A Delaware bankruptcy judge on Wednesday approved specialty home decor retailer Z Gallerie LLC’s disclosure statement to be sent to creditors for voting on its Chapter 11 plan after revisions assuaged concerns from the Office of the U.S. Trustee.
During a hearing in Wilmington, U.S. Bankruptcy Judge Laurie Selber Silverstein said she would sign off on the disclosure once final revisions are added as she deemed it complete enough to send to creditors to solicit their votes on a two-track plan that would either divvy proceeds from a sale of assets or debt-for-equity swap.
Z Gallerie’s attorney Joshua M. Altman of Kirkland & Ellis LLP told the judge a revised disclosure statement was submitted with the court Tuesday, the day after the federal bankruptcy watchdog told the court that the document was lacking in key details.
In an objection filed Monday, U.S. trustee representative Jaclyn Weissgerber said Z Gallerie’s plan disclosure statement did not meet the standards of the bankruptcy code that require adequate information about a Chapter 11 plan to be provided to creditors when soliciting their votes.
“It does not contain a liquidation analysis, demonstrate the plan’s feasibility, or include projected recoveries for voting creditors,” the objection said. Section 1125 of the U.S. Bankruptcy Code describes the adequacy of disclosure statements and requires a debtor to inform creditors about what their recoveries would be in a liquidation and a reorganization, among other things.
Z Gallerie came to court in March with a prepackaged Chapter 11 plan to pursue either an all-asset sale of its 76-store retail chain or a debt-for-equity swap with a secured creditor. Closings are ongoing at 17 of the stores, according to the disclosure statement. Z Gallerie attorney Justin R. Bernbrock of Kirkland & Ellis LLP told the judge that multiple prospective buyers have expressed interest in Z Gallerie's assets and the company is working with those parties in the hopes of preparing bids by a May 16 deadline.
If a qualified bid is submitted, Z Gallerie said it may seek to assign a stalking horse and bid protections in advance of an auction. Z Gallerie plans to hold a confirmation hearing in June, according to the disclosure statement.
The company came into Chapter 11 with $138 million in debt in the form of $19 million of senior secured revolving loans, $91 million in senior secured term loans, $10 million in senior unsecured notes and $17 million in senior unsecured refinancing notes.
According to the disclosure statement, secured claims are projected to be recovered at 100 percent except for secured term loan claims, which could see a recovery of up to only 10 percent. General unsecured claims are not expected to see any recovery unless there are funds left after other creditor classes are paid, the disclosure statement said.
The revised disclosure also included a liquidation analysis that determined creditor classes will get recoveries that are not less than what they would have in a Chapter 7 liquidation and certain financial projections including anticipated company earnings and expenses.
Z Galleries’ interim President and CEO Mark Weinsten said in a first-day declaration that a series of decisions made by the company did not pan out in the wake of a 2014 transaction that saw the three siblings who founded the company sell off a 70% stake in Z Gallerie to affiliates of Brentwood Associates.
Since that deal, the retailer has opened more stores, opened a new distribution center in Atlanta and failed to adequately develop its e-commerce platforms, according to the declaration. The results of these actions did not meet the company's expectations, as the stores did not perform as anticipated, the distribution center disrupted logistics and added costs, and the lackluster web sales platform limited e-commerce growth, Weinsten said.
The missteps combined with larger industry trends affecting the retail sector — especially brick-and-mortar retailers — have left Z Gallerie with less than $2 million in cash, despite recent efforts to address the problems.
Z Gallerie was formed in 1979 by Joe, Carole and Mike Zeiden when they started a poster-selling and framing business out of their parents' garage in Sherman Oaks, California. The brand expanded to home furnishings and decor, eventually growing to 76 stores in 28 states.
The debtor is represented by Domenic E. Pacitti and Michael W. Yurkewicz of Klehr Harrison Harvey Branzburg LLP and Joshua A. Sussberg, Joshua M. Altman and Justin R. Bernbrock of Kirkland & Ellis LLP.
The U.S. trustee is represented by Jaclyn Weissgerber.
The case is In re: Z Gallerie LLC et al., case number 1:19-bk-10488, in the U.S. Bankruptcy Court for the District of Delaware.