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Chargeback fight escalates; May added

Brent Felgner -- Home Textiles Today, November 10, 2003

Wilmington, DE — Even as it continues to liquidate, Pillowtex Corp. is battling chargeback claims and last week also filed suit in federal bankruptcy court here to collect more than $9 million in outstanding bills and "unsubstantiated deductions" it claims are owed by May Co., Target Corp. and Mervyn's.

Target Corp., including Marshall Field's, and Mervyn's earlier filed chargeback claims with the court seeking nearly $2.5 million in claims and deductions from outstanding invoices. The retailers claimed they suffered "considerable hardships" resulting from Pillowtex's "unscheduled" bankruptcy.

In response, Pillowtex countered that the claims were "completely without basis in fact or law."

The bankrupt former mill currently exists as little more than an entity on paper. Most of its remaining assets passed last week to GGST LLC in the sale closing of an earlier auction (see accompanying article, page 23).

Most of what remains includes some real estate still to be sold and more than $50 million in outstanding receivables, according to documents filed with the court.

Pillowtex's language was sharp in its response to Target's claim, even challenging the enforceability of the chargebacks.

"Movants [Target] have failed even to allege — let alone prove — that the debtors had any obligation in contract or otherwise to continue supplying them with products," Pillowtex answered in the court filing.

"In the absence of such an obligation, the shutdown and liquidation of the debtors' business may have been inconvenient for movants, but it did not give rise to a claim for damages. There is certainly no sense in which the movants' unsupported assertions conceivably could be regarded as 'undisputed' claims that properly would be subject to setoff or recoupment or that properly should be subject to a motion for relief from the automatic stay."

Moreover, the court has previously recognized "that the recoupment doctrine presupposes that the debtor has breached a legally enforceable obligation to a creditor," the filing stated. It also cited several instances of case law to support its position.

Depositions from buyers for Target, Marshall Field's and Mervyn's are scheduled to be taken here at Pillowtex's local bankruptcy attorney's offices through most of this week. Representatives of Target did not respond to calls seeking comment last week.

Additionally, the bankrupt mill's unsecured creditor's committee has also filed notice of its objection to Target's claim with the court.

A hearing is scheduled before chief bankruptcy court judge Peter J. Walsh on Dec. 8. But the date is problematic, since under the bankruptcy law a motion for relief from the automatic stay is granted by default where there is no decision within 30 days of the motion's filing.

Pillowtex has asked the court to summarily reject Target's motion or to extend the automatic stay to the hearing date.

In its suit against the retailers, Pillowtex claims Target, Target Direct, Marshall Field's and Mervyn's owe it a total of $2,087,743 in past due invoices, up to a year old, and in disputed chargebacks.

In a separate action against May Company, including its Famous Barr, Filene's, Foley's Hecht's and Robinsons May divisions, Pillowtex claims it is owed a total of $6,597,946 in amounts between one day and 691 days past due. That includes at least $1,864,982 in disputed chargebacks, according to the Pillowtex court documents. Pillowtex supplied May Co. with goods under the Fieldcrest, Royal Velvet and Tommy Hilfiger brands, among others.

"May does not comment on litigation," spokeswoman Sharon Bateman said.

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