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Case 13-16429

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UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS (Eastern Division)

In re: BUILDING #19, INC., Debtor.

Chapter 11 Case No. 13-13-16429

In re: PAPERWORKS #19, INC., Debtor.

Chapter 11 Case No. 13-16430

In re: BETHS BASICS, INC., Debtor.

Chapter 11 Case No. 13-16433

In re: FURNITURE #19, INC., Debtor.

Chapter 11 Case No. 13-16431

In re: PB&J KIDS #19, INC., Debtor.

Chapter 11 Case No. 13-16434

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In re: FOOTWEAR #19 PLUS, INC., Debtor.

Chapter 11 Case No. 13-16432 Joint Administration Requested

MOTION FOR (1) THE APPROVAL OF GOING OUT OF BUSINESS SALES, (2) THE APPROVAL OF CONSULTING AGREEMENT, AND (3) RELATED RELIEF (Emergency Determination Requested) Pursuant to Sections 105 and 363 of the United States Bankruptcy Code (the Bankruptcy Code), Federal Rules of Bankruptcy Procedure 2002, 6004 and 9006, and MLBR 6004-1, Building #19, Inc., Paperworks #19, Inc., Beths Basics, Inc., Furniture #19, Inc., PB&J Kids #19, Inc., and Footwear #19 Plus, Inc. (collectively the Debtors), each a debtor and debtor-inpossession, move the Court for an order (a) authorizing the Debtors to conduct going out of business sales free and clear of liens pursuant to sections 363(b) and (f) of the Bankruptcy Code, (b) authorizing the Debtor to enter into an agreement with Gordon Brothers Retail Partners, LLC (Gordon Brothers) to provide consulting services with respect to the liquidation of the Debtors assets, and (c) for related relief. Building #19, Inc. (Building 19) operates a chain of ten (10) discount stores located in Massachusetts, New Hampshire and Rhode Island, selling a wide variety of goods, including food, furniture, giftware, house wares, clothing, shoes, domestics and mattresses. The other Debtors (sometimes collectively the Jointly Administered Debtors) operate departments within Building 19s retail stores and pay Building 19 a license fee to conduct those operations. The Debtors acquire their inventory from purchases of surplus, salvage goods, overstocks, closeouts

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and irregulars, and are therefore able to offer the goods to consumers at substantially discounted prices. The Debtors have determined that the liquidation of their assets in an orderly fashion is in the best interest of their respective bankruptcy estates. Each of the Debtors primary asset is its inventory. Conducting so-called going out of business sales (GOB Sales) at the Debtors current retail locations will permit the sale of the Debtors respective inventory at the highest value in the shortest period of time, and will maximize the value of the Debtors inventory for their creditors. Time is required in order to prepare advertising, manage personnel and take the other steps necessary to conduct an efficient and successful GOB Sale. Delays in the commencement of the GOB will increase the costs of doing the GOB Sale and reduce the amount ultimately available for creditors. Emergency determination of this motion is therefore warranted. In further support of this motion, the Debtors aver as follows: I. 1. BACKGROUND

On November 1, 2013 (the Petition Date), each of the Debtors filed voluntary

petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Massachusetts (the Court). 2. The Debtors continue to operate as debtors- in-possession pursuant to Sections

1107 and 1108 of the Code. As of the date of this motion, no official committee of creditors has been appointed.

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A. 3.

The Debtors. Building 19 is a Massachusetts corporation founded in 1966. Building 19 is

headquartered in Hingham, Massachusetts. The Jointly Administered Debtors are all Massachusetts Corporations. 4. Building 19 operates ten (10) retail stores and also maintains a corporate

headquarters and warehouse space. Building 19 does not own any real estate, but instead leases all of its retail stores, its corporate headquarters and its warehouse. Four (4) of Building 19s stores are leased from third parties, and the remainder of Building 19s facilities are leased from non-debtor affiliates (collectively the Real Estate Affiliates). Building 19 is a party to separate leases for each of its leased locations. 5. Building 19 employs approximately ninety-nine (99) full time and part time

employees, primarily in Massachusetts, approximately seventy-five (75) of who work in the Debtors retail stores and approximately twenty-four (24) of who work in the Debtors corporate headquarters or warehouse facility. 6. The Jointly Administered Debtors employ an aggregate of approximately

seventeen (17) full time and fourteen (14) part time employees. 7. Six (6) non-debtor entities (collectively the Licensees) operate departments

within Building 19s retail stores pursuant to license agreements with Building 19. Two (2) of the Licensees, International Floor Crafts, Inc. (IFC) and Gee Zee, Inc. (Gee Zee), are affiliates of Building 19. Under the license agreements with the Licensees, Building 19 is entitled to retain a percentage of the respective Licensees gross sales as a license fee. The license fees payable by the Licensees range between twenty percent (20%) and thirty-five percent (35%) of the Licensees gross sales proceeds.

