Payless Is Suing Martha Stewart for $1 Million — Here’s Why

After emerging from Chapter 11 bankruptcy, Payless ShoeSource is taking Martha Stewart Living Omnimedia Inc. to court.

In an attempt to reclaim a $1 million payment it made to Martha Stewart Living prior to filing for Chapter 11 protection in February 2019, Payless filed a complaint against the brand on June 19 in U.S. Bankruptcy Court for the Eastern District of Missouri.

According to the complaint, Payless subsidiary Payless Finance Inc. transferred $1 million to Martha Stewart Living in January 2019 — one month before it went bankrupt. The funds were for royalties under an agreement dating back to July 2018.

Now reorganized following its bankruptcy, Payless is asking the court to order Martha Stewart Living to repay the funds. The retailer claims it was insolvent when the transfer was made, and that Martha Stewart Living is liable to repay the $1 million under section 555 (a) of the Bankruptcy Code, which allows a trustee to recover property transferred pre-petition. Additionally, Payless claims the payment was an “avoidable transfer” under section 547(b) of the Bankruptcy Code.

Payless first filed for Chapter 11 protection in April 2017. The retailer was strapped with nearly $840 million in liabilities, much of which stemmed from a 2012 leveraged buyout by private equity firms Blum Capital and Golden Gate Capital. Payless emerged from that Chapter 11 filing four months later, after shedding about $435 million in funded debt and closing hundreds of stores.

But only a year and a half later, in February 2019, Payless found itself back on the bankruptcy court docket, announcing that it would exit its North American business, closing up all 2,500 units in the region. During the second set of bankruptcy proceedings, the retailer continued to operate 750 brick-and-mortar stores in Latin America, as well as parts of Asia, Africa and the Middle East. Payless came out of its second bankruptcy in early 2020 — emerging with new leadership and plans to return to the United States.

Martha Stewart and Payless teamed up in December 2018 on a limited-edition holiday collection of footwear, released under the Martha Everyday label. The line was in collaboration with Stewart’s parent company, Sequential Brands Group Inc. (Her brand was sold in April 2019 to licensing company Marquee Brands, owner of Bruno Magli and BCBG.)

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