(Detroit Free Press) - Two years after Art Van Furniture went bankrupt and started closing all its stores, the bankruptcy case's trustee is now attempting to go after the family of the late Art Van Elslander for tens of millions of dollars in proceeds from the retailer's 2017 leveraged-buyout sale to a private-equity company.
The lawsuit, filed this month in federal bankruptcy court in Delaware, focuses on the flurry of sale-leaseback transactions that were part of the deal and involved nearly 40 Art Van Furniture stores and related properties that the retailer had owned outright.
Those transactions financed 70% of the Van Elslanders' $621 million deal in March 2017 with Boston-based Thomas H. Lee Partners. The sale-leasebacks saddled Art Van Furniture with new rent expenses — on top of a debt load from the deal — that, according to the lawsuit, immediately doomed the company and would prove unsustainable.
Company founder Art Van Elslander was still alive when the sale happened. He died the following year at age 87.
Proceeds from the real estate transactions went to do the deal — not support the furniture company's future.
The Archie A. Van Elslander Trust received more than $529 million from the sale, and entities controlled by the patriarch's children, including Gary Van Elslander and David Van Elslander, received more than $75 million, according to the lawsuit.
The lawsuit seeks to recover more than $105 million in what it calls "fraudulent transfers" that included the sale-leaseback transactions, as well as $8 million in transfers to Gary Van Elslander and $2.5 million to David Van Elslander, among other transfers.
The "fraudulent" term used in the lawsuit has a different and less severe meaning in federal bankruptcy court than fraud in the general sense, according to consultant and financial adviser Van Conway, president of Detroit-based Young Conway Group.
More commonly known as "fraudulent conveyance," the term doesn't represent a crime, but rather a claim that a third party did not receive fair value in a deal.
In a statement Tuesday, the Van Elslander family said it will fight the lawsuit's allegations and placed the entirety of the blame for Art Van Furniture's demise on "business decisions made by the company that purchased our family business."
A representative for Thomas H. Lee Partners, which is not a defendant in the lawsuit, declined comment for this article.
The private-equity firm previously said it lost "100%" of its principal investment in Art Van Furniture and never received any dividends or returns of capital.
According to Conway, the outcome of the Art Van lawsuit will likely hinge on whether the judge determines that the sale-leasebacks — plus other aspects of the 2017 deal — so over-leveraged the furniture company that it was essentially insolvent once the deal occurred, making failure inevitable.
Conversely, the judge could view Art Van's eventual 2020 bankruptcy as the result of post-deal factors and bad management that the Van Elslanders had little to do with.
Conway emphasized that these type of lawsuits are common — even expected — after leveraged-buyout deals that turn out bad, as they give people who lost money another chance to recoup some of it.
"If this lawsuit didn’t happen, I’d be shocked, because it’s a free throw," he said. "If they spend $10 or $20 million in legal fees and lose, oh well, (they) are trying to get hundreds of millions back."
Conway cited one classic example of such a case that concerned the $1.25 billion leveraged buyout in 1986 of drug store chain Revco, a business that started in Detroit in the 1950s.
Revco filed for bankruptcy two years after the buyout, and claims of fraudulent conveyances later followed as the deal was said to have left the company with too little in capital to succeed.
The main investor and underwriter in that deal, former New York investment firm Salomon Brothers, ended up paying more than $30 million in settlements.
In the Art Van Furniture case, "the question becomes, did the debt from those transactions render the company insolvent at the time of the (deal)?," Conway said.
Art Van Furniture was profitable before the 2017 deal, averaging just under $17 million in annual net income between 2011 and 2016, according to the lawsuit filed March 7 by bankruptcy trustee Alfred Giuliano. Back then, it owned about 75% of its total square footage and had no debt.
Thomas H. Lee Partners had an initial equity commitment for the deal of up to $216 million. But at the deal's closing, that equity commitment had dropped to $70 million, plus a $45 million shareholder note, according to the lawsuit.
Of the $621.5 million total purchase price, just $2 million was left over for the furniture company's use after all the Van Elslanders, and others, were paid.
And just $70 million, or 11%, of the purchase price was equity; the remaining 89% came from new debt and the sale-leaseback transactions.
The deal and its sale-leaseback obligations required Art Van Furniture to pay about $33.4 million more per year than it did before the Van Elslander family sold.
"That amount far exceeded the average net earnings generated by the business and even exceeded the highest net earnings ever generated by the business," the lawsuit says, adding that the company also had to pay about $8.5 million in extra sale-leaseback fees.
