (collectively, the “Consultant”), (ii) approving the Debtors’ proposed store closing sale procedures in respect of 281 stores and (iii) granting a proposed employee bonus program with a maximum payout of $2.5mn [Docket No. 406]. A list of the 281 stores approved for store closing sales is attached to the consulting agreement (itself attached to the order) as Exhibit A. A largely identical interim order [Docket No. 102] was issued on August 14th.

The Debtors cite the the resurgence of COVID-19 in the southeastern United States as obviating any possibility beyond a full 281-store liquidation process, with the Debtors' Petition date announcement that they intended "to close a significant portion, if not all, of its brick-and-mortar stores" having evolved to a more certain and final position of a total liquidation. Also in that Petition date press release (see below) was a mention of "strategic alternatives, including the potential sale of its eCommerce business and related intellectual property;" to date there has been no suggestion that those aspirations have evolved.

What has apparently evolved, however, is the Debtors' paydown of prepetition debt; with a reported $60.0mn of sales proceeds already used to repay the Debtors' prepetition ABL lender ($96.0mn owed as at the Petition date, see Committee objection to use of cash collateral at Docket No. 284).

E-Commerce Asset Sale

The Debtors' e-commerce assets were sold to Retail Ecommerce Ventures which has purchased numerous e-commerce assets out of bankruptcy (or on the edge) including Pier 1, Radio Shack, Modell’s Sporting Goods, Linens ‘n Things, Dressbarn, and now Stein Mart. The asset purchase agreement in respect of the sale is at Docket No. 651 and the Court's sale order at Docket No. 762.

The Disclosure Statement provides: "On October 30, 2020, the Debtors filed the Motion for Entry of an Order, Pursuant to Sections 105 and 363 of the Bankruptcy Code, (I) Authorizing the Sale of Certain Intellectual Property Free and Clear of Liens, Claims, Encumbrances, and Other Interests, and (II) Granting Related Relief [Docket No. 651] (the'IP Sale Motion'), pursuant to which the Debtors are seeking to establish procedures for the sale of the Stein Mart trademark, website and other intellectual property (collectively, the 'Intellectual Property').  The Debtors entered into a contract to sell the Intellectual Property to an unrelated third party entity as a 'stalking  horse' buyer for approximately $4 million (the 'Intellectual Property Purchase Agreement'), subject to higher offers at an auction. As a result of the auction, the net price of the sale was increased to approximately $ 5.9 million. The sale was approved at the hearing on the IP Sale Motion on November 23, 2020."

Petition Date Perspective

In a press release announcing the filing, the Debtors advised that: “The Company expects to close a significant portion, if not all, of its brick-and-mortar stores and, in connection therewith, the Company has launched a store closing and liquidation process. The Company, however, will continue to operate its business in the ordinary course in the near term; and The Company is evaluating any and all strategic alternatives, including the potential sale of its eCommerce business and related intellectual property."

The Debtors have also entered into an agreement with Hilco Merchant Resources, LLC, Gordon Brothers Retail Partners, LLC, Great American Group, LLC, Tiger Capital Group, LLC and SB360 Capital Partners, LLC for purposes of conducting liquidation sales at substantially all of the Company’s stores. [Did anyone not make the list?]

In a later filed Court document [Docket No. 987], the Debtors noted: "Prior to the COVID pandemic, in January 2020, Debtors entered into a merger agreement with Kingswood Capital Management, LLC (‘Kingswood’) and an entity managed by Jay Stein, the then chairman of Stein Mart. Under the merger agreement, Stein Mart’s equity shareholders (the “Shareholders”) would have received $0.90 in cash for each share of common stock owned. However, the Shareholders were never given an opportunity to vote on the merger agreement. In April 2020, the merger agreement was terminated prior to closing because the pandemic caused Debtors to be unable to satisfy the minimum liquidity closing conditions contained in the agreement. Debtors subsequently continued discussing a sale of the company to Kingswood, but an agreement was never reached. Debtors’ further efforts to find a different buyer or additional sources of financing also proved unsuccessful. Debtors then determined a Chapter 11 liquidation was the best strategy going forward."

Goals of the Chapter 11 Filings

"The Company believes the immediate liquidation of the Company’s assets by a professional liquidation advisor under the supervision of the Bankruptcy Court is the best strategy to maximize value for the benefit of creditors. The Company’s current best estimate is that the liquidation of inventory, equipment, fixtures, leases, intellectual property and similar assets will produce a gross recovery in the range of approximately $250 million, which is likely to be sufficient to pay the cost of the liquidation process and Chapter 11 administrative expenses and repay the secured creditors but unlikely to produce any meaningful funds for other creditors. Accurate financial projections are very difficult in the current COVID retail environment. If Kingswood or another potential buyer steps forward with an offer to buy all or part of the Company as a going concern, the Debtors will pursue a sale to maximize value and preserve the jobs of employees, as well as a potential future tenant for landlords and a potential future customer for vendors. PJS has been actively marketing the Company for over two and one-half years and has a full data room available for potential qualified buyers.

Events Leading to the Chapter 11 Filing

In a Court filing [Docket No. 3], the Debtors provide the following as to the events leading to their Chapter 11 filings: “The retail industry has generally experienced difficult business conditions during the past several years. In general, retailers have experience decreased store traffic and have lost market share to fast-growing e-commerce retailers. The declines in store traffic have been especially pertinent for apparel and accessories retailers, such as the Company, which have also experienced lower operating margins as a result. From 2016 through the present, the Company’s sales generally declined and the Company faced the difficult task of growing sales while significantly reducing expenses in a difficult retail environment. 

The on-set of the COVID-19 pandemic, including the store closures and declined store traffic exacerbated the difficult retail environment. The Company’s initial shut-down in March 2020 in response to the COVID-19 pandemic materially, adversely impacted the Company’s revenues, liquidity, results of operations and cash lows, and its ability to pay vendors and landlords according to standard terms. The Company may have been able to survive following the initial reopening of the stores with the support of its vendors, landlords and lenders. However, the July 2020 resurgence of COVID-19 caused a second major decline in revenues and store traffic. 

Other large retail bankruptcies, including Brooks Brothers, Lord & Taylor, Ascena (Ann Taylor), Tailored Brands (Men’s Wearhouse and Jos. A. Bank), Sur La Table, Lucky Brand, JC Penney, J Crew, Neiman Marcus, GNC, Stage Stores, Aldo, Pier 1, Tuesday Morning and RTW Retailwinds (New York & Co), caused vendors to become nervous and reluctant to sell new merchandise without payment in advance. The Company’s sales decline in July 2020 made it impossible for the Company to propose a realistic repayment plan for the outstanding accounts payable owed to vendors from the initial COVID-19 shut-down. The Company’s updated financial projections, following the July resurgence of COVID-19, indicated that the Company would not have sufficient liquidity to continue operating the business in the ordinary course consistent with pastpractice. The Company’s efforts to find a buyer or additional sources of financing, with the assistance of PJ Solomon Securities, LLC ('PJS'), a leading investment bank serving the retail industry, were unsuccessful following the termination of the prior merger agreement with Kingswood in April 2020."

Exhibits Attached to the Disclosure Statement [Docket No. 849]:

  • Exhibit A: Chapter 11 Plan (Separately filed at [Docket No. 848])

About the Debtors

According to the Debtors: “Stein Mart, Inc. is a national specialty omni off-price retailer offering designer and name-brand fashion apparel, home décor, accessories and shoes at everyday discount prices. Stein Mart provides real value that customers love every day. The company operates 281 stores across 30 states.”

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