A Texas judge approved $15 million of debtor-in-possession financing to help Tuesday Morning pay employees and some other expenses as it navigates its second Chapter 11 filing in three years, just a fraction of the $51.5 million the off-price retailer had on offer from investment firm Invictus Global Management.
Tuesday Morning's bankruptcy first-day hearing lasted well into two days with witnesses testifying how the retailer "abruptly and surprisingly" reversed its decision on getting financing from another lending group led by Wells Fargo, and fired key advisers days before filing for Chapter 11 in the U.S. Bankruptcy Court for the Northern District of Texas, Fort Worth division.
Court documents show Tuesday Morning had two competing and "vastly different" debtor-in-possession financing proposals. The offer from Austin, Texas-based Invictus, which touts itself as having an "opportunistic, value-oriented investment style" in special situations such as bankruptcy, gives Tuesday Morning an opportunity to reorganize or pursue a sale in the Chapter 11 process. The other proposal came from Tuesday Morning's pre-petition asset-based lenders led by Wells Fargo that required an immediate companywide liquidation.
Judge Edward Lee Morris, in giving his decision to the court on the access to $15 million of debtor-in-possession financing, said he was surprised the debtor and lenders were unable to come to a shared agreement, but came to the conclusion that the debtors were exercising their best business judgment.
"It was my hope all parties could come together on a path that is more or less consensual," Judge Morris said in making the ruling. "It is unfortunate that did not occur. There is sufficient evidence for the debtors to pursue a path forward and have an opportunity to liquidate in a potentially controlled format and, more importantly, a sale opportunity that could theoretically create more value for certain parties other than a liquidation."
The financing is expected to keep the company operating in the weeks ahead as Tuesday Morning's leadership team awaits what it hopes will be a stalking horse bidder.
Two Offers
Days before filing for bankruptcy protection, Tuesday Morning walked away from an agreed upon Wells Fargo-led proposed debtor-in-possession financing facility, according to witness testimony during the hearing, to go for Invictus' offer and what is being called a partial liquidation. Tuesday Morning is asking the court to exit more than half of its leased stores that are unprofitable and remain in business.
Tuesday Morning CEO Andrew Berger told the court the Wells Fargo-led lenders took certain actions limiting the retailer's ability to remain in business a going concern in the weeks leading up to the bankruptcy filing.
The pre-petition lenders increased Tuesday Morning's reserve requirements on multiple occasions from about $10 million to $30 million, which effectively eliminated Tuesday Morning's operating liquidity and required the company to begin store closing sales, Berger said. The lenders also terminated and accelerated the pre-petition facility, taking money that the debtors needed to operate and to buy inventory to support its ongoing operations, Berger said.
To date, Tuesday Morning has about $70 million in inventory on hand, according to witness testimony. Wells Fargo claims that it is owed $28.7 million, though much of that total is disputed.
In his declaration to the court, Berger said Tuesday Morning "intends to rapidly replace its letters of credit currently with Wells Fargo with those of a replacement bank, close its accounts at Wells Fargo and open new accounts at another bank."
In addressing why Tuesday Morning wasn't planning to pay Wells Fargo back on its pre-petition debt if Invictus was giving the retailer plenty of money for bankruptcy, Berger said, "Why would I do a favor for a bank that has done damage to the company?"
Wells Fargo declined to comment beyond the court hearings to CoStar News. Tuesday Morning didn't respond to inquiries for comment.
Parting With Consultants
Tuesday Morning's former legal counsel Haynes and Boone, which helped the retailer navigate its previous bankruptcy case in 2020, resigned from serving as Tuesday Morning's legal counsel on Feb. 10, according to court documents. The retailer filed for bankruptcy Feb. 14.
Tuesday Morning fired its restructuring and financial adviser BDO on Feb. 10, according to court documents. BDO and Haynes and Boone didn't respond to requests for comment from CoStar News.