Seven months after the 2017 deal closed, Art Van Furniture posted a $22.4 million loss for the fiscal year — its first loss in at least a decade. Two years later, the losses reached nearly $189 million.
The lawsuit calls out Art Van Elslander, Gary Van Elslander, David Van Elslander and former Art Van CEO Kim Yost for "breaches of duty" that led to the "stripping in value" of the company.
The three Van Elslanders knew that the private-equity deal was risky and highly leveraged, the lawsuit says, and also were aware of plans for the sale-leasebacks and yet signed off on those transactions.
"They even commissioned an appraisal report of the real properties for 'potential sale leaseback purposes,' " the lawsuit said.
Yost stayed on as chief executive after the sale until about June 2018, and Gary Van Elslander stayed on as president for about 90 days to help with the transition.
The lawsuit accused the two of failing to address the debt situation and approving two "ill-conceived acquisitions" of Pennsylvania-based Levin Furniture and Wolf Furniture stores.
Art Van Furniture filed for what became a Chapter 7 liquidation bankruptcy in early March 2020, just as the COVID-19 pandemic arrived in Michigan.
Nearly 190 Art Van stores closed and roughly 3,000 workers in nine states lost jobs. Creditors had hundreds of millions in unpaid claims, according to the bankruptcy trustee.
At the time of the bankruptcy filing, Art Van's chief financial officer laid out various other factors for the downturn in business, including the company's overexpansion in the Chicago market, high turnover among top executives, over $8 million in new costs from furniture tariffs and increased competition from online retailers Amazon and Wayfair, plus traditional retailers such as Bob's Discount Furniture.
Yost, now president of Canada-based The Dufresne Group, owner of Dufresne Furniture & Appliances, did not immediately return a message for comment Tuesday afternoon. The lawsuit seeks to claw back the $6 million Yost allegedly received at the time of the 2017 sale, plus another $1 million the following year.
There have been other recent fraudulent conveyance lawsuits concerning fashion retailers J. Crew, Neiman Marcus and Nine West, which all filed for bankruptcy in the wake of private-equity deals that turned out bad.
Those lawsuits can spend years in court and often result in settlements, said Andrew Park, senior policy analyst for a coalition of left-leaning groups called Americans for Financial Reform.
“I have yet to see a definitive ruling on any of these," he said. "These things just take time to get through court and they are very complicated cases."
Thomas H. Lee Partners later set up a nearly $2 million hardship fund to help the laid-off Art Van employees, enough money for about $1,200 for each eligible former worker.
Many of the shuttered Art Van stores were reborn in late summer and fall 2020 as Loves Furniture, an entirely new company created by a Texas private-equity firm.
But Loves encountered a slew of setbacks, including expensive warehouse and logistical problems related to the pandemic, and filed for bankruptcy early last year.
In February 2021, the Van Elslander family bid $6 million to buy back legal rights to the Art Van Furniture name from the bankruptcy court.
Other named defendants in the lawsuit include Debra Van Elslander, a daughter of Art; Kenneth Van Elslander, a son; Sandra Seroka, a daughter; Karen Paglino, a daughter; Lori Webb, a daughter; Kim Van Elslander, a daughter; Kris Scarfone, a daughter, and Beth Wood, a daughter.
Those Van Elslander defendants received at least $2.5 million each from the deal, according to the lawsuit.
Below is the full statement from the Van Elslander family in response to the lawsuit:
Make no mistake, the bankruptcy proceedings may be labeled “Art Van,” but this is about the consequences of business decisions made by the company that purchased our family business in 2017.
When company founder Art Van Elslander — our father, grandfather and great-grandfather — sold Art Van Furniture as a thriving family business, the company was generating cash, debt-free. We were promised by the buyer that the decades of commitment to employees and communities would continue as strong as ever. Those promises were broken.
Throughout its history, Art Van’s priorities included paying its suppliers and employees on-time, in full. It has been painful to hear the stories of employees losing their jobs and creditors not getting paid, sullying our family’s good name.
That is why we bought the Art Van name last year — to keep it out of the hands of those who could inflict further damage to the reputation built over 58 years of business. Importantly, all the family owns now is the name. We have no ownership of what happened to the business after the sale on March 1, 2017.
The U.S. Bankruptcy Trustee’s efforts to force our family into court to somehow play a role in solving problems caused by the buyer of our business, specifically in the years following the sale, is an unfair attempt to shift losses to us, that we will fight in court.
By JC Reindl
March 22, 2022
