Michigan-based Christian bookstore retailer Family Christian Stores withdrew a bankruptcy proposal this week after debtors criticized its restructuring plan that would have involved selling virtually all of its assets.
According to Lynde Langdon of World News Group, the company did not provide a reason behind the change; documents filed in a Michigan bankruptcy court indicated that it had a total of about $107 million in liabilities. Steve Ware, a professor at the University of Kansas who specializes in bankruptcy, contended that the arrangement of the company wanting to buy itself was questionable.
"The president of the debtor ought to be thinking, like a seller, 'I want to get as high a price as possible,'" Ware said. "But if he is also the buyer, [then] he's conflicted, and he won't want the seller to get as high a price as possible."
Ware explained to Langdon that Family Christian Stores, or FCS, wanted to pull a move known in bankruptcy law as a Section 363 sale, which would allow the company to sell all its assets to a single buyer to raise money to pay off creditors. However, unlike a traditional restructuring plan, Ware stated that a "363" process would be quicker and give creditors less oversight.
"Under the umbrella of its non-profit organization, Family Christian Resource Centers, it formed a new company called FCS Acquisition that would have bought the stores and their assets for $28 million cash and assumed many of the stores' leases," Langdon wrote. "The total value of the sale would have been about $74 million."
Langdon added that FCS "would have walked away from the rest of its debt" after it used the $28 million to pay off creditors.
According to Nick Manes of MiBiz, United States Trustee Daniel McDermott filed an objection with the bankruptcy court last week in regards to the original restructuring plan FCS presented.
"The debtors, the senior lender, and the stalking horse bidder are all ultimately owned or controlled by the same person(s)," McDermott wrote. "This is a fast-track sale to an insider to pay off another insider, with little or no marketing time and bid procedures and sale terms that could chill competitive bidding."
According to Langdon, creditors were also concerned that a "senior secured creditor" backed by Richard Jackson, the president of the board of Family Christian Resource Centers, would be the first to get paid after the sale. U.S. bankruptcy attorney Michael Maggio agreed with Credit Suisse's lawyer Jennifer Hagle that the case had a "significant issue of transparency."
"In essence, at the moment, it would appear we're only moving this case for the benefit of Mr. Jackson," Maggio said.
Langdon looked at the bankruptcy court and IRS records and found that the company's sales declined by about 25 percent since 2008. FCS argued that the Great Recession and changing consumer habits were to blame for the decline.
"The basic idea of business bankruptcy ... is to distinguish a company that's been going downhill and it's going to keep going downhill, from a company that's been going downhill but it has a good chance of rebounding," Ware said.
Mark Kuyper, president of the Evangelical Christian Publishers Association, told Langdon that the FCS bankruptcy placed publishers in competing positions as both creditors and suppliers.
"None of our publishers want to lose 260 outlets for Christian resources, particularly because those stores are focused on Christian retail and carry more breadth than a general market retailer might," Kuyper said.
According to MiBiz, FCS filed for Chapter 11 last month, reporting "assets of less than $50,000 and liabilities of between $50 million and $100 million." Kuyper told Langdon that there was "no way to minimize that impact," adding that the Christian publishing industry will be significantly affected.
"Regardless of how it ultimately goes, it will be a hardship for publishers," Kuyper said. "It is just a question of how much."