Linens 'n Things bankruptcy implements Vendor Program: providing stronger creditor protection for suppliers.(extra credit)

The United States Bankruptcy Court for the District of Delaware recently approved a Trade Vendor Payment Program (the "Vendor Program" or "Program") in the Linens 'n Things ("Linens") bankruptcy (1). According to Linen's motion in support of the Vendor Program, Linens created the Program in order to encourage trade creditors to extend credit to Linens with terms that were "no fewer than 45 days after receipt of goods." (2) In return for 45-day creditor terms, creditors would receive the benefit of a letter of credit funded up to $100 million. The Vendor Program reflected a willingness by Linens' committee of unsecured creditors to provide better trade terms, in exchange for better creditor protection.

Why Linens Filed and Why It Needed a Vendor Program

In 2006, Linens tried unsuccessfully to restructure and improve profitability. By 2007, Linens' sales reached $2.8 billion, yet it was operating at a net loss of $191 million. (3) Linens' troubles were due, in part, to a poor housing market, resulting in lower sales and tighter credit. These conditions worsened during the beginning of 2008, resulting in Linens filing for Chapter 11 bankruptcy protection in May 2008.

As the second-largest specialty retailer of products for the home (from bedding and towels to cookware and small appliances), Linens deals with over 1,000 suppliers. In order to properly reorganize, Linens needed to maintain, and possibly improve, its supplier relationships. As a result, less than two months after filing for bankruptcy, Linens filed its motion to approve the Vendor Program.

During the hearing to consider the Vendor Program, counsel for the committee of unsecured creditors stated that the Vendor Program was critical to the success of the case. Without the Program, Linens' trade creditors would continue to restrict trade credit, in turn limiting Linens' cash flow. The creditors' committee wanted to avoid a situation common in past retail bankruptcies where the debtor's secured debt became so large that it diluted the administrative claims of trade vendors. Instead, the parties sought to institute a program that would provide vendors with creditor protections sufficient to continue the supplier relationships, plus provide more favorable payment terms to Linens.

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The Design of the Vendor Program