When Shoe Pavilion Inc. filed to reorganize under bankruptcy court protection, the discount footwear chain said it was fighting a poor retail economy and high store rents. But the Sherman Oaks-based discount footwear retailer quickly discovered it also had to fight its biggest secured creditor, Wells Fargo Retail Finance LLC.
Wells Fargo is owed $10.9 million and has a lien on the company’s cash collateral. It claims its standing could be imperiled by Shoe Pavilion’s actions.
In court documents, Wells Fargo’s lawyers claimed Shoe Pavilion executives sought Chapter 11 relief too hastily when they filed on July 15. “The filing came a mere few weeks after the debtors replaced a majority of the members of their board,” the lawyers argued.
Shoe Pavilion executives did not return calls seeking comment.
Wells Fargo also opposed Shoe
Pavilion’s emergency request to shutter as many as 71 of its 117 stores, claiming the company’s original plan to conduct store closing sales without the assistance of a professional liquidator would put the bank’s money at risk.
Henry David, a Los Angeles bankruptcy lawyer with Dreier Stein Kahan Browne Woods George LLP, who is not involved with the proceedings, looked over the
filings and said it is unusual that Shoe
Pavilion and Wells Fargo have their swords drawn in the early stages of the bankruptcy process.
“Wells Fargo has serious doubts about management and the quality of information they are getting from management,” he said.
“Shoe Pavilion seems to be having more disagreements with the lenders than I would have expected at this point in time,” David said. “To go into a Chapter 11 when you are fighting with the bank makes it difficult to successfully reorganize.”
In a hearing July 29, a judge sided with Wells Fargo, granting Shoe Pavilion the right to close only 14 stores in Texas and one in California.
Under an order that bankruptcy Judge Maureen Tighe issued the next day, the company has until October to conduct closing sales at these stores. The judge also ruled that the chain must get court approval for any more store closures.
In filings, Shoe Pavilion reported $61 million in assets and between $25 million to $27 million in liabilities.
Founded in 1979 by Chief Executive Dmitry Beinus, Shoe Pavilion offers consumers designer label footwear at 20 percent to 60 percent below department store prices. Its stores are located in strip malls and outlet centers.
The bankruptcy and the discount sale of millions of dollars of its inventory marks a reversal from the chain’s expansion mode of only two years ago.
In 2006, Shoe Pavilion had stores in
California, Oregon and Washington,
then launched a plan to add 15 to 20 stores annually, expanding to New Mexico and Texas.
The expansion came as Shoe Pavilion sought to capitalize on the growing off-price shoe market, which was then the fastest growing category in domestic footwear.
But the aggressive expansion, combined with adding apparel, fragrances, sunglasses and jewelry to its merchandise, may have contributed to its difficulties.
Jeff Mintz, a Los Angeles-based footwear and apparel researcher with Wedbush Morgan Securities, said Shoe Pavilion got in trouble because the expansion plan
came just before the economy began
to decline.
“They started expanding a little before the economy peaked and took on a lot of debt to do the expansions,” Mintz said. “When the economy went down, they didn’t have the customer traffic to support new stores and the revenue to support the debt.”
Shoe Pavilion is one of several retailers in Chapter 11 proceedings, including Mervyn’s, Steve & Barry’s and Linens ‘n Things.
Some see Shoe Pavilion’s recovery as an open question.
“I think there is a chance they could bounce back as a much smaller company after Chapter 11,” Mintz said. “But it isn’t guaranteed they can do so.”
