Pillowtex Prepares for Next Phase

Brent Felgner, Staff Staff, December 12, 2005

Wilmington, Del. —The original Pillowtex Corp. is settling old accounts and planning for life — a relatively modest one — after bankruptcy.

The company has filed a preliminary reorganization plan and disclosure statement laying out its proposal to pay off creditors, finalize key litigation — including its chargeback cases — and launch its new business life. The remnants of the mill will likely emerge as a minority partner in a real estate play, at least short term.

When GGST LLC acquired Pillowtex's assets in an auction, initially for $128 million, it sought to lower that amount by selectively excluding some of the mill's real estate, most notably Plant No. 1 in Kannapolis, N.C. The company then cut a deal with a developer.

The proposal envisions its post-Chapter 11 life as a landlord and property developer. It will hold a one-third interest in the buyer of the Kannapolis plant, which is planning a mixed-use development.

Creditors' committee attorney Mark Indelicato said it might be nothing more than a short-term effort — helping to maximize returns to creditors, according to the documents — but it has the potential to develop into a longer term business.

Court documents also indicate the company made significant inroads in its efforts to recover more than $6.6 million in chargebacks and unpaid invoices from several former retail customers.

The cases involved Target, Mervyn's and Marshall Fields, which were originally under the Target Corp. umbrella, then separated as the divisions were sold off, as well as May Department Stores and Linens 'n Things. A separate case involving Kohl's Department Stores is set for mediation shortly.

All the cases were conducted largely under a veil of secrecy in which most court records were sealed. But additional information on the status of the cases is contained in the company's disclosure statement and plan of reorganization.

In general, Pillowtex attempted to recover unpaid invoices and chargebacks, while the retailers countersued, claiming damages caused by Pillowtex's bankruptcy and subsequent failure to deliver.

In the May Department Stores case, Pillowtex sought payment of $4.6 million, while May claimed the amount was $1.4 million and claimed damages from the bankruptcy of $13 million. The case was mediated and settled in July for a $3.25 million payment to Pillowtex.

Pillowtex also claimed Linens 'n Things owed it $3.3 million, while LNT acknowledged just $2.6 million of that amount and sought to offset the entire matter with a counterclaim of $7.5 million in damages. Mediation settled the case with a $2.5 million payment to Pillowtex in November.

In the Target and Marshall Fields case, Pillowtex sought to recover $1 million in net receivables from the retailers, according to the court documents. Target claimed the amount was $830,000 and filed a counterclaim for damages of $650,000. The case was settled in March for $930,000.

Pillowtex claimed Mervyn's owed it $918,000, while the retailer claimed the amount was $702,000 and that it had damages of $1.6 million. The case settled for $760,000 in late August.

Still pending is the case involving Kohl's in which Pillowtex is seeking to recover $4.8 million. Kohl's admits to $4 million outstanding and is seeking to offset that amount with a counterclaim involving $11 million in damages. That case is scheduled to be mediated before mid-February.

In the meantime, the plan proposes to pay priority tax, administrative, and first- and second-tier secured lenders up to 100 percent. A third class of “convenience claims” that includes unsecured creditors that agree to lower their outstanding claims to less than $10,000 would receive a 12 percent payout. A fourth class of general unsecured creditors would receive a pro rated share of the remaining distribution — an amount not yet set because of the pending litigation, among other reasons. Equity holders would receive no payouts under the proposal.

“This is not a typical case,” Indelicato said. “You have a large employee population that was displaced, you have creditors who have lost tens of millions of dollars. So we're balancing all the interests and hoping to come out with something that would work to everyone's interests.”

The proposed plan is still a work in progress and will be influenced by, among other things, the class action and union-led WARN Act suits affecting some 7,500 workers, which are still pending. While the plan has been filed with the federal bankruptcy court here, no date has yet been set to file objections or set a vote on confirmation.

“We have not scheduled a disclosure hearing, we're still working on finalizing some issues of the plan,” said Indelicato. “Our hope is to get it filed within the next couple of weeks.” The creditors' committee is a proponent of the plan.

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