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B. 8.

Events Precipitating The Bankruptcy Filings. The advent of internet shopping has dramatically altered the retail landscape,

particularly for so-called big box stores such as are operated by Building 19. As a result, Building 19s respective sales have declined. The decline in sales and the resulting losses, among other things, eroded Building 19s working capital. Without sufficient working capital, Building 19 was left with little flexibility to make inventory purchases. Since much of Building 19s inventory consists of surplus, salvage goods, overstocks, closeouts and irregulars that become available erratically, Building 19s business model relies, in part, on having sufficient working capital on hand to make erratic inventory purchases. Building 19s lack of working capital impaired its ability to capitalize on erratic opportunities to purchase inventory. 9. The combined impact of declining sales, continuing losses and a lack of working

capital forced the Debtors to file for Chapter 11 bankruptcy protection. II. A. 10. Assets. Building 19s tangible assets consist of its inventory which, as of the Petition ASSETS AND LIABILITIES1

Date, was valued at approximately $2.25 million, at cost, and its furniture, fixtures and equipment. Building 19s intangible assets consist of its trademarks and trade names, and its accounts receivable from affiliates, the collectability of which is uncertain.2

The Debtors have not determined the amount of any claims against it and/or the extent, priority or validity of any of the liens asserted against its assets, and reserves the right to challenge any claims and liens on any grounds.
2

IFC and Gee Zee, two non-debtor affiliates that operate departments in Building 19s stores, are creditors of Building 19, being owed an aggregate of approximately $6.1 million.

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11.

The Jointly Administered Debtors assets consist of inventory and furniture,

fixtures and equipment. The aggregate value, at cost, of the Jointly Administered Debtors inventory as of the Petition Date was approximately $770,000. B. i. 12. Liabilities. Secured Claims. Between 2000 and 2003, various insiders of Building 19 loaned an aggregate of

approximately $2,715,000 to Building 19. The loans were used for working capital and general corporate purposes. The loans were evidenced by various demand promissory notes (collectively the JFLP Notes) with an interest rate of the prime rate plus one percent (1%). The JFLP Notes were subsequently assigned to three insider entities, the Judi Family Limited Partnership, the Judi Family Limited Partnership II, and Judith Elovitz. These three entities formed the JFLP Financial Group (JFLP), and, on August 8, 2008, Building 19 executed a security agreement in favor of JFLP that granted a lien on substantially all of Building 19s assets to secure the amounts due under the JFLP Notes. As of the Petition Date, the amount allegedly due to JFLP was approximately $4.6 million, inclusive of accrued interest. 13. William Elovitz (Mr. Elovitz, and together with JFLP the Secured Creditors),

Building 19s president, loaned approximately $2,900,000 to Building 19, on the same terms as the JFLP Notes, as evidenced by various notes (collectively the Elovitz Notes). The loans were used for working capital and general corporate purposes. On January 6, 2004, Building 19 executed a security agreement in favor of Mr. Elovitz that granted a lien on Building 19s corporate names, trade names, trademarks, service marks, trademark registrations, pending registrations, and all goodwill associated with the foregoing, to secure the amounts due under the

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Elovitz Notes. As of the Petition Date, the amount allegedly due to Mr. Elovitz was approximately $4.8 million, inclusive of accrued interest. 14. Building 19 has not conceded the amount of the Secured Creditors claims nor the

extent, priority or validity of the liens asserted by the Secured Creditors. 15. ii. 16. There are no secured claims asserted against the Jointly Administered Debtors Priority Claims. As of the Petition Date, Building 19 owed sales taxes to the Commonwealth of

Massachusetts and the State of Rhode Island of approximately $136,000 and $30,000, respectively. Building 19 does not owe any other material taxes. 17. The Jointly Administered Debtors owe aggregate sales taxes to the

Commonwealth of Massachusetts and the State of Rhode Island of approximately $32,000. 18. Contemporaneously with the filing of this motion, the Debtors have filed motions

for authority to pay pre-petition wages and benefits owed to their employees. Those motions details the amounts owed to employees that would constitute priority unsecured claims. iii. 19. Non-Priority Unsecured Debt. As of the Petition Date and excluding inter-affiliate debt, Building 19s non-

priority unsecured debt totaled approximately $5.38 million, consisting largely of trade debt. 20. As of the Petition Date, Building 19 owed affiliates the following amounts: (a)

approximately $15.5 million owed to affiliates for amounts owed under license agreements between Building 19 and such affiliates; and (b) approximately $40.0 million owed to the Real Estate Affiliates for unpaid rent and other charges under Building 19s leases of its retail, corporate and warehouse facilities.

