Liquidators ask Southern Season vendors to refund pre-bankruptcy payments

In the months leading up to Southern Season’s Chapter 11 bankruptcy last year, food vendors pleaded with the Chapel Hill gourmet foods business to pay its bills.

Now these vendors, many small, specialty food makers in the Triangle and across the state, who collectively received $4 million in payments from Southern Season, may be forced to return the money as part of the bankruptcy case.

As many as 125 vendors will soon receive “demand letters” seeking refunds of bill payments they received from Southern Season in the 90 days before the company filed for bankruptcy on June 24, 2016. The letters will be sent out in the coming week from SSI Liquidation, said John Paul Cournoyer, a Chapel Hill lawyer who represents SSI.

SSI is a separate entity from the Southern Season food emporium, which continues operating its flagship Chapel Hill store under new ownership. SSI is responsible for the $18.3 million in liabilities from the food store in the bankruptcy matter. The Chapel Hill store, website and trade names were acquired in August for $3.5 million by kitchenware company Calvert Retail. Calvert Retail is not connected to the refund request.

Southern Season ran into financial trouble after it was unable to replicate the success of its Chapel Hill store. Large stores in Mount Pleasant, S.C., outside Charleston, and Richmond, Va., closed last year, as did three smaller shops in Raleigh, Asheville and Charleston.

Bankruptcy demand letters are sent out to make sure that preferred creditors were not paid at the expense of other creditors. Otherwise, favored vendors, such as friends and relatives, may walk away with their accounts settled, while other vendors receive nothing for their goods and services, as sometimes happens when businesses slide into insolvency.

“This is a fairly routine process for larger cases,” Cournoyer said by email. “The purpose of ‘preference’ actions is to ensure fair and equal treatment across the various classes of creditors.”

Cournoyer said it would be inappropriate for him to disclose the names of the vendors who will be receiving the demand letters. But he said by email that between 100 and 125 can expect to be notified, and that the total represents about 10 percent of the 1,200 creditors listed in the bankruptcy case.

The recipients may end up being able to keep part or all of the money they received from Southern Season.

“The preference defendants will be offered an opportunity to settle the claim quickly and at a discount of the total liability,” Cournoyer said. “It is reasonable to expect that some creditors will take the settlement, but it will be necessary to commence litigation against others.”

The vendors who fight the process in bankruptcy court have some legal defenses at their disposal that could entitle them to keep their payments from Southern Season. One common defense is that the payments were made in the ordinary course of business, not in response to aggressive collection efforts. Other defenses involve demonstrating that the vendors supplied additional goods and services, offsetting the value of the payment.

Cournoyer said his firm will not send demand letters to any creditor who received bill payments less than $6,425, which is the legal threshold for such claims.

This story was originally published March 6, 2017 at 4:37 PM with the headline "Liquidators ask Southern Season vendors to refund pre-bankruptcy payments."