In re Whitehall Jewelers Holdings, Inc., Case No. 08-11261(KG) (Jointly Administered) (Bankr.Del. 7/28/2008)
| Decision Date | 28 July 2008 |
| Docket Number | Re Dkt. No. 314,Re Dkt. No. 15,Case No. 08-11261(KG) (Jointly Administered) |
| Parties | In re: Whitehall Jewelers Holdings, Inc., et al., Chapter 11, Debtors. |
| Court | U.S. Bankruptcy Court — District of Delaware |
The Debtors, Whitehall Jewelers Holdings, Inc., and affiliated entities ("Debtors") have submitted to the Court an issue of great importance to Debtors in their Chapter 11 liquidation: is it permissible pursuant to Section 363 (f)(4) of the Bankruptcy Code to sell consigned goods in a sale under Section 363 of the Bankruptcy Code? The vendors of the consigned goods raise a hue and cry that Debtors are attempting to sell property Debtors do not own. The resolution of the issue is extremely time sensitive and the opinion is therefore more brief than the Court would like. The Debtors require the Court's ruling for a sale of all of their assets. The bid deadline is tomorrow, July 29, 2008 at 12:00 p.m., and a sale hearing is scheduled for August 8, 2008 at 10:00 a.m. The framework of the urgency is Debtors' intention to sell the consigned goods at the auction, which will almost certainly result in significant losses to the consignment vendors. The legal issues are as interesting as they are important. The Court has not been asked to conduct an evidentiary hearing and therefore will limit the discussion to the most relevant, undisputed facts.
Debtors are nationwide specialty retailers of fine jewelry, offering a selection of merchandise including diamonds, gold, precious and semi-precious jewelry and watches. They operate 373 retail stores in 39 states. On June 23, 2008 (the "Petition Date"), the Debtors each filed a petition for relief under Chapter 11 of the Bankruptcy Code.
As of the Petition Date, a substantial portion of the inventory held by the Debtors at their retail stores was comprised of consigned goods (the "Consigned Goods") received from approximately 124 consignment vendors (the "Consignment Vendors"). The Debtors estimate that, as of the Petition Date, they held approximately $63 million of Consigned Goods in inventory at their retail stores. The Consignment Vendors, as a group, are Debtors' largest creditors.
The relationship between the Debtors and each Consignment Vendor is in nearly all instances governed by a Vendor Trading Agreement (the "VTA"), which in its generic form provides, in part:
The Parties intend that the transfer and delivery of goods by Consignor to Consignee pursuant to these Terms of Consignment shall be characterized as a "Consignment" by a "Consignor" to a "Consignee" within the respective meanings of each such term under the Uniform Commercial Code as adopted in each applicable jurisdiction (the "U.C.C.") and the provisions of the U.C.C. relating to consignment, including without limitation Section 9-103, 9-317, 9-319 and 9-324 thereof, shall apply hereto.
Exhibit A to VTA, ¶ 1(c). The VTA further provides:
Consignor is and shall remain the owner of Consigned Merchandise, retaining full title to each item of Consigned Merchandise . . . . Consignee shall acquire no right, title or interest in the Consigned Merchandise other than the right to possess the Consigned Merchandise as a consignee and sell the Consigned Merchandise as provided under the Terms of Consignment.
Exhibit A to VTA, ¶ 2. Finally, the VTA provides that Consigned Goods were "sold to Whitehall by Vendor on a `sale or return' basis." VTA, ¶ 9.1
The Consigned Goods were delivered to the Debtors for resale to the Debtors' retail customers and are of the same general nature and quality as goods that the Debtors purchased directly for their inventory ("Asset Goods"). The Consigned Goods are not segregated or otherwise identified as Consigned Goods to the Debtors' customers.
Debtors have classified the Consignment Vendors as follows:
1. Consignment Vendors who failed to file financing statements and those who filed improperly or who failed to comply with UCC Article 9, including those who did not refile when Debtors changed their name.
2. Consignment Vendors whose consignments are governed by UCC Article 2 and therefore are subject to the claims of Debtors' creditors.
The difficulty for the Court, and ultimately for the Debtors, is that the classifications are incomplete and are mere allegations. There is a minimal, if any, evidentiary record.
