January 25, 2012

John and Linda Lalley’s article on the challenges faced in the InkStop bankruptcy and the lessons learned is featured in the January Ohio TMA Newsletter.

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, requiring a very different set of advisory skills.

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, providing convenient access to consumers and work-at-home professionals. Over time, the company expanded its product offerings to include electronic consumables under the slogan "Fuel for your Digital Life". At its peak, the company operated more than 160 stores in 14 states and the District of Columbia.

InkStop reported steady growth for several years. In April 2009, it was included in a list of America’s fastest-growing retailers by RBC Global Capital Markets. But on October 1st, 2009, the company surprised everyone by abruptly suspending operations, laying off all employees and closing all stores, literally overnight. The company 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 InkStop’s failure are the subject of ongoing litigation and are a topic for another time. What is clear, however, 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 to the trustee and her advisors.

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. InkStop’s management had announced the closing – and the fact that the next day’s payroll would not be funded - late in the day. Apparently, most employees immediately left the building.

Half-eaten bags of Cheetos and children’s artwork addressed to "Grandma" were among the personal articles left behind. Work was similarly suspended. Incomplete piles of data to enter, half-finished worksheets, and unfiled papers littered the workstations. Sorting through items left on the desktops provided some insight into the status of unfinished work, but the task was made more difficult by the landlord’s decision to cut off heat to the office space after the filing. It took several weeks but the heat was eventually restored; in the interim fingerless gloves were a very useful tool.

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 the final product. Undoubtedly, 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; the contents of each workstation, including those partially completed work products, was documented in a master-organization file.

This process was further 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 these 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 and on time, while still providing controlled access to the documents.

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

In addition to 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, customer records, etc. The trustee needed multiple subpoenas to service providers (all of whom of course were 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, and almost 150 computers, servers, tapes and storage media. The skills of organizing and controlling the materials while adapting to fastchanging circumstances were different than turnaround advisors typically face.

Here are some important lessons one might take away from this experience:

  • Organization is critical; adherence to the organizational plan is ultra critical.
  • Healthy skepticism of data is normal; extreme skepticism of data in these circumstances is better. Forensic auditing skills are useful to test the key documents found (or not found) in the clean-up. Special attention must be paid not only to the electronic data but also the related metadata to control as much as possible the integrity of the files.
  • Like when camping in the middle of the forest, be prepared to bring with you any necessary communications and conveniences. There may be no internet, phone access or copiers, and you’ll never appreciate East Ohio Gas more than on the first day the heat returns.
  • Flexibility is a key trait. While contract help did most of the heavy lifting, everyone must be willing to pitch in as needed to make sure the trivial and 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/Girl Scouts. These lessons were very handy on this engagement.

John and Linda Lalley are partners at Inglewood Associates LLC.

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