Payless Creditors Criticize Hedge Fund Owner for Role in the Retailer’s Second Bankruptcy

Payless ShoeSource may be bankrupt, but its creditors and lenders aren’t quite done with it yet.

The retailer — which in February announced that it would liquidate all 2,500 of its North American locations, costing around 16,000 people their jobs — has been majority owned by the hedge fund Alden Global Capital since emerging from its first bankruptcy in 2017. Now, in Payless’ second round of Chapter 11 proceedings, some vendors and suppliers blame the investment firm for expediting the chain’s demise.

In a court filing, a committee of unsecured creditors asserted that Alden oversaw the retailer’s “18-month free fall from emergence into one of the largest liquidations in retail history” while allegedly engaging in transactions that could result in claims against it, including the appointment of what one lawyer described in court as “inexperienced and unqualified Alden executives” to replace members of Payless’ senior management team.

Per court documents, three of the five people on Payless’ board currently have ties to Alden, including the hedge fund’s president, Heath Freeman. The committee has alleged those ties could give rise to conflicts of interest that would put the fund’s interests ahead of other creditors. It has also objected to continuing to pay a total of $84,000 per month to retain the five managers during bankruptcy proceedings.

In a separate filing, Payless’ lawyers argued that the board “has overseen Payless through an unexpectedly challenging retail environment, and into the current proceedings,” including maintaining the company’s ongoing Latin America business and international franchise network. “The board’s involvement in the debtors’ operations is far more demanding than a company operating in the ordinary course,” the filing read.

In an Eastern District of Missouri bankruptcy court last Wednesday, Chief Judge Kathy Surratt-States addressed some of the committee’s complaints, according to a USA Today report, ordering that an independent monitor be appointed to supervise the board and report any improper conduct.

The judge also said that Payless’ two independent board members would form a special committee with the sole authorization to “review, consider, negotiate and adopt or approve any document, action or transaction … in which Alden or its affiliates and any director is either interested or may be implicated” and set out a plan for siloing the company’s legal counsel to avoid conflicts of interest.

According to experts, much of Payless’ financial troubles stemmed from a 2012 leveraged buyout by private equity firms Blum Capital and Golden Gate Capital, which saddled the business with hundreds of millions of dollars in liabilities at a time when retail as a whole was struggling to find its footing. Despite shedding about $435 million in debt and closing nearly 1,000 stores, Payless emerged in 2017 from a reorganization “ill-equipped to survive in today’s retail environment,” said the company’s chief restructuring officer Stephen Marotta in a statement.

“They didn’t really have enough time to evolve the business model, given the financial constraints they had to contend with,” B. Riley FBR analyst Jeff Van Sinderen told FN shortly after the 2019 bankruptcy filing. “Not being omni-digitally relevant hurt them.”

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