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Daffy’s Headed to Bankruptcy Court

The chain has hired Hilco Trading to liquidate the store inventory, and is said to be in discussions with landlords to exit store leases.

NEW YORK — Daffy’s, the struggling off-price chain that said nearly three weeks ago it was liquidating its stores, has to first make a stop in bankruptcy court.

According to financial sources, factors owed money from the cash-strapped firm are pushing the company to file in order to protect their claims. Daffy’s is believed to be preparing for a filing that could occur as early as the end of this week, or risk the factors forcing the firm into an involuntary bankruptcy.

A spokesman for Daffy’s could not be reached for comment.

It takes at least three creditors joining forces to file a petition in bankruptcy court against a debtor.

It was unclear at press time whether the filing would be a Chapter 7 liquidation or a Chapter 11 petition for bankruptcy court protection that would entail an orderly liquidation of the retail chain. Credit sources said the company is currently seeking debtor-in-possession financing, suggesting that the filing would be a Chapter 11 petition.

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In addition, Hilco Trading was officially hired on Monday to liquidate the inventory in the stores.

According to one factor, there are enough assets to at least pay off the factoring claims. Daffy’s can file in any bankruptcy court where its headquarters are located or in any state where it has retail operations. The likely choices are New York and New Jersey.

According to sources, Daffy’s has already started discussions with landlords to exit store leases. The store at Herald Square was supposedly sold in December for $10 million, with the funds placed in escrow should it be needed to pay off creditors, said financial and real estate sources familiar with the transaction.

Daffy’s itself does not own any of its store sites, but a few are said to be owned either directly or indirectly by Marcia Wilson, Daffy’s chairman and chief executive officer.