Southern Season executives will learn next week whether a judge will allow the Chapel Hill gourmet food retailer to borrow $6 million to help it come out of bankruptcy.
At a hearing Tuesday in Greensboro, U.S. Bankruptcy Judge Benjamin A. Kahn will hear arguments about whether Southern Season should be able to borrow $6 million from Silk Route Capital Corp. Silk Route is made up of some of the original investors who purchased Southern Season in 2011, according to testimony by Southern Season executives during court hearings. That has raised some red flags for Southern Season’s main secured creditor.
Let’s back up a bit: Southern Season was started in 1975 as an 800-square-foot specialty coffee and food store. It grew to become a $30 million operation with its current anchor location in Chapel Hill’s University Mall and a strong mail-order business. The company suffered during the 2008 recession and never recovered.
In 2011, Southern Season was bought by TC Capital Fund, a company led by Chapel Hill entrepreneur Clay Hamner, who became Southern Season’s CEO. Hamner hoped to replicate the success of the Chapel Hill store with its restaurant and cooking school in other locations but it did not work out. Earlier this year, the company closed a 44,000-square-foot store in Mount Pleasant, S.C., outside Charleston, and a 53,000-square-foot store in Richmond, Va.
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The bankruptcy filing shows that Southern Season has $9.8 million in assets, including $3.6 million in inventory, and $18.3 million in liabilities. Those liabilities include $4.6 million owed to creditors whose debt is secured by property and $13.7 million in unsecured claims.
At a court hearing Friday in Durham, J.P. Cournoyer, one of Southern Season’s attorneys, told the creditors’ lawyers that the bankruptcy is intended to help Southern Season break the leases on those large stores. Without that debt, he said, “We feel confident that this company is going to succeed and come out of bankruptcy successfully in December.”
At a July 11 hearing, Southern Season asked the bankruptcy judge to allow the company to borrow $6 million from Silk Route; the funds would pay for its operation and efforts to better position the company when it comes out of bankruptcy.
However, the judge heard objections from Chris Schueller, a lawyer who represents Summit Bridge, an investment firm that owns a $5 million loan made to Southern Season in 2014. Summit Bridge is owed $4.4 million in secured debt. Schueller questioned how Hamner, as an investor and manager of Southern Season, can negotiate a loan with Silk Route in which he also has a role.
“We are deeply concerned about Clay Hamner running this debtor when Clay Hamner and perhaps others are significantly involved with the (debtor-in-possession) lender,” Schueller said. “That’s an inherent conflict of interest.”
Kahn, the bankruptcy judge, approved Southern Season borrowing $750,000 from Silk Route, but required the company to disclose what economic interest any owners of Southern Season have with the lending company and disclose any overlap among the two groups of investors. Those disclosures are not public record. The judge stipulated that anyone who wants to view those disclosures must sign a confidentiality agreement.
Southern Season’s Chapel Hill store is still open, and the company operates three smaller Taste of Southern Season stores in Raleigh, Asheville and Charleston, S.C. While in bankruptcy, the company plans to open two other Taste of Southern Season stores in Wilmington and Southern Pines. The company also hopes to revamp its online store to help the business. The $6 million in loans would help with those plans, said Brian Fauver, Southern Season’s chief financial officer, who testified Friday.
Fauver testified that e-commerce makes up only about 8 percent of Southern Season’s business. Other retail companies attribute 40 to 50 percent of their business to online sales, Fauver said. “I think it’s a huge opportunity for us,” Fauver testified.
Fauver testified that the company’s inventory is low now because the summer is a slow time for the company. However, Fauver said, the company has been able to negotiate terms with vendors – many of whom are owed hundreds and thousands of dollars – who are willing to continue to supply its stores. “I’ve been extremely encouraged by how responsive vendors have been,” Fauver said.
It is unlikely that the unsecured creditors who are owed $13.7 million will be repaid; such claims are usually paid pennies on the dollar, according to experts.