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21.

As of the Petition Date and excluding inter-affiliate debt, the Jointly Administered

Debtors non-priority unsecured debt totaled approximately $1.05 million, consisting largely of trade debt. III. A. 22. Sale of Assets. Section 363(b)(1) of the Bankruptcy Code provides, in part, that a trustee, after RELIEF REQUESTED

notice and a hearing, may use, sell, or lease other than in the ordinary course of business, property of the estate. 11 U.S.C. 363(b)(1). Courts have approved a sale of a debtors assets if the proposed transaction represents a reasonable business judgment on the part of the trustee. See In re Martin, 91 F.3d 389, 396 (3d Cir. 1996); In re Lionel Corp., 722 F.2d 1063, 1070 (2d Cir. 1983); see also Stephens Indus. v. McClung, 789 F.2d 386, 390 (6th Cir. 1986); In re Thomas McKinnon Securities, Inc., 120 B.R 301 (Bankr. S.D.N.Y. 1990); In re Coastal Indus., Inc., 63 B.R 361,367 (Bankr. N.D. Ohio 1986); In re Baldwin United Corp., 43 B.R 888 (Bankr. S.D. Ohio 1984). 23. After consulting with its professionals, the Debtor has determined that the orderly

sale of its assets and wind down of its operations is in the best interest of its bankruptcy estate and its creditors. Conducting one or more GOB Sales is the most efficient way to liquidate the Debtors inventory as it will result in the highest value for the inventory in the shortest period of time. A lengthier sale process would result in increased costs that would eliminate increase in the prices received for the Debtors inventory and reduce the amount that would ultimately be available for creditors. Sales of the Debtors furniture, fixtures and equipment as part of a GOB Sale may also maximize the value of the furniture, fixtures and equipment. Prior to filing bankruptcy, the Debtors contacted various nationally known inventory liquidators, and although

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each was prepared to assist the Debtors in the liquidation of their inventory, none of the inventory liquidators was prepared to purchase the Debtors inventory or furniture, fixtures and equipment outright. 24. The request to sell the Debtors inventory and furniture, fixtures and equipment

through one or more GOB Sales is well within the Debtors reasonable business judgment, and the approval of those sales is therefore justified pursuant to Section 363 of the Bankruptcy Code. 25. Under Section 363(f) of the Bankruptcy Code, a debtor- in-possession may sell

property free and clear of any interest in such property of an entity other than the estate if certain conditions are satisfied. 11 U.S.C. 363(f). The Secured Creditors have consented to the sale of the inventory free and clear of liens, claims and interests, provided that the Secured Creditors liens attach to the proceeds of such sales to the same extent, priority and validity as existed on the Petition Date. Moreover, each of the Secured Creditors could be compelled under a Chapter 11 plan to accept money in satisfaction for their interests in the inventory. Sections 363(f)(2) and (5) have therefore been satisfied. See 11 U.S.C. 363(f); In re Healthco International, Inc., 174 B.R. 174 (Bankr. D. Mass. 1994) (lienholder could be compelled to accept money in satisfaction of interest in property under a Chapter 11 plan, thus satisfying Section 363(f)(5) of Bankruptcy Code). 26. The approval of the sale of the inventory and furniture, fixtures and equipment free

and clear of liens, claims and interests is therefore warranted. B. 27. Retention of Gordon Brothers. The Debtors do not have experience in conducting GOB Sales, and have therefore

determined that the retention of a liquidation consultant to provide advice regarding the conduct of GOB Sales will maximize the amount received from the sale of their inventory.

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28.

Prior to the Petition Date, the Debtors solicited proposals to conduct GOB Sales

from various firms that specialize in asset liquidation. The Debtors received proposals from Gordon Brothers, Hilco Merchant Resources, LLC (HILCO), and Tiger Capital Group, LLC (Tiger), to provide consulting services to the Debtors for GOB Sales. The consulting fees proposed by Gordon Brothers and HILCO were substantially lower than the fee proposed by Tiger. Although the consulting fee proposed by HILCO is modestly lower than the fee proposed by Gordon Brothers, the Debtors believe that Gordon Brothers is better suited to provide the required consulting services because, among other things, (a) Gordon Brothers main office is located in Boston, and will therefore be able to more efficiently provide the required consulting services, (b) Gordon Brothers has extensive local knowledge of the Boston retail marketplace and customer base, and (c) the individual who would oversee the process for Gordon Brothers has twenty (20 ) years experience in the discount store industry. Subject to the approval of the Court, the Debtors selected Gordon Brothers as the best choice to provide the consulting services necessary to maximize the revenue generated by the GOB Sales. 29. Subject to the approval of the Court, the Debtor and Gordon Brothers have agreed

