Daffy’s Inc. voluntarily filed for chapter 11 bankruptcy protection in the Southern District of New York bankruptcy court. According to court filings, Daffy’s board of directors determined that the company “would best be able to maximize its assets through a sale of the [company's] leasehold interests and a liquidation of the [company's] inventory” in June of this year after being served with default notices by Wells Fargo. The same court filings provide a summary of the history of Daffy’s:
The Debtor is a family-owned discount retailer of apparel, accessories, and home goods. In 1961, Irving J. Schulman opened the Debtor’s first store, under the name of “Daffy Dan’s Bargaintown,” in Elizabeth, New Jersey. Since that time, the Debtor has grown significantly and now operates 19 stores in New York, New Jersey, and Pennsylvania, as well as a distribution and storage facility located in Secaucus, New Jersey. Nine of the Debtor’s stores are located in New York City, eight of the stores are located in high-traffic suburban retail centers in New York and New Jersey, one store is located in Philadelphia, Pennsylvania, and one store is located at the Debtor’s facility in Secaucus, New Jersey. The Debtor leases all its stores and its distribution center/warehouse and does not own any real property. A number of the Debtor’s leases (particularly certain leases in New York City) are under-market and, accordingly, constitute valuable assets of the Debtor’s estate.
Key statistics about the company:
- Assets: $60.2 million (as of July 1)
- Liabilities: $70.5 million (as of July 1)
- Total Secured & Unsecured Claims (as of Petition Date): $36.2 million (according to Schedules)
- Net Sales: $151.3 million (2011)
- Net Operating Losses: $11.4 million (2011)
- Employees: 1,162 (U.S. only)
Immediately upon filing for bankruptcy, Daffy’s set forth its plan to liquidate its assets pursuant to which it anticipates being able to satisfy all scheduled claims in full. Among the key first day filings, Daffy’s sought approval to assume an Asset Purchase, Assignment, and Support Agreement dated July 18, 2012 pursuant to which it would sell certain of the Debtor’s real property leasehold interests, including the lease of its store location in Herald Square, fixtures, and intellectual property to Jericho Acquisitions I LLC for cash consideration of $43 million. Jericho Acquisitions I LLC is an affiliate of Herald Center Department Store Tenant LLC, which is in turn a subsidiary of J.E.M.B. Realty Corporation. On December 20, 2011, Daffy’s entered into an option agreement with Herald Center Department Store Tenant LLC pursuant to which it sold an irrevocable option to acquire Daffy’s interest in the Herald Square Lease. There is also a second asset sale agreement entered into between Daffy’s principal shareholder and affiliates of the same entities whereby the principal shareholder has agreed to sell certain properties which are leased to Daffy’s for $40 million. Daffy’s has guaranteed $9 million of debt related to those properties, but the guarantees will be released as part of the principal shareholder’s sale.
Second, on July 31st, Daffy’s entered into an agency agreement with a joint venture comprised of Gordon Brothers Retail Partners, LLC and Hilco Merchant Resources, LLC to sell all of Daffy’s remaining inventory through store closing sales. The Hilco/Gordon Brothers joint venture (referred to below as the “Agent”) was the winning bidder at an auction held on July 30th. Daffy’s has filed a motion to assume this agency agreement with the bankruptcy court. Among the key terms of the proposed agency agreement:
- The Agency Agreement provides that the Agent shall guarantee the Debtor a “Guaranty Percentage” minimum recovery of 99.5% of the cost of the Debtor’s inventory (subject to various adjustments which could reduce the minimum recovery).
- This Guaranty Percentage equates to a minimum recovery for the Debtor under the Agency Agreement of approximately $16.915 million based on a threshold inventory level of $17 million.
- The Agency Agreement is conditioned upon the entry of an order approving assumption of the Agency Agreement no later than August 10th.
- The Agency Agreement also provides that the Debtor shall receive 5% of the gross proceeds from the sale by the Agent of any “augmented inventory” the Agent includes as part of the store closing sale process.
Prior to the July 30th auction, Daffy’s had entered into a stalking horse agreement with Great American Group WF, LLC. That stalking horse agreement had provided for a “Guaranty Percentage” of 92.7%.
We have provided complimentary copies of many of the key first day filings from Daffy’s bankruptcy case here on our blog. You can find them by following the links below.
- Voluntary Petition
- Declaration of Daffy’s Inc.’s Vice President of Finance and Secretary, Richard Kramer
- Motion to Assume Asset Purchase, Assignment & Support Agreement
- Motion to Approve DIP Financing
- Motion to Approve Sale of Assets Through Store Closing Sales & Assumption of Agency Agreement
- Proposed Plan of Liquidation
- Statement of Financial Affairs
- Schedules of, Among Other Things, Assets & Liabilities