Retail Bankruptcy Lessons from the InkStop Liquidation

In January 2012, the Ohio Chapter of the Turnaround Management Association featured an article by Inglewood partners John Lalley and Linda Lalley in its newsletter. Their subject: the InkStop, Inc. Chapter 7 liquidation, and the retail bankruptcy lessons it offered. Those lessons had less to do with balance sheets than with bankers' boxes, subpoenas, and fingerless gloves. The article is reprinted below with permission.

Lessons Learned from an Unusual Bankruptcy

By John Lalley and Linda Lalley

January is a time for focusing on retail companies. The Christmas selling season has always defined the winners and losers. The TMA's January 27th meeting features a panel discussion of a retail bankruptcy that had a successful result. This article describes a retail bankruptcy with a very different result, one that required a very different set of advisory skills.

The Rise and Sudden Fall of InkStop

InkStop, Inc. was an office supplies retailer founded in late 2005 by a group of former OfficeMax managers. It initially focused on selling high-margin products through a large network of small-footprint stores, giving convenient access to consumers and work-at-home professionals. Over time, the company expanded its offerings to include electronic consumables under the slogan "Fuel for your Digital Life." At its peak, InkStop operated more than 160 stores in 14 states and the District of Columbia.

The company reported steady growth for several years. In April 2009, RBC Global Capital Markets included it in a list of America's fastest-growing retailers. Then, on October 1, 2009, InkStop surprised everyone by abruptly suspending operations, laying off all employees, and closing every store, literally overnight. The company filed for liquidation under Chapter 7 of the Bankruptcy Code on November 5, 2009, and Mary Ann Rabin, Esq. was appointed trustee.

The reasons for InkStop's failure are the subject of ongoing litigation and a topic for another time. What is clear is that the nature of InkStop's closure, combined with the need to quickly optimize the value of the estate's remaining assets, presented unusual challenges for the trustee and her advisors.

Walking Into the Twilight Zone

One of the first tasks was to get control of the status of the company's books and records. Walking into the InkStop offices after the filing brought back memories of an old Twilight Zone episode (for those readers old enough to remember such a thing): people seemed to have just disappeared in mid-stride. Management had announced the closing late in the day, along with the fact that the next day's payroll would not be funded. Apparently, most employees left the building immediately.

Half-eaten bags of Cheetos and children's artwork addressed to "Grandma" sat among the personal articles left behind. Work was suspended just as abruptly. Incomplete piles of data to enter, half-finished worksheets, and unfiled papers littered the workstations. Sorting through the items left on desktops offered some insight into the status of unfinished work, but the task got harder when the landlord cut off heat to the office space after the filing. It took several weeks to get the heat restored; in the interim, fingerless gloves were a very useful tool.

Securing 30 Tons of Records

More serious was the need to quickly identify and catalog the relevant documents, computers, and storage media that could contain corporate records, and to separate unidentified draft documents from final work product. Many people would be poring over the records in the months to come. Using an organization chart and an office space plan, each office, cubicle, and file cabinet was assigned a unique "data site" number, and the contents of each workstation, including partially completed work, were documented in a master organization file.

The process grew more complicated when InkStop's liquidator determined the headquarters space would be one of the sites for the close-out sale. Approximately 40% of the data sites would be open to the public during the sale. The documents and materials in those sites filled 600 bankers' boxes that had to be packed, indexed, moved, and secured in a three-day period, allowing the liquidation to go forward on time while still providing controlled access to the documents.

It quickly became apparent that certain offices held an unexpected paucity of desk files and computers. InkStop's former executives had removed a number of critical documents, desktops, and laptops to "safeguard" them against the chaos and employee anger that followed the shutdown, the bounced payroll checks, and the canceled medical insurance. After Attorney Rabin explained her powers and responsibilities as trustee, the materials were returned, though additional measures were needed to ensure the integrity of that data.

Beyond the onsite paper and electronic documents, InkStop had outsourced the hosting of most of its major electronic data functions, including its ERP system, website and e-commerce hosting, and customer records. The trustee needed multiple subpoenas to service providers, all of them understandably unhappy about unpaid bills, to obtain the InkStop servers and their resident data.

In total, the headquarters contained an estimated 30 tons of documents, ultimately packed into 1,200 boxes, plus almost 150 computers, servers, tapes, and storage media. Organizing and controlling those materials while adapting to fast-changing circumstances demanded different skills than turnaround advisors typically face.

Retail Bankruptcy Lessons Worth Keeping

Here are some important lessons to take away from this experience:

• Organization is critical. Adherence to the organizational plan is ultra critical.
• Healthy skepticism of data is normal; extreme skepticism in these circumstances is better. Forensic auditing skills are useful for testing the key documents found, or not found, in the clean-up. Pay special attention not only to the electronic data but also to the related metadata, to control the integrity of the files as much as possible.
• Come prepared, as if camping in the middle of the forest. Bring any necessary communications and conveniences. There may be no internet, phone access, or copiers, and you will never appreciate East Ohio Gas more than on the first day the heat returns.
• Flexibility is a key trait. Contract help did most of the heavy lifting, but everyone must be willing to pitch in as needed to make sure the trivial things and the large things all get done.

The CTP program is an excellent curriculum, but on occasion it is helpful to remember lessons learned in Boy Scouts and Girl Scouts. Those lessons were very handy on this engagement.

John and Linda Lalley are partners at Inglewood.

Reprinted with permission from the Ohio Chapter of the Turnaround Management Association.