On or about June 25, 2007, Debtors changed their operating name from "Whitehall Jewellers" to "Whitehall Jewelers." See Fourth Amended and Restated Certificate of Incorporation of Whitehall Jewellers, Inc. filed with State of Delaware, Secretary of State, Division of Corporations (bearing stamp, "Delivered 11:28 p.m. 06/25/2007, FILED 10:42 p.m. 06/25/2007, SRV 070749273 — 0417913 FILE"). Certain of the Consignment Vendors allege that the Debtors continued to transact business under the name "Whitehall Jewellers" subsequent to the date of the name change. See, e.g., Resp. and Incorporated Mem. Law of Consignment Group in Opp'n to Debtors' Supplemental Motion ¶¶ 24-26.
A number of the Consignment Vendors claim that they terminated their relationship with Debtors prior to the Petition Date. Debtors contest the validity of the terminations.
On June 23, 2008, the Debtors filed a Motion for an Order Pursuant to Sections 105, 363 and 365 of the Bankruptcy Code (A) Authorizing Debtors to Enter Into a Stalking Horse Agency Agreement in Connection with Store Closing Sales; (B) Approving Payment of a Break-up Fee in Connection Therewith; (C) Approving Auction Procedures for a Disposition of Substantially All of the Debtors' Assets, and Subsequent to Such Auction (1) Approving a Sale Transaction Pursuant to Which Certain of the Debtors' Stores Would Continue as Going Concerns and/or (2) Authorizing the Debtors to (a) Implement an Agency Agreement with a Liquidation Agent, (b) Conduct Store Closing Sales at the Debtors' Locations and (c) Sell Assets at Such Locations Free and Clear of All Liens, Claims and Encumbrances; (D) Establishing Procedures in Connection with the Rejection of Leases for Nonresidential Real Property; and (E) Granting Ancillary and Other Related Relief (the "Sale Motion") [D.I. 15]. By the Sale Motion, the Debtors sought an order permitting them to sell substantially all of their assets, including inventory.
On June 24, 2008, at first day hearings held before this Court, counsel for certain of the Consignment Vendors objected to the Sale Motion because the sale or agreement incident to a going out of business sale included the Consigned Goods. The Court approved the Sale Motion but preserved the Consignment Vendors' objections. On July 10, 2008, this Court held a status conference regarding the issues raised by the Consignment Vendors with respect to the Sale Motion. At the conclusion of the status conference, this Court directed the Debtors to file a Motion specifying the relief Debtors are seeking. On July 15, 2008, Debtors filed the Supplemental Motion in Support of including the Consigned Goods in the Sale.
By their Supplemental Motion, the Debtors are seeking the approval of this Court to approve a sale or a going out of business arrangement to sell substantially all of their assets, including inventory comprised largely of the Consigned Goods. The Debtors argue that the Court has the authority to permit such relief under Section 363(f)(4) of the Bankruptcy Code because a bona fide dispute exists as to the Consigned Goods. However, as discussed below, the Debtors have ignored or avoided the threshold issue in this matter, whether the Consigned Goods are property of the estate.
The Debtors have framed the issue narrowly: whether the Consignment Vendors' interests in the Consigned Goods is in bona fide dispute within the meaning of Section 363(f)(4). Section 363(f) provides:
The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if . . .
(4) such interest is in bona fide dispute.
The Debtors argue that the dispute here concerning the parties' relative interests in the Consignment Goods qualifies as bona fide within the meaning of section 363(f)(4). The Consignment Vendors have asserted that they hold an ownership interest in the Consignment Goods sufficient to prevent their sale. The Debtors, however, argue that there are several objective bases to dispute that assertion as a legal matter:
• First, to the extent that the Consignment Vendors' provision of Consigned Goods to the Debtors is governed by Article 9 of the Uniform Commercial Code, the unperfected and defectively-perfected Consignment Vendors have failed to perfect their asserted interests rendering them merely unsecured creditors with no enforceable interest in the Consignment Goods.
• Further, the non-authenticated Consignment Vendors have failed to take the necessary steps to assert priority of their interests, and thus, as a practical matter, are the equivalent of unsecured creditors, as they are subject to prior floating liens.
• Moreover, if Article 9 does not apply, there is, at a minimum, a bona fide dispute as to whether Article 2 of the Uniform Commercial Code would provide the fuel of decision as to the Vendors' asserted interests. Pursuant to UCC § 2-326, the Consigned Goods of all Consignment Vendors (including Perfected Vendors) would be deemed a "sale or return" (as the VTAs stipulate), and thus subject to the claims of Debtors' creditors.
A bankruptcy court may not allow the sale of property as "property of the estate" without first determining whether the property is property of the estate. See Moldo v. Clark (In re Clark), 266 B.R. 163, 172 (B.A.P. 9th Cir. 2001) (...
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