Bankruptcy trustee wants Art Van Furniture heirs to repay millions

Two years after Art Van Furniture went bankrupt and all of its stores began to close, the trustee in the bankruptcy case is now trying to sue the family of the late Art Van Elslander for tens of millions of dollars in proceeds from the retailer’s 2017 leveraged buyout sale to a private equity firm.

The lawsuit, filed this month in federal bankruptcy court in Delaware, focuses on the wave of sale-leaseback transactions that were part of the deal and involved nearly 40 Art Van Furniture stores and related properties that the retailer owned.

Those deals funded 70% of the Van Elslanders’ $621 million deal in March 2017 with Boston-based Thomas H. Lee Partners. The sale-leasebacks burdened Art Van Furniture with new rental expenses – in addition to a debt resulting from the agreement – ​​which the lawsuit said immediately doomed the company and would prove unsustainable.

Company founder Art Van Elslander was still alive at the time of the sale. He died the following year at age 87.

The proceeds from the real estate transactions went to make the deal – not to support the future of the furniture business.

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The Archie A. Van Elslander Trust received more than $529 million from the sale, and entities controlled by the patriarch’s children, including Gary Van Elslander and David Van Elslander, received more than $75 million, according to the trial.

The lawsuit seeks to recover more than $105 million in what it calls “fraudulent transfers” which included the sale-leaseback transactions, as well as $8 million in transfers to Gary Van Elslander and $2.5 million to David Van Elslander, among other transfers.

The term “fraudulent” used in the lawsuit has a different and less harsh meaning in federal bankruptcy court than fraud in a general sense, according to consultant and financial adviser Van Conway, president of the Detroit-based Young Conway Group.

More commonly known as “fraudulent transfer”, the term does not represent a crime, but rather an assertion that a third party has not received fair value in a transaction.

In a statement on Tuesday, the Van Elslander family said they would fight the lawsuit’s allegations and placed full responsibility for Art Van Furniture’s disappearance on “business decisions made by the company that bought our family business.” .

A representative for Thomas H. Lee Partners, who is not a defendant in the lawsuit, declined to comment for this article.

The private equity firm previously said it lost “100%” of its core investment in Art Van Furniture and never received any dividends or return of capital.

According to Conway, the outcome of the Art Van lawsuit will likely hinge on whether the judge determines that the sale-leasebacks — along with other aspects of the 2017 deal — left the furniture company so overleveraged that it was essentially insolvent once the deal was made, making failure inevitable.

Conversely, the judge could view Art Van’s eventual bankruptcy in 2020 as the result of post-deal factors and mismanagement that the Van Elslanders had little to do with.

Conway pointed out that these types of lawsuits are common — even expected — after leveraged buyout deals turn out bad, because they give people who lost money another chance to get some of it back.

“If this trial hadn’t happened, I would be shocked, because it’s a free kick,” he said. “If they spend $10 million or $20 million in legal fees and lose, well, (they) try to recover hundreds of millions.”

Conway cited a classic example of such a deal that involved the 1986 $1.25 billion leveraged buyout of drugstore chain Revco, a company that started in Detroit in the 1950s.

Revco filed for bankruptcy two years after the takeover, and claims of fraudulent transfers later followed, as the deal would have left the company with too little capital to succeed.

The lead investor and underwriter in that deal, former New York investment firm Salomon Brothers, ended up paying more than $30 million in settlements.

In the Art Van Furniture case, “the question becomes, did the debt from these transactions render the company insolvent at the time of the (transaction)?” Conway said.

Art Van Furniture was profitable before the 2017 deal, with an average annual net income of just under $17 million between 2011 and 2016, according to the lawsuit filed March 7 by bankruptcy trustee Alfred Giuliano. At the time, she owned about 75% of her total square footage and had no debt.

Thomas H. Lee Partners had an initial equity commitment to the deal of up to $216 million. But by the time the deal closed, that equity commitment had dropped to $70 million, plus a $45 million shareholder note, according to the lawsuit.

Of the total purchase price of $621.5 million, only $2 million remained for the use of the furniture business after all of the Van Elslanders and others were paid off.

And only $70 million, or 11%, of the purchase price was equity; the remaining 89% came from new debt and sale-leaseback transactions.

The deal and its sale-leaseback obligations caused Art Van Furniture to pay about $33.4 million more per year than before the sale of the Van Elslander family.

“This amount greatly exceeded the average net profit generated by the company and even exceeded the highest net profit ever generated by the company,” the lawsuit states, adding that the company also had to pay around 8.5 million. dollars in additional leaseback costs.

