Unsecured creditors, trustee fault Brookstone bankruptcy plan

$30 million loan, executive bonuses among the targets

Objections filed by creditors and the bankruptcy trustee might prevent Brookstone from closing its mall stores and auctioning off the rest of the company by the end of September.

The Merrimack-based retailer of high-end gadgets – which on Aug. 2 filed in Delaware for Chapter 11 bankruptcy protection – wants to close its 102 brick-and-mortar stores as well as auction off its 37 airport stores, its online business and its intellectual property as a going concern. The goal is to get this done by Sept. 30.

But those filing objections are blasting that plan, criticizing its secrecy and compressed time schedule. They also have criticized the secured lenders, who want to advance another $30 million, of really trying to get their money at the expense of other creditors and the company itself.

Those lenders “should not be permitted to run these cases entirely for their benefit and on the backs of unpaid landlords and vendors,” said the Official Committee of Unsecured Creditors, which includes a representative of Simon Properties, the developer and operator of many of the shopping malls in which Brookstone has stores.

The committee also objected to the high fees, including a $450,000 closing fee and higher interest rates than the previous loan, which would be more than 11.25 percent on the fixed portion of the loan. The loan would also give the lenders collateral that they didn’t have before, including any proceeds from actions that the committee was pursuing against the company’s chief executives. Meanwhile, the plan doesn’t pay landlords their rent in a timely fashion during the going-out-of-business sale.

The lenders “seek to drive a process that monetizes their collateral quickly and without regard to junior creditors, and to obtain substantial fees and other benefits that far outweigh the utility of their nominal funding,” said the committee.

Rather than save the company, it could leave it with no money, resulting in Chapter 7 liquidation rather than Chapter 11 liquidation, they argued. 

The trustee’s objections focused on a special bonus paid to retain executives. Such payouts – incentives for the executives to stick with the company during reorganization – are common during bankruptcy, but the trustee complained that Brookstone didn’t want to name who would get the payouts, how much they could potentially get and what were the individual parameters they would have to meet. 

Brookstone argued that it needs to keep that information secret because if other companies knew of their compensation they could more easily lure them away. It might also ”cause harm and distress to the participating employees, thus lowering employee morale.”

The trustee said that such an argument does not outweigh the “presumption in favor of access.”

In a separate motion, the trustee argued against some of the more general provisions of the incentive plan, which could result in nearly $1 million to going to five insiders.

The executives would receive some money (at least 25 percent of their salary) if the combined proceeds of the going-out-of-business sale and the sale of the rest of the company goes for half of the appraised value of the company. For each incremental million dollars above that minimum sale price, they would get an additional 5 percent of their targeted bonuses, up to 125 percent.

Selling a company for half of what it is worth “does not appear to be a challenging or difficult to achieve metric,” the trustee wrote. And because it is so “easy to achieve” it is “not truly incentivizing.”

The trustee also raised concerns about the fees going to the companies that are conducting the going-out-of-business sale for the mall stores, especially since one of them, Gordon Brothers Retail Partners LLC, is related to one of the secured creditors, Gordon Brothers Finance Company, which is helping with that $30 million loan.

In a response, Gordon Brothers Retail said it disclosed the relationship and Brookstone had “waived any actual or perceive conflict” 

The Delaware bankruptcy court is scheduled to rule on the objections on Aug. 29. The very next day, is the deadline for the “stalking horse,” which would place the initial bid that would have to be topped during the bankruptcy auction.