to the form of a consulting agreement (the GB Agreement), a copy of which is attached as Exhibit A. The primary terms of the GB Agreement are as follows:3 a. Services. Gordon Brothers will provide, among other things, the following services: (i) commencing immediately upon execution of this Agreement, recommend appropriate point-of-purchase, point-of-sale, and external and internal advertising and signage necessary to effectively sell all of the Merchandise (as defined below) in accordance with a sale on everything/entire store on sale at the Stores. Upon entry of an order approving the GOB Sales (the Approval Order), provide such recommendations will be in furtherance of the going out of business (or other mutually agreed upon themed) sale handle; (ii) provide

The description of the terms of the GB Agreement is a summary only, and the GB Agreement contains other terms and conditions. Capitalized terms not defined in the summary shall have the meaning ascribed to them in the GB Agreement.

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qualified supervisors to assist and oversee the sales; (iii) evaluate and provide the Debtors with reports concerning sales of merchandise and expenses; (iv) evaluate and provide the Debtors with reports concerning sales of goods by IFC and Gee Zee (subject to the Debtors ability to provide Gordon Brothers with systems and administrative personnel necessary to allow for such evaluation/reporting); (v) recommend sale-related customer service and housekeeping activities; (vi) recommend sale-related staffing levels; (g) recommend sale-related loss prevention initiatives; and (vii) advise the Debtors with respect to the licensing requirements affecting the Sale as a going out of business, store closing, or other mutually agreed upon themed sale in compliance with applicable state and local going out of business laws (GOB Laws), to the extent applicable prior to the entry of the Approval Order; provided that, in connection with the GOB Laws and the sales: (A) the Debtors will consult with its own counsel; (B) Gordon Brothers will follow the directions of the Debtors (or its counsel); and (C) Gordon Brothers shall not be liable to the Debtors for any violations of the GOB Laws. b. Term of the sale. The sales will terminate no later than December 8, 2013 (Sale Termination Date); provided however that either party may from time to time establish an earlier Sale Termination Date with respect to any one or more Stores (on a per Store basis) upon five (5) days prior notice to the other party. Expenses. All expenses incident to the conduct of the sales and the operation of the Debtors stores (the Store) during the term of the sale shall be borne by the Debtors; except solely for any of Gordon Brothers Controlled Expenses that exceed the aggregate budgeted amount (as provided in Section 3(B) of the GB Agreement) for such Gordon Brothers Controlled Expenses. Compensation. The Debtors shall pay to Gordon Brothers a Consulting Fee as one of the following (e.g., back to first dollar):
Aggregate Gross Proceeds Below $2,250,000 $2,250,000-$2,499,999 $2,500,000$2,759,999 $2,750,000-$2,999,999 $3,000,000 and Above Consulting Fee 0.75% of Aggregate Gross Proceeds 1.00% of Aggregate Gross Proceeds 1.25% of Aggregate Gross Proceeds 1.50% of Aggregate Gross Proceeds 1.75% of Aggregate Gross Proceeds

c.

d.

In addition to all other compensation otherwise payable by the Debtors to Gordon Brothers, in connection with the Final Reconciliation the Debtors shall pay Gordon Brothers the sum of fifty percent (50%) of the savings between the actual expenses incurred for the Gordon Brothers Controlled Expenses the budgeted amount for the Gordon Brothers Controlled Expenses set forth on Exhibit B to the GB Agreement.

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e.