Seven months after closing the 2017 deal, Art Van Furniture posted a loss of $22.4 million for the year – its first loss in at least a decade. Two years later, losses reached nearly $189 million.

The lawsuit calls Art Van Elslander, Gary Van Elslander, David Van Elslander and former CEO of Art Van Kim Yost for “breaches of duty” that led to the “devaluation” of the company.

The three Van Elslanders knew the private equity deal was risky and highly leveraged, according to the lawsuit, and were also aware of the sale-leaseback plans and yet signed those deals.

“They even commissioned a real estate valuation report for ‘potential sale-leaseback’ purposes,” the lawsuit states.

Yost stayed on as chief executive after the sale until around June 2018, and Gary Van Elslander stayed on as chairman for around 90 days to help with the transition.

The lawsuit accused the pair of failing to settle the debt situation and approving two “ill-conceived acquisitions” of Pennsylvania-based Levin Furniture and Wolf Furniture stores.

Art Van Furniture filed what became a Chapter 7 liquidation bankruptcy in early March 2020, just as the COVID-19 pandemic hit Michigan.

Nearly 190 Art Van stores have closed and around 3,000 workers in nine states have lost their jobs. Creditors had hundreds of millions in unpaid claims, according to the bankruptcy trustee.

At the time of the bankruptcy filing, Art Van’s CFO exposed a variety of other business-slowing factors, including the company’s over-expansion in the Chicago market, high executive turnover, more than $8 million new costs related to furniture tariffs and increased competition from online retailers Amazon and Wayfair, as well as traditional retailers such as Bob’s Discount Furniture.

Yost, now president of Canada-based The Dufresne Group, owner of Dufresne Furniture & Appliances, did not immediately return a message for comment Tuesday afternoon. The lawsuit seeks to recover the $6 million Yost allegedly received at the time of the 2017 sale, plus an additional $1 million the following year.

There have recently been other fraudulent transfer lawsuits involving fashion retailers J. Crew, Neiman Marcus and Nine West, all of which filed for bankruptcy following private equity deals that turned out badly.

These lawsuits can take years in court and often result in settlements, said Andrew Park, senior policy analyst for a coalition of left-wing groups called Americans for Financial Reform.

“I haven’t seen a final decision on any of them yet,” he said. “These things just take time to get through the courts and they are very complicated cases.”

Thomas H. Lee Partners later created a contingency fund of nearly $2 million to help laid-off Art Van employees, enough money for about $1,200 for each eligible former worker.

Many closed Art Van stores were reborn in late summer and fall 2020 as Loves Furniture, a brand new company created by a Texas private equity firm.

But Loves encountered a series of setbacks, including costly pandemic-related warehouse and logistics issues, and filed for bankruptcy early last year.

In February 2021, the Van Elslander family offered $6 million to buy out the legal rights to the Art Van Furniture name in bankruptcy court.

Other defendants named in the lawsuit include Debra Van Elslander, a daughter of Art; Kenneth Van Elslander, one son; Sandra Seroka, a daughter; Karen Paglino, one daughter; Lori Webb, a daughter; Kim Van Elslander, one daughter; Kris Scarfone, a daughter, and Beth Wood, a daughter.

Those Van Elslander defendants received at least $2.5 million each from the settlement, according to the lawsuit.

Below is the full statement from the Van Elslander family in response to the lawsuit:

Don’t get me wrong, the bankruptcy proceedings may be labeled “Art Van”, but these are the consequences of business decisions made by the company that bought our family business in 2017.

When the company’s founder, Art Van Elslander – our father, grandfather and great-grandfather – sold Art Van Furniture as a thriving family business, the business was generating cash, debt free. The buyer promised us that decades of commitment to employees and communities would remain as strong as ever. These promises have been broken.

Throughout its history, Art Van’s priorities have been to pay its suppliers and employees on time, in full. It was painful to hear the stories of employees losing their jobs and creditors not being paid, thus tarnishing our family’s reputation.

That’s why we bought the Art Van name last year – to keep it out of reach of those who could further damage the reputation built up over 58 years of business. Above all, all the family has now is the name. We do not own what happened to the business after the March 1, 2017 sale.

The US trustee’s efforts to force our family to appear in court to play a role in resolving the problems caused by the purchaser of our business, particularly in the years following the sale, is an unfair attempt to transfer to us the losses, in which we will fight to seek.

Contact JC Reindl: 313-378-5460 or [email protected]. Follow him on Twitter @jcreindl. Learn more about companies and register for our business newsletter.

Janet E. Fishburn