Tuesday Morning also decided to part ways with liquidator Gordon Brothers Retail Partners the weekend before it filed for bankruptcy, according to witness testimony. In Berger's declaration, he described the consulting agreement with Gordon Brothers from January as being "very expensive," with the firm tasked with liquidating store merchandise, as well as furniture, fixtures and equipment in stores, distribution centers and its corporate headquarters in Dallas. Tuesday Morning is now planning to self-liquidate its inventory at the stores on its proposed closure list.
Tuesday Morning is seeking to exit its contract with Gordon Brothers. Without rejecting the agreement outright, Judge Morris ordered employees with Gordon Brothers to avoid Tuesday Morning's stores and respect the company's stay in bankruptcy court. He told the courtroom he wants to know more about the agreement and if Tuesday Morning will save money by having its employees liquidate the merchandise in the stores rather than use a professional liquidator.
Gordon Brothers didn't immediately respond to requests for comment.
Unusual Case
Changing legal counsel and consultants days ahead of a bankruptcy filing is unusual, said Sidney Scheinberg, who chairs the bankruptcy and creditors rights section of Godwin Bowman PC law firm and is not involved with Tuesday Morning's case.
"It's unusual for a conflict to arise so late in the game, but there could've been a conflict that popped up," Scheinberg told CoStar News. "There could've been a conflict of interest or a conflict of personalities or perhaps they didn't like the approach the firm was taking, but we will probably never know."
Executives with Wells Fargo seem to agree.
"In my experience, it is exceptionally unusual" for a debtor’s key advisers to all "resign or to be fired in the days before a bankruptcy filing," said Danielle Baldinelli, managing director of Wells Fargo, in a declaration to the court. Baldinelli oversaw the bank's pre-petition asset-based lending credit agreement with Tuesday Morning.
Scheinberg, who represents clients in complex and critical bankruptcy and business litigation matters, said he's also surprised to see Tuesday Morning back so quickly in bankruptcy court, albeit at a different courthouse.
In 2020, Tuesday Morning filed for bankruptcy protection in Dallas. This go-around, the retailer decided to file in Fort Worth, which is even more puzzling, Scheinberg said.
"They could have been forum shopping and could want a better outcome, but I can't see any advantage to going to Fort Worth versus Dallas," he said, since it is not like companies filing for Chapter 11 get to choose their judge. "Oftentimes major cases go before specific judges, but whether it is one of two judges in Fort Worth or one of three judges in Dallas, it doesn't seem to make a difference. It baffles me."
When Neiman Marcus filed for bankruptcy in 2020, the luxury retailer chose to do so in a court in Houston. Dallas-based Neiman Marcus' headquarters happens to be blocks away from a Dallas courthouse where it could have filed. Similarly, RadioShack filed for bankruptcy in Delaware in 2015 rather than its hometown of Fort Worth, Texas, which drew criticism from a Fort Worth judge at the time on why the retailer decided to go across the country for relief.
Next Steps
Tuesday Morning is planning to self-liquidate its inventory at the 242 stores short-listed for closure, according to Tuesday Morning, with the process expected to wrap up before the end of March.
Tuesday Morning is also expected to exit its distribution center leases, as it plans to take its supply chain to a third-party logistics provider. If the liquidation plans are an indicator of anything, the company could also shed some of its corporate real estate, along with excess furniture, fixtures and equipment from its headquarters.
Invictus is expected to receive a fee of $4.6 million in exchange for offering the $51.5 million of debtor-in-possession financing to Tuesday Morning. An attorney on behalf of Invictus said the firm plans to step up as the stalking horse bidder by Feb. 24.
Tuesday Morning has a hearing scheduled for March 2 to address the continuation of the debtor-in-possession financing. The judge could approve to draw on additional funds offered by Invictus.
For the Record
Munsch Hardt Kopf & Harr PC is Tuesday Morning's legal counsel in its current bankruptcy case. Vinson & Elkins LLP is serving as legal adviser to Tuesday Morning’s special committee. Piper Sandler is the retailer's financial adviser.