ShopKo Files For Chapter 11 Bankruptcy

Another icon of the Wisconsin retail world has filed for bankruptcy. Shopko is closing about two-thirds of its retail locations in the coming months, including more than forty stores in Wisconsin as it attempts to re-tool and re-shape itself in Chapter 11 bankruptcy.

Another One Bites The Dust

Shopko is the latest Wisconsin retailer to seek bankruptcy protection in light of changing consumer shopping habits. The Green Bay based big box store has a sizeable footprint in the Great Lakes, Midwest, and Pacific Northwest, but it could not compete with larger chains like Walmart and Target or online shopping trends.

Between now and mid-May, the company will shutter around 70 percent of its existing locations, and hope that its smaller footprint will help it attract a buyer. The company originally planned to close only 39 stores, but the list of closers has steadily increased.

However, some locations will see a stand-alone ShopKo branded optical centers open in the coming months. It is this focus on small locations that may prove the company’s saving grace. Reports indicate that the chain’s most profitable locations were sites with pharmacies and eye doctors and stores in small towns where larger competitors cannot build at their typical scale.

The company’s profitable pharmacy business has already been sold off, mostly to competitors.

Down But Not Out

Shopko’s decision to file for Chapter 11 rather than Chapter 7 bankruptcy is a common one. Businesses and business owners would typically rather salvage something than walk away with nothing.

The Chapter 11 process allows the business to focus on finding and exploiting its core competencies while closing up or selling off less profitable or peripheral enterprises. Debts can also be renegotiated or shifted around much more easily. It can be a hopeful or even joyful experience because it liberates businesses to try something new in a way that would not otherwise be possible.

Hopefully Shopko will come through the Chapter 11 process with a renewed sense of purpose, a strategy for success, as well as a more manageable debt load. If it doesn’t, the Chapter 11 case may be converted to a Chapter 7 case.

In a Chapter 7 case, the assets held by a company are liquidated, the creditors take whatever they can get, and the business is wound down. A recent example of a business that had to convert its Chapter 11 reorganization into a Chapter 7 liquidation is Toys R Us. It simply could not find a path to profitability or a buyer, so it no longer exists.

Don’t Wait Until It’s Too Late

If your company is having financial difficulties or is teetering on the brink of bankruptcy, it’s time to talk to an experienced bankruptcy attorney. The longer you delay, the more limited your options will be. Taking steps to avoid bankruptcy, or choosing to file for Chapter 11 rather than Chapter 7 is only possible if you are proactive.

Theft By Contractor Claims In The Bankruptcy Courts

Shady contractors are about as clichéd as dishonest used car salesmen. Nearly every homeowner has some sort of crazy contractor story to tell, and nearly every contractor does too. Unforeseen circumstances and downright odd stories should not be surprising in an industry that ebbs and flows with the economy, and boasts and eclectic mix of highly skilled and relatively unskilled laborers, but every outrageous contractor story we hear seems to outdo the last. This is one of the reasons why there are unique rules that apply when a contractor files for bankruptcy in Wisconsin, and why bankruptcy cases involving contractors can be so contentious.

Though bankruptcy law is federal law, Wisconsin has a theft by contractor law that applies in cases where a contractor has filed for bankruptcy without finishing their work, or without paying for supplies or labor.

Wis. Stat. section 779.02(5), safeguards against the misappropriation of funds by a contractor working on a private construction project by creating a trust fund for the benefit of the project’s owners, laborers, and suppliers. A contractor’s use of the trust funds for any reason other than to pay for labor and materials on the particular project constitutes theft by contractor.

When a contractor files for bankruptcy, laborers and suppliers who are owed money, and/or property owners who claim the work they have paid for is unfinished or unsatisfactory can use the theft by contractor statute to fight for their share of the insolvent contractor’s bankruptcy estate.

In order to keep such claims from being discharged by the bankruptcy court, the laborer/supplier/property owner must establish:

(1) that a trust existed;
(2) that the debtors were fiduciaries of that trust; and
(3) that the debtors committed fraud or defalcation while acting as fiduciaries of the trust.

Wisconsin’s construction trust fund statute typically satisfies the first and second elements since the law says funds paid to a contractor are to be held in a trust, so the challenging part is proving fraud or defalcation.

Fraud requires a false statement, but defalcation is just the misappropriation of funds entrusted to someone. In the construction trust fund context, the Seventh Circuit Court of Appeals has stated that defalcation is more than mere negligence, but less than fraud. This has been interpreted to mean that the contractor must have acted in bad faith or committed some other act of affirmative misconduct.

In these cases, the courts often try to determine if the contractor actually knew they had a fiduciary duty under Wisconsin law because that is an indication that the contractor knew what he or she was doing was wrong, which could satisfy the third element.

Whether any one claim will be preserved or discharged by the bankruptcy court is difficult to predict without knowing a lot of details about the project, the contractor’s actions, and the actions of other parties. If you think you might have a claim for theft by contractor, or a contractor you are working with has filed for bankruptcy in the middle of a project, we encourage you to call our office to schedule a free consultation with one of our experienced bankruptcy attorneys.

UW System Bails Out UW-Oshkosh

Former UW-Oshkosh Chancellor Richard Wells and former Vice Chancellor Thomas Sonnleitner still face 17-and-a-half years in prison and $50,000 in fines for allegedly assuring lenders that the UW System would bail out the UW-Oshkosh Foundation if it defaulted on its loans. But that is exactly what has happened, and it is raising a lot of eyebrows in the bankruptcy world, in academia, and across the state of Wisconsin.

There’s a bankruptcy case, a civil case, and a criminal case all pending because the UW-Oshkosh Foundation, which is a separate, supposedly self-funded entity designed to support UW-Oshkosh inked five development deals that it hoped would provide revenue to the school over time. It backed two bio-digesters that turn farm animal waste in energy, an alumni welcome center, a sports complex, and a hotel in downtown Oshkosh.

When some of the investments went bust, it was revealed that Wells and Sonnleitner had allegedly promised the Foundation’s lenders that UW-Oshkosh — so students and taxpayers — would back the loans if the Foundation couldn’t make its payments. However, state law prohibits public funds from being spent to benefit private entities.

That being said, it was recently announced that the UW System has stepped up to the plate and agreed to pay $6.3 million to satisfy UW-Oshkosh’s lenders. This is exactly what Wells and Sonnleitner are in trouble for saying would happen, which is an interesting turn of events.

Taxpayers and lawmakers are watching to see exactly where the $6.3 million the UW System will pay is coming from. Academics and college administrators are wondering whether the charges against Wells and Sonnleitner will be dropped.

All of us in the bankruptcy world are interested in this case because this is not the last time we will see a case where lenders believe they have been promised access to assets that someone later says they cannot touch. Many businesses today are really a collection on related entities that work together. It can be unclear what assets are really on the table when a deal is stuck.

That’s where we come in. Our firm wades into the thick of disagreements over who owes and owns what all the time, and we have years of experience settling and litigating such matters. If you are trying to collect a debt and hitting brick wall, or you are trying to fend off an overzealous creditor, we are here to help.