In re Brookstone Holdings Corp.

• Decision Date: 01 October 2018
• Docket Number: Case No. 18-11780 (BLS)
• Citation: 592 B.R. 27
• Parties: IN RE: BROOKSTONE HOLDINGS CORP., et al., Debtor.
• Court: U.S. Bankruptcy Court — District of Delaware

592 B.R. 27

IN RE: BROOKSTONE HOLDINGS CORP., et al., Debtor.

Case No. 18-11780 (BLS)

United States Bankruptcy Court, D. Delaware.

Signed October 1, 2018

Sean Matthew Beach, Andrew L. Magaziner, Young, Conaway, Stargatt & Taylor, Wilmington, DE, Dylan S. Cassidy, David M. Feldman, Jason Zachary Goldstein, Matthew K. Kelsey, Keith R. Martorana, Matthew John Williams, Gibson, Dunn & Crutcher LLP, New York, NY, for Debtor.

Seth Van Aalten, Cathy Hershcopf, Evan M. Lazerowitz, Summer M. McKee, Seth Van Aalten, Robert Winning, Colley LLP, New York, NY, Justin R. Alberto, Erin R Fay, Gregory Joseph Flasser, Bayard, P.A., Wilmington, DE, for Creditor Committee.

Re: Docket Nos.: 25; 261

OPINION¹

BRENDAN LINEHAN SHANNON, UNITED STATES BANKRUPTCY JUDGE

Before the Court is the Motion for Interim and Final Orders Authorizing the Debtors To Assume the Closing Store Agreement and for related relief (the "Store Closing Motion") [Docket No. 25]. By this Motion, Brookstone seeks to assume a store closing agreement (the "Agreement") with Gordon Brothers Retail Partners, LLC and Hilco Merchant Resources, LLC (collectively referred to hereinafter as "Hilco") to perform certain services relating to going-out-of-business sales (the "GOB Sales"). The United States Trustee ("UST") does not object generally to the relief sought by way of the Store Closing Motion, but argues that assumption of the Agreement is procedurally improper to the extent that the Agreement with Hilco constitutes the retention of a "professional" under Bankruptcy Code § 327(a). For the reasons that follow, the Court determines that Hilco is not a professional for the purposes of the Bankruptcy Code § 327(a), and the Debtor has otherwise carried its burden to warrant assumption of the Agreement.

INTRODUCTION

Hilco is a familiar player in Chapter 11 retail restructurings in this Court. In countless cases, it has provided valuable services to debtors relating to disposition and monetization of inventory, real estate, intellectual property and other estate assets. The procedural mechanism by which Hilco (and the handful of entities that are its industry peers) are engaged to perform these services has — with very few exceptions — been by way of assumption of a services contract by motion under §§ 365(a) and 363(b) of the Bankruptcy Code. Notwithstanding a well-developed practice in this and other courts, the UST has in recent months objected in several cases and insisted that, in the circumstances described above, Hilco is serving as a "professional" in the bankruptcy proceeding and must be retained under the strictures of § 327(a). See Heritage Home Corp., LLC, et al. , Case No. 18-11736 (KG), UST Objection [Docket No. 265]; Samuels Jewelers, Inc. , Case No. 18-11818 (KJC), UST Limited Objection [Docket No. 162].

In a very recent case, my colleague Judge Gross was called upon to decide whether SB360 Capital Partners was a professional where it was acting in a role broadly similar to Hilco in the instant case. Heritage Home Corp., LLC, et al. , Case No. 18-11736 (KG), 2018 WL 4684802, Mem. Op. dated September 27, 2018 ("Heritage Home") [Docket No. 330]. After review of the applicable legal test derived from the First Merchants decision discussed in detail below, Judge Gross distilled the relevant analysis down to a standard the undersigned cannot improve upon: "What is clear in First Merchants is that a ‘professional’ is limited to those occupations which control, purchase or sell assets that are important to reorganization, is negotiating the terms of a plan of reorganization, [and] has discretion to exercise his or her own personal judgment...." Id. at ¶ 12, citing In re First Merchants Acceptance Corp. , 1997 WL 873551 at *3 (D. Del. Dec. 15, 1997).

Applying this test to the case at bar, this Court is satisfied that Hilco's services, while clearly valuable and important, are not sufficiently central to the development and implementation of the Debtor's reorganization to support a finding that it is a "professional" within the meaning of § 327(a). The established practice requires fulsome disclosure of the services to be provided and the compensation to be paid, followed by a hearing on the merits where a debtor must carry its burden under Bankruptcy Code §§ 365 and 363 to demonstrate that it is proceeding in good faith and that its proposed course of action reflects the exercise of its reasonable business judgment. This structure is compliant with the Bankruptcy Code and is sufficient to address the UST's legitimate desire for transparency and due process without imposing the additional requirements and restrictions required by § 327(a).

