Thursday, March 17, 2016

SPORTS AUTHORITY PLAYS HARDBALL AGAINS SUPPLIERS


Sports Authority Plays Hardball in Suits Against Suppliers

 

Suits challenge vendor claims to consigned goods on the shelves of the distressed retail chain

 
 
  Sports Authority filed for chapter 11 protection earlier this month with more than $1 billion in debt.    
Sports Authority filed for chapter 11 protection earlier this month with more than $1 billion in debt.    
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By
Peg Brickley
 
Updated March 16, 2016 5:30 p.m. ET
 
  
Sports Authority Inc. is playing hardball with suppliers, filing lawsuits against more than 160 of them just weeks after it sought bankruptcy protection for its chain of ailing stores.
 
Suppliers are striking back, fighting the beleaguered company over goods they placed with it for sale under consignment arrangements. At stake is $85 million worth of shoes and other gear on the shelves of the insolvent retailing operation, which filed for chapter 11 protection earlier this month.
 
Filed Tuesday in bankruptcy court, the suits challenge vendor claims to consigned goods on the shelves of the distressed retail chain, which has already begun liquidating 140 stores and has little time to save the rest in bankruptcy.
 
“Dozens” of suppliers have demanded that the beleaguered company stop selling their consigned goods, Robert Klyman, lawyer for Sports Authority said at a court hearing Wednesday. Complying with those requests “would be devastating to the business,” he said. Sports Authority sued, invoking its “strong arm” powers under bankruptcy law in an effort to lay claim to the goods.
 
Judge Mary Walrath on Wednesday told Sports Authority it will have to comply with consignment vendor demands to return their goods, reinstate arrangements that existed before bankruptcy which means continued payments to suppliers, or settle with the suppliers.
 
“I think you have to make peace with them,” the judge said.
 
In response, Sports Authority said it would continue dealing with the consignment goods as it did before the bankruptcy, selling them and handing a portion of the proceeds to the vendors. If Sports Authority wins the lawsuits, it may be able to reclaim the money.
 
Sports Authority filed for chapter 11 protection March 2 with more than $1 billion in debt. Lenders are giving the retailer until April 28 to find a buyer or come up with a reorganization plan.
 
 Bank of America,  as lead bank in the syndicate of top-ranking lenders to the distressed company, is backing Sports Authority in the opening of legal hostilities against the suppliers, according to a court filing Wednesday.
 
With big rival  Dick’s Sporting Goods Inc.  poised to sweep up most of the business that will be left behind if Sports Authority disappears, observers are predicting there is a slim chance of survival for a significant group of stores.
 
At Sports Authority’s bankruptcy debut, the judge allowed the sales to continue but required Sports Authority to escrow proceeds from consigned goods. The order also instructed Sports Authority or its banks to file lawsuits challenging the consignment claims by March 23.
 
Additionally, the order allowed vendors to require Sports Authority to stop selling consigned goods, and set them aside. According to Mr. Klyman, many vendors made that choice. Setting aside the consigned goods would cost Sports Authority $4 million to $5 million, he said.
 
Bradford Sandler, lawyer for the official committee of unsecured creditors, said the panel was concerned about what the fight over the consigned goods would do to Sports Authority’s prospect of a turnaround.
 
Among those sued is shoemaker Asics America Corp., which holds a seat on the official creditors committee, and is owed more than $23 million, court records show. Jeff Davis, lawyer for Asics, said the lawsuit against his client was premised on a weak foundation.
 
The suits are designed to determine who gets the money when consigned goods are sold, vendors or the banks. Consignment arrangements are supposed to give makers of goods a direct claim on the money that comes in when the goods are sold. Sports Authority and its top banks signaled they are testing for defects in the consignment deals to upset those claims.
 
If the lawsuits succeed, vendors that thought they had secured claims will wind up as unsecured creditors.
 
Sports Authority is owned by private-equity firm Leonard Green Partners Co., which acquired it in 2006.