Restructuring Advisors

GLC Limited

Company: GLC Limited
Industry: Retail
Region: Mid Atlantic & South East
Revenue: $80 million
Services: Chief Restructuring Officer, Forensic Accounting, Asset Sale and Litigation Support

Background

When a deal seems too good to be true, chances are it is too good to be true.

GLC Limited, a West Virginia Corporation that sold close-out and customer returned merchandise through retail and wholesale channels, was a company that was “too good to be true.”

GLC’s merchandise originated from “Big Box” chains in which product sales volumes were too low to warrant retail space. The company’s management, which had virtually no retail experience, opened and closed a series of 12 locations from the summer of 2007 through the fall of 2010. During that time, GLC raised $81.9 million in funding from non-bank sources, mainly through contacts of an early investor, Jim Donnan.

Jim Donnan and GLC Limited President/Owner Greg Crabtree worked together to determine the funds needed in order for Mr. Crabtree to purchase merchandise. Mr. Crabtree focused on purchasing deals, while Mr. Donnan, who had a successful national championship college football coaching career, focused on bringing in investments from wealthy friends, other prominent coaches and former professional athletes in order to fund GLC activity. In addition to being an early investor, Mr. Donnan received commissions by acting as the solicitation partner. Investors were promised to be paid interest rates ranging from 50% to 133%. Many investors believed their funds were for the purchase of specific merchandise that was pre-sold, thus eliminating both risk and carrying cost. Of the $81.9 million received from private investors, GLC purchased less than $12 million of inventory. Sales receipts indicated that of the $12 million in inventory, less than $6 million had been sold through its retail and wholesale operations.

In December 2010, Jim Burritt, the managing partner of Restructuring Advisors was retained as the Chief Restructuring Officer of GLC Limited. An ad hoc committee of GLC investors understood that Jim’s more than 25 years of experience providing expert guidance to troubled and underperforming companies was crucial in evaluating the GLC Limited. The investors had become concerned by GLC’s inability to make scheduled interest payments, which spurred several investors to visit the company operations – only to realize that what existed was far from what they had been led to believe.

The Challenges

From all appearances, GLC Limited had been operating a Ponzi scheme from mid-2007 through the fall of 2010. During that time, GLC Limited had bilked investors of a substantial amount of money and the company’s activity elicited all the hallmarks of a Ponzi scheme, including:

  • Few facts were recorded or entered into an accounting system
  • A lack of meaningful records to trace investor transactions
  • No clear path of the origination of funds
  • No clear documentation of how funds were used
  • No clear understanding of who received benefit from the use of the funds.

The main challenge for Burritt and the team of investigative accountants in addressing GLC Limited’s issues, however, was in following the trail of money through 28 different bank accounts the company had used in order to determine:

  • The origination of the money during the three years in question
  • How money had been used and to document who had received payments
  • Which, if any, parties had received more than they invested (net winners)
  • Which parties had received less than they had invested (net losers).

Burritt sought to find the assets that remained to determine the amount and what those assets consisted of and then convert them into cash. It was obvious that the company’s assets, which included four warehouses covering 315,000 square feet and costing more than $60,000 per month, would be helpful in recovering investor dollars.

Just as there was a limited paper trail with investor funds, the trail of determining the company’s purchase history was also non-existent. The lack of purchasing data and inventory tracking system rendered it impossible to know fully GLC’s assets, let alone establish a plan and rate for selling them.

With an eye on the future, Burritt and his team positioned themselves to address two additional challenges:

  • Preservation of documentation that would be beneficial in holding the organizing parties accountable for potential alleged illegal activities
  • Establishment of a legal, fair and consistent process to distribute recovered funds to GLC Limited investors and trade creditors.
The Strategy

Prior to finalizing a strategy, Jim Burritt and his colleagues took stock of what they knew about GLC Limited:

  • The company had not been well run
  • As a stand-alone business it was not profitable, had negative cash flow and was not likely to be profitable with the existing inventory or distribution channel
  • During its time in operation GLC Limited had hurt far more people than it had helped
  • While a small number of retail stores were operating, and approximately 40 employees still remained, there was no baseline business that offered long term value through restructuring.

