Bankruptcy Pleading of the Day: Official Committee of Unsecured Creditors of RoomStore, Inc. Asks Court to Appoint a Chapter 11 Trustee

The Official Committee of Unsecured Creditors appointed in the chapter 11 bankruptcy case of RoomStore, Inc. filed a motion asking the Eastern District of Virginia bankruptcy court to appoint a chapter 11 trustee in the case.  A copy of the motion is embedded below.  RoomStore also filed its own motion this afternoon and asked the bankruptcy court to convert its case to chapter 7 instead – find out more about this motion in our subsequent post found here.

In the motion, the Committee explains its assertion that there is an immediate need for appointment of a trustee thusly:

The current situation for unsecured creditors is dire. On July 18, 2012, the DIP lender served notice on the Committee that it has declared defaults under the DIP loan and intends to exercise its rights against its collateral, which is comprised of the Debtor’s remaining assets. It did so in part because it just learned, as did the Committee, that, despite collecting sales taxes from customers, the Debtor did not pay those sales taxes to the taxing authorities as it had represented to the DIP lender that either it had done or was going to do in its borrowing certificates. Instead, it used those funds to pay other expenses. Upon information and belief, the DIP lender has not agreed to fund the Debtor’s wind-down because, similar to the Committee, it has lost all faith and confidence in the Debtor’s Board of Directors due to this and other transgressions. Throughout this bankruptcy proceeding the Committee has been concerned that the Board, dominated by the heavy hand of the Chairman of the Board, Steven L. Gidumal, was pursuing a motive other than maximizing the recovery for unsecured creditors.

The Committee motion then continues on to provide a laundry list of what it terms “indiscretions” that has caused the DIP Lender’s and the Committee’s loss of “all faith and confidence” in the RoomStore Board of Directors (all of the following bullet points are quoted directly from the Committee’s motion):

  • Failure to pay sales taxes of up to $2 million despite collecting those taxes from customers and using those funds to pay other expenses, despite representing to the DIP lender that those taxes were being paid;
  • Filing a disclosure statement and chapter 11 plan just prior to the Court-approved extension of exclusivity that proposes to distribute money to equity security holders before unsecured creditors are to be paid in full;
  • Seeking approval of a chapter 11 plan that would maintain control of the Debtor in designees of the current Board, while simultaneously attempting to retain control over fiduciary duty claims that the Committee believes the Debtor’s estate has against members of the Board;
  • Filing a disclosure statement that recklessly suggests to creditors they may achieve an 80% return on their claims, when the Debtor knew at the time of filing that such a result was unachievable;
  • Burning close to $10 million in operating cash and incurring significantly increased administrative claims at a time when the Debtor was wildly missing its sales and cash forecasts and knew it soon would be out of cash;
  • Running the retail operations to the point of absolute illiquidity, despite knowing by April 2012 that even hitting unachieved sales targets would lead to continued deterioration of liquidity without a cash infusion;
  • The Chairman’s refusal to allow the Debtor to honor its agreement with the Committee to permit the Debtor’s financial advisor to prepare by February 1, 2012, an outline and timeline for a going concern sale process of the retail stores and Mattress Discounters Group to be put in place in advance of a liquidation;
  • The Board’s failure to market for sale the Debtor’s 65% interest in Mattress Discounters Group LLC before running out of cash, including its failure to hire an investment banker acceptable to the DIP lender and the Committee, despite the Debtor’s obligation to do so in a stipulation and Court Order for the purpose of marketing those assets “as soon as possible”;
  • The willful failure of the Chairman and the outside directors on the Board to comply with the Rule 2004 Order by their repeated delay and refusal to turn over to the Committee the documents requested;
  • Despite repeated demands for the Debtor’s compliance, the Debtor’s willful violation of the Final DIP Order’s requirement that the Debtor establish and fund a Professional Fee Escrow Account, which the Committee specifically negotiated as part of its consent to the DIP Loan;
  • Collecting payments earmarked for rent from the acquirer of the Dallas GOB inventory and lease designation rights and then, risking default under that sale, diverting those payments from the intended landlords to fund other expenses; and
  • Allowing its retail stores to accept deposits, and, in some cases, full payment, from customers for merchandise to be delivered in the future when the Debtor’s Board must have concluded previously that delivery of the merchandise was unachievable.

The motion further asserts that appointment of a trustee is further justified by RoomStore’s failure to observe its fiduciary obligations in at least four instances, including by failing to disclose that the company’s chairman had  submitted a “secret $2 million bid for the minority interest in [Mattress Discounters Group] early in the bankruptcy case, at a time when the Chairman was on the Board and simultaneously was acting as one of the Debtor’s representatives on the board of managers of [Mattress Discounters Group].”  The motion also claims that appointment of a chapter 11 trustee “may allow the major constituencies to negotiate an agreement with the DIP lender for wind-down funding and an expeditious, but appropriate, process for the marketing and sale of the Debtor’s remaining assets,” an outcome which the Committee believes is “preferable to conversion of the case to chapter 7.”