Timing of Payment of Consulting Fee. On a weekly basis in connection with each weekly reconciliation, the Debtors shall pay to Gordon Brothers (each a Weekly Payment) an amount equal to three quarters of one percent (0.75%) of the Aggregate Gross Proceeds attributable to the prior week (or partial week in the case of the first and last week) (Weekly Gross Proceeds), which amounts shall be fully earned when Merchandise is sold; provided however, that if and as the Aggregate Gross Proceeds exceeds one or more incremental performance hurdles in the table above (e.g., $2.75mm, $3.00mm, $3.25mm, and $3.50mm), the Debtors shall both (a) increase the rate of the Weekly Payment to the applicable increased Consulting Fee; and (b) pay Gordon Brothers a makeup payment to reflect the fact that the rate of the Consulting Fee applies back to first dollar of Aggregate Gross Proceeds. Reconciliation. In connection with the Final Reconciliation, among other things, Gordon Brothers shall pay the Debtors, or the Debtors shall pay Gordon Brothers (as the case may be) any adjustment that may be required to account for the amount by which the aggregate Weekly Payments exceeded, or were insufficient to satisfy (as the case may be), the actual Consulting Fee due under the GB Agreement. Conduct of Sale. (a) the Debtors shall have sole control over the personnel in the Stores; (b) the Debtors shall have sole control over the cash, debit and charge card payments for all merchandise sold during the term of the sale; (c) the Debtors shall solely be responsible for calculating and collecting all sales taxes associated with the sale of merchandise during the term of the sale, and the Debtors shall be solely responsible for reporting and paying the same to the appropriate taxing authorities. Gordon Brothers Indemnification. Gordon Brothers shall indemnify and hold the Debtors and its affiliates, and their respective officers, directors, employees, consultants, and independent contractors (collectively, the Debtors Indemnified Parties) harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from or related to: (i) Gordon Brothers material breach of or failure to comply with any of its agreements, covenants, representations or warranties contained herein or in any written agreement entered into in connection herewith; (ii) any harassment or any other unlawful, tortious or otherwise actionable treatment of any employees or agents of the Debtors by Gordon Brothers, its affiliates or their respective officers, directors, employees, agents, independent contractors or representatives; or (iii) the gross negligence, willful misconduct or unlawful acts of Gordon Brothers, its affiliates or their respective officers, directors, employees, agents, independent contractors or representatives. Debtors Indemnification. The Debtors shall indemnify and hold Gordon Brothers, its affiliates and their respective officers, directors, employees,

f.

g.

h.

i.

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consultants, and independent contractors (collectively, Gordon Brothers Indemnified Parties) harmless from and against all claims, demands, penalties, losses, liability or damage, including, without limitation, reasonable attorneys' fees and expenses, directly or indirectly asserted against, resulting from or related to: (i) the Debtors material breach of or failure to comply with any of its agreements, covenants, representations or warranties contained herein or in any written agreement entered into in connection herewith; (ii) any claims by any party engaged by the Debtors as an employee or independent contractor arising out of such engagement, except where due to the gross negligence, willful misconduct or unlawful acts of Gordon Brothers, its affiliates or their respective officers, directors, employees, agents, independent contractors or representatives; (iii) any consumer warranty or products liability claims relating to any Merchandise; (iv) the failure by the Debtors to properly and in full compliance with applicable law, collect, handle, account for, report, or pay any sales (or similar) taxes in connection with the sale; (v) the Debtors business (whether before, during, or after the term of the sale); and/or (vi) the gross negligence, willful misconduct or unlawful acts of the Debtors, its affiliates or their respective officers, directors, employees, agents, independent contractors or representatives.

30.

The terms of the GB Agreement are customary under the circumstances, and the

selection of Gordon Brothers and the execution of the GB Agreement represent the exercise of the Debtors prudent business judgment. Since Gordon Brothers is not being retained under section 327 of the Bankruptcy Code, the Debtors request that Gordon Brothers be compensated pursuant to the terms of the GB Agreement without the requirement to file any fee application with this Court. IV. 31. NOTICE

The Debtors will serve this Motion on (a) the Secured Creditors, (b) any taxing

authority that has a claim against the estates, (c) the 20 largest unsecured creditors of each Debtor, (e) the Office of the United States Trustee, and (f) all parties who have filed a notice of appearance in these cases. The Debtors believes that such service provides sufficient notice in light of the nature of the relief requested and request that the Court approve such notice.

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WHEREFORE, the Debtors respectfully requests that this Court enter an Order: (a) approving the notice of this motion as described above; (b) authorizing the Debtors to sell their inventory and furniture, fixtures and equipment, free and clear of liens, claims and interests, under one or more GOB Sales; (c) approving the retention and compensation of Gordon Brothers pursuant to the GB Agreement; and (d) granting such other relief as is just and proper. Respectfully Submitted, BUILDING #19, INC., PAPERWORKS #19, INC., BETHS BASICS, INC., FURNITURE #19, INC., PB&J KIDS, INC., FOOTWARE #19 PLUS, INC. By its proposed counsel,

/s/ D. Ethan Jeffery Harold B. Murphy (BBO #362610) D. Ethan Jeffery (BBO #631941) MURPHY & KING, Professional Corporation One Beacon Street Boston, MA 02108-3107 Tel: (617) 423-0400 Fax: (617) 556-8985 dej@hanify.com Dated: November 1, 2013
658623

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