Based on these criteria, Burritt determined the best strategy was to close GLC Limited, and through liquidating the assets, hand back as much money as possible to the creditors.

To achieve its strategy, the following 10 initiatives were implemented:

  1. Get control of the cash
  2. Get control of the business records and systems
  3. Close and merge all bank accounts except for a primary operating account and depository accounts for outlying retail locations
  4. Safeguard the existing physical assets
  5. Develop business controls and reporting processes for the remaining stores
  6. Implement inventory control processes for the known warehouse locations
  7. Establish approval processes for purchasing and accounts payable
  8. Interview the parties involved to determine what they knew
  9. Establish an ongoing communication process with the stakeholders
  10. Review legal processes that would serve as a foundation for the issues the company was facing.
The Solution

Immediately and concurrently, the Restructuring Advisors team began to act on behalf of the GLC Creditors by taking the following actions:

  • Initiated controls and procedures to assist with record keeping and monitoring cash flow
  • Categorized inventories by type
  • Facilitated visits at the retail and warehouse locations with potential buyers to view and extend offers
  • Provided timely communications to creditors on the information being uncovered.
  • Determined that the best venue for a bankruptcy filing.
  • Worked with legal counsel to establish:
    – A common legal venue to oversee the asset sales,
    – File injunctions against the responsible parties,
    – Establish a legal methodology to deal with the varied interests of the creditors
    – To establish stipulations that only the Courts can provide which ensure buyers that products purchased would be free of liens, claims and encumbrances.

In February 2011, approximately 100 days after Mr. Burritt was engaged, and after closing down five of the remaining stores and combining the four warehouses in to two, GLC Limited filed a Chapter 11 liquidating plan.

Working in conjunction with the company attorney, Ron Gold, Member of the bankruptcy and restructuring practice at Frost Brown Todd and the creditor committee counsel, Frank DeBorde, Chair of bankruptcy and creditor rights practice at Morris, Martin and Manning, Burritt and the Restructuring Advisors team rebuilt three years of financial data. This forensic accounting analysis required the team to work with the 28 financial institutions to recreate a cash-basis financial statement covering the 2007-2010 time frame. Approximately 9,000 pages of information was accumulated and served as the baseline for all litigation support for the period in time that the Ponzi scheme had been in operation.

Results

Within eight months all GLC Limited inventory had been sold, all stores had been closed and all warehouse operations had ceased. A plan was put to vote by the creditors in the fall of 2011 and received overwhelming approval. Mr. Burritt was asked to continue his involvement with GLC Limited and was employed through the bankruptcy court with support from the U.S. Trustee and the creditor committee to serve as the Plan Administrator.

Supported by the forensic and investigative accounting work completed, GLC Limited has to date been able to successfully litigate:

  • 28 of 28 net winner cases (net winners are people or entities that received more money than they invested)
  • 4 of 4 fraudulent conveyance cases
  • A settlement with the former owners/officers and directors.
  • While Mr. Donnan chose to file a personal bankruptcy in lieu of returning his net winnings, GLC Limited worked together with Mr. Donnan’s counsel to develop a joint plan and disclosure statement that provided significant benefits to the company’s creditors.

In addition, Burritt responded to subpoena requests from both the U.S Attorney’s office and the Security Exchange Commission as it worked through its investigation of GLC Limited practices.

Fifteen months after GLC’s bankruptcy filing, all priority claims and secured creditors have been paid. The general unsecured claims, which as originally submitted by the creditors at nearly $58 million, were culled to just over $20 million due to the forensic accounting and litigation support work completed.

Mr. Crabtree and Mr. Donnan were indicted on 85 counts by the Grand Jury in the United States District Court for the Middle District of Georgia Athens Division. Their trials are set to begin in May 2014.