BACKGROUND

Brookstone Holdings Corporation and its affiliates (hereinafter "Brookstone" or the "Debtor") operate a well-known manufacturing and retailing business which produces and sells Brookstone-branded products in traditional retail outlets, including both mall and airport stores. Declaration of Greg Tribou In Support of the Debtors' Chapter 11 Petitions and Requests for First Day Relief (the "First Day Aff.") [Docket No. 2] at ¶ 16. Brookstone also sells its branded products on the internet and as wholesaler. In addition to selling its own products, Brookstone provides distribution and sale opportunities for third-party products that fit within Brookstone's brand concept. Id. at ¶ 15.

The record reflects that, as of the commencement of these cases on August 2, 2018 (the "Petition Date"), the Debtor operated 137 retail stores, 102 of which were located in malls and 35 of which were located in airports. Id. at ¶ 11. For fiscal year 2017, sales from Brookstone's mall stores made up approximately 52% of Brookstone's net sales, and sales from Brookstone's airport stores made up approximately 14% of Brookstone's net sales. The balance of Brookstone's sales came from e-commerce and its wholesale operation. Id. at ¶ 16.

A number of factors led Brookstone to seek Chapter 11 relief. Notably, the Debtor represents that a shift in consumer preferences has led to a decline in profitability for Brookstone's mall stores, which have been operating at a loss each year since the Debtor's emergence from its first Chapter 11 proceeding in 2014. Id. at ¶ 17, 55, 57. While its mall stores have been struggling, however, Brookstone sees potential for improvement in its other business segments. Id. at ¶ 18-19, 22-27. In contrast to its mall stores, Brookstone's airport stores have, for the most part, operated profitably. Id. at ¶ 18. The Debtor believes that its intellectual property carries substantial value, and its e-commerce presence has potential for expansion and further development. Id. at ¶ 27-29. However, Brookstone asserts that in order to realize its potential, it must restructure its operations. Id. at ¶ 6-7, 18, 22, 26.

Prior to the Petition Date, Brookstone determined that its restructuring plan would include the closure of its mall stores and the liquidation of a substantial portion of the inventory of those stores.

Id. at ¶ 66-67. In order to assist Brookstone with the management of those store closures and the associated GOB Sales, it engaged the services of Hilco. Id. at ¶ 66-67. On August 1, 2018, the Debtor and Hilco executed the Store Closing Agreement, which laid out the terms and conditions by which Hilco would assist Debtor with its store closures. The Debtor filed its petition for Chapter 11 relief the next day, and contemporaneously filed the Store Closing Motion [Docket No. 25] which requested, inter alia , that the Court authorize the Debtor to assume the Agreement.

The UST has filed a limited objection to the issuance of an order granting Debtor approval of the assumption of the Closing Store Agreement (hereinafter the "Limited Objection") [Docket No. 185]. Specifically, the UST asks the Court to find that Hilco is a professional for the purpose of 11 U.S.C. § 327(a), and that the Debtor therefore must abide by the statutory requirements governing the retention of professionals in bankruptcy proceedings. After a hearing, the Court issued an Interim Order [Docket No. 75] granting most of the relief requested by the Debtor in the Store Closing Motion (and thereby allowing the GOB Sales to proceed), but taking under advisement the issue of whether Hilco is a "professional" for purposes of § 327(a).

Hilco and the UST have prepared and submitted a helpful Joint Stipulation of Facts (the "Joint Stipulation") [Docket No. 261] setting forth agreed-upon facts relevant to the Store Closing Motion and the Limited Objection. The Joint Stipulation reflects that, prior to the Petition Date, the Debtor determined to close 102 stores and liquidate inventory over an 8-week post-petition period, and in order to facilitate this process, it entered into the Store Closing Agreement with Hilco. Joint Stipulation at ¶ 2-4. Hilco's duties and obligations are as follows:

(i) Recommend appropriate discounting to effectively sell all of Merchant's goods located at the Stores as of the Sale Commencement Date or thereafter delivered thereto as may be mutually agreed by the parties in accordance with a "store closing" and other mutually agreed upon themed sale, and recommend appropriate point-of-purchase, point-of-sale, and other internal and external advertising in connection therewith;

(ii) Provide qualified supervision to oversee the conduct of the Sale;

(iii) Maintain focused and constant communication with Merchant's Store Operations team to coordinate and keep them abreast of strategy and timing and to properly effect Store-level communication by Merchant's employees to customers and others about the Sale;

(iv) Establish and monitor accounting functions for the Sale, including evaluation of sales of Merchant's goods located at the Stores by category, sales reporting and expense monitoring;

(v) Recommend loss prevention strategies;

(vi) Coordinate with Merchant so that the operation of the Stores is being properly maintained including ongoing customer service

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