It’s been two years since Art Van Furniture collapsed and held ‘going out of business’ sales across its 200 stores. Now a bankruptcy trustee is seeking to recover millions from the founding family who sold the Michigan-based furniture retail chain in 2017.
An 86-page lawsuit, filed in federal bankruptcy court earlier this month, alleges that the sale-leaseback of Art Van Furniture properties entered into during the $621 million deal condemned the company with new rent payments in addition to debt from the leveraged buyout.
The “fraudulent transfer” allegation, made by bankruptcy trustee Alfred T. Giuliano, seeks to recover $105 million from the Van Elslander family to pay creditors. The heirs of founder Art Van Elslander are contesting the lawsuit, saying Art Van Furniture failed due to the new owner’s business decisions.
“We do not own what happened to the business after the sale on March 1, 2017,” the family said in a statement.
Related: Art Van Furniture will close its stores, liquidation begins March 6
Laura Bartell, a law professor at Wayne State University, says fraudulent transfer allegations, which are not rooted in actual fraud, are common in leveraged buyouts. Ultimately, these types of lawsuits attempt to figure out what caused a company’s financial ruin. Bartell is not involved in the lawsuit, but is an expert in bankruptcy law.
“They’re not saying the heirs were trying to do anything wrong,” she said. “The question is whether, in fact, the company has been rendered insolvent as a result of the fraudulent transfer. The heirs say that the company was perfectly solvent when they sold it and that it was the new buyers who brought it down. The truth is somewhere in between.”
Art Van Furniture, founded in 1959, was a “profitable and successful midwestern family-owned furniture retailer.” That all changed in 2017 when defendants VE (Van Elslander) decided to sell the business for approximately $620 million,” the lawsuit states.
Prior to the sale, Art Van Furniture was making nearly $17 million in annual profits. After the deal, he would “never have a profitable fiscal year,” according to the complaint.
In March 2020, the company announced it would close all of its stores, putting nearly 4,000 people out of work, setting off a clearance sales frenzy and evacuating dozens of massive storefronts.
Related: Police order crowded Art Van Furniture store to close early: ‘We could be getting closer to a riot’
The Van Elslanders argue that Art Van Furniture was “cash generating, debt free” when it was sold to Boston-based Thomas H. Lee Partners.
“The buyer promised us that decades of commitment to employees and communities would remain as strong as ever. Those promises have been broken,” a statement from the family said.
Giuliano argues in the lawsuit that Art Van Furniture was stripped of its “crown jewels” when mortgage-free properties were sold to landlords for $434 million under the sale-leaseback agreement. These real estate sales, including the one million square foot corporate headquarters in Warren, accounted for 70% of the purchase price.
That put Art Van Furniture on the hook for $877 million in future lease obligations, up from $136.5 million before the sale — “unsustainable debt,” the lawsuit alleges. The company owed about $33.4 million more in interest and lease costs per year under the new owners.
“This amount greatly exceeded the average net profit generated by the company and even exceeded the highest net profit ever generated by the company,” the lawsuit states.
By September 2017, seven months after the sale, Art Van Furniture had lost nearly $22.5 million, the first loss in at least a decade. Two years later, losses amounted to $189 million.
“The target company is impoverished because they’re taking on all this debt that they didn’t have before,” Bartell said. “And that’s what the trustee alleges, that the company was rendered insolvent by this transaction in which the Art Van family took the money.”
The Archie A. Van Elslander trust received $529 million from the sale, according to the lawsuit, and heir-controlled entities received more than $75 million. Another $8 million went to Gary Van Elslander, $2.5 million to David Van Elslander, and $6 million to former CEO Richard Kim Yost.
After the deal, the lawsuit says Art Van Furniture ended up with $2 million.
Bartell says it’s unusual to see a fraudulent conveyance allegation brought against a family business like Art Van Furniture, where each heir got a “little or big chunk” of the business. The 10 Van Elslander children, Yost and the Archie Van Elslander estate are named in the lawsuit.
Related: Art Van Furniture founder Art Van Elslander dies at 87
“Sometimes they succeed. Sometimes they’re not,” Bartell said. “It’s a financial assessment and you always look at it in the rear view mirror. It is very difficult to say that they were perfectly solvent at the time of the transaction, and now they are bankrupt. So how did they get from there to here?
The Van Elslander family argues that this lawsuit is an “unfair attempt” to pass on the company’s losses.
“Make no mistake, the bankruptcy proceedings may be labeled ‘Art Van’, but these are the consequences of business decisions made by the company that purchased our family business in 2017,” a statement read.
The Van Elslanders said they plan to challenge the lawsuit in court.
Learn more about MLive:
Art Van Furniture sells to private equity firm
Art Van Furniture’s warranties will expire after the company goes bankrupt
Loves Furniture files for bankruptcy less than 6 months after the reopening of the old Art Van stores