Airwalk Internationals parent company, Sunrise Capital Partners, almost made it to the finish line in their bid to buy the troubled company out of foreclosure on Friday, but they were stymied at the eleventh hour by a group of Asian factories and an agent that cried foul to the U.S. Bankruptcy Court in Denver, filing a petition on Thursday that forced Airwalk International, LLC /dba Tare7 into involuntary Chapter 11 bankruptcy protection.
The action effectively stays all further legal action against the company — including the foreclosure — according to attorneys close to the case.
The factories contend they have been fighting to get paid by Airwalk for the last two years, reportedly entering into agreements with the company to make and deliver more product on credit terms with the promise that past debts would be paid in full. Some of the plaintiffs have also indicated that the company failed to pay for those goods delivered on credit terms and instead went to other factories to have product made when they were not able to pay the outstanding balances owed the plaintiffs.
The petition filed on Thursday by three parties — that have claims approaching $6.8 million — alleges breach of contract . ASE Industries, an agent out of Korea, is seeking approximately $850,000 in the petition. Two Chinese factories, Suzhou Hae Kang Shoe Co. Ltd. and Mikeda (Qingdao) Sports Commodities Co. Ltd., have filed claims of approximately $1.8 million and $4.1 million, respectively. One additional factory, HWA Seung Shoe Manufacturing of Dalian China, has additional claims in excess of $4.0 million.
Once papers are served, Airwalk has twenty days to respond to the petition and prove the company has the ability to satisfy the claims. If not, the Court will move forward with the Chapter 11 proceedings. As of press time Friday, the company had not been served and senior management said they were not aware of any proceedings. One attorney close to the case said that attempts to serve the papers at the old Golden, CO address and the new Englewood, CO address had been unsuccessful.
The petition certainly throws a wrench into the efforts by Sunrise and Airwalks senior secured creditor, Congress Financial Corporation, to secure the companys assets free and clear of any other debt.
In a story first reported by SEW last week, The Supreme Court of the State of New York on November 3, 2003 issued a foreclosure order on behalf of Congress and appointed a temporary receiver with the authority to “sell certain assets” of Airwalk International, LLC at public auction.
Sunrise Capital Partners, the New York-based private equity fund that bought Airwalk in 1999, has formed a new subsidiary that was attempting to purchase the assets of Airwalk for $26 million. The purchase offer by the new subsidiary, Collective Licensing International, LLC, is funded by the holders of “the first and second priority liens” on the assets, or Congress and Sunrise. Current Airwalk senior management was expected to join the newly formed subsidiary to run Airwalk upon completion of the plan.
Two law firms are now leading the charge for the factories and have joined forces to press their case. In discussions with Paul Donsbach, an attorney with Kutak Rock LLP of Irvine, CA, Sports Executive Weekly learned that the attorneys see the bankruptcy proceedings not only as a forum to make claims, but also to get a better understanding of the “distribution of assets” of the company and to determine the ownership of same. Kutak Rock, which represented most of the claimants, is partnered with another firm in Denver that represents Mikeda.
The numbers that are coming together here are astounding for a company that is expected to generate less than $10 million in licensing revenues from its current deals with Payless ShoeSource and its international partners.
Another deal reported last week that had BBC signing a three-year license deal was said to be incorrect, according to Tare7 management. BBC has had a kids license with Airwalk, and may have been in talks with the company for a broader deal, but the foreclosure — and now the bankruptcy — should put the future of any deal in doubt. BBC has reportedly already hired a senior sales executive to run sales for the brand. Sources tell us the deal was not supposed to be announced until after the completion of the foreclosure plan.
The factories alone are looking for at least $11 million and Congress, the senior secured lender, has a claim for just north of $14 million in the foreclosure petition. Other creditors are expected to join the case that could see total debt reach a face value of nearing $30 million, excluding statutory and other potential damage claims. Current assets will certainly fall short of those numbers, which had prompted at least one plaintiff to attach Sunrise to the case in an effort to recoup the debt.
The Chapter 11 proceedings could potentially include a sale of assets at a much lower price than the $26 million that was stipulated in the previously reported foreclosure scheme, and may bring in other suitors that balked at the high price tag set by Sunrise and Congress that was rumored to keep others out of the deal. It know looks as though the other creditors will have a voice at the table that may provide them a forum to press their case.
Sunrise reportedly purchased the struggling Airwalk for less than $20 million and is rumored to have sunk another $50 million to $60 million into the venture since 1999. Plunking down another $26 million must have seemed like a good idea at the time to get back to square one, but now they may be treated as just another creditor. Is it still worth $26 million when they have to pay off the others?
>>> We can think of a number of brand aggregators that would love to get their hands on these debt-free properties for less than $20 million.
>>> The courts will have to untangle the mess and determine who really owns what — and who made the decisions that led to the factories claims
