Lessons Learned from an Unusual Retail Bankruptcy Liquidation

When a retail bankruptcy liquidation goes sideways, the work looks nothing like the case studies. The InkStop engagement is a good example of what happens when a company stops overnight and leaves its advisors to reconstruct order from the wreckage. This article, written by John and Linda Lalley for the Ohio Chapter of the Turnaround Management Association, describes a case that demanded a very different set of advisory skills.

January is a season for focusing on retail. The Christmas selling season has always defined the winners and the losers. The TMA's January meeting featured a panel on a retail bankruptcy that ended well. This is the other kind of story.

A fast-growing retailer that stopped overnight

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 consumers and work-at-home professionals convenient access. Over time the company added electronic consumables under the slogan "Fuel for your Digital Life." At its peak, InkStop operated more than 160 stores across 14 states and the District of Columbia.

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

The reasons for the failure are the subject of ongoing litigation and a topic for another day. What is clear is that the nature of the 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 aftermath

One of the first tasks was getting control of the company's books and records. Walking into the InkStop offices after the filing brought back memories of an old Twilight Zone episode: people seemed to have disappeared in mid-stride. Management had announced the closing, and the fact that the next day's payroll would not be funded, late in the day. Most employees left the building immediately.

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

Cataloging 30 tons of records under pressure

More serious was the need to quickly identify and catalog the documents, computers, and storage media that could contain corporate records, and to separate unidentified draft documents from final 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 products, were documented in a master-organization file. This kind of disciplined support for a bankruptcy trustee is what protects the integrity of an estate before value can be recovered.

The process got harder when InkStop's liquidator determined the headquarters space would be one of the sites for the close-out sale. Roughly 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 proceed on time while still providing controlled access to the records.

It quickly became apparent that certain offices had an unexpected shortage of desk files and computers. Former executives had removed critical documents, desktops, and laptops to "safeguard" against the chaos and employee anger that followed the shutdown, the bounced payroll checks, and the canceled medical insurance. After explaining her powers and responsibilities as trustee, Attorney Rabin was able to get the materials returned, though additional measures were needed to ensure the integrity of that data.

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

In total, the headquarters held an estimated 30 tons of documents, ultimately packed into 1,200 boxes, along with almost 150 computers, servers, tapes, and storage media. Organizing and controlling those materials while adapting to fast-changing circumstances demanded skills that turnaround advisors do not typically face.

What the engagement taught us

• Organization is critical, and adherence to the organizational plan is ultra critical.
• Healthy skepticism of data is normal; extreme skepticism is better here. Forensic auditing skills are useful for testing the key documents found, or not found, in the clean-up. Pay attention not only to the electronic data but also the related metadata, to protect the integrity of the files as much as possible.
• Come prepared, like you would for camping. 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 has to be willing to pitch in so the trivial and the large tasks all get done.

The CTP program is an excellent curriculum, but on occasion it helps 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.