Bankrupt Sports Authority Inc. has sued 161 of its vendors.
The lawsuits were filed Tuesday by the retailer through affiliated debtors that are connected to its bankruptcy. Sports Authority filed its Chapter 11 petition for bankruptcy court protection on March 2 in Delaware. The lawsuits filed on Tuesday are considered adversarial proceedings connected to the bankruptcy, and were filed as part of its bankruptcy case, according to the bankruptcy court docket.
Consignment is at the heart of the lawsuits, and ultimately who gets the proceeds from the sale of goods at the retailer’s stores.
The lawsuits said the sales agreements between retailer and vendor have described the arrangement as a consignment, with the vendor retaining title until the date of sale. But Sports Authority is now saying that the consignment provision in its agreement under federal law — the Uniform Commercial Code, a set of rules governing commercial dealings on the transfer of property that has been adopted in whole or in part by all the states — is ineffective because the goods have been shipped to the retailer. The UCC does allow the conversion of the merchandise to a security interest. But Sports Authority said that under the terms of its sales agreement, vendors are required to “perfect” that interest through the filing of a financing statement. It’s that filing of the financing statement that Sports Authority is now contesting, saying that the vendors it filed suit against “did not take the most basic step” to perfect a security interest in the goods even though the “opportunity to do so was highlighted in the agreement.”
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How the matter will get decided is still to be determined, and Delaware Bankruptcy Court Judge Mary Walrath might provide some preliminary guidance Wednesday afternoon at a court hearing in the case. Currently the vendors, who have claims on the consigned goods, are secured creditors. Should Sports Authority win, it would turn the vendors into unsecured creditors, and the proceeds from the sales would go to the debtor’s estate and benefit its lenders.
A call to Sports Authority’s lead bankruptcy counsel on the lawsuits was not returned by press time.
At the time of the filing, Sports Authority said it had more than $1 billion in debt. It has until April 28 to find a buyer or put together a plan of reorganization. Dick’s Sporting Goods and Modell’s Sporting Goods are seen as possible buyers for all or part of the chain. The bankruptcy filing was expected given that the retailer missed an interest payment in January.