It’s been two years since Art Van Furniture collapsed and held “going out of business” sales at its 200 stores. Now, a bankruptcy trustee is seeking to recoup 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 the sale-leaseback of Art Van Furniture properties made during the $621 million deal doomed the company with new rent payments on top of debt from the leveraged buyout.
The “fraudulent transfer” allegation, made by bankruptcy trustee Alfred T. Giuliano, aims to reclaim $105 million from the Van Elslander family to pay creditors. Heirs to founder Art Van Elslander dispute the lawsuit saying Art Van Furniture failed because of the new owner’s business decisions.
“We have no ownership of what happened to the business after the sale on March 1, 2017,” the family said in a statement.
Related: Art Van Furniture to close stores, liquidation begins March 6
Wayne State University law professor Laura Bartell says fraudulent transfer allegations, which aren’t rooted in actual fraud, are common in leveraged buyouts. Ultimately, these types of lawsuits are trying 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 something wrong,” she said. “The question is whether in fact the company was rendered insolvent because of the fraudulent transfer. The heirs say the company was perfectly solvent when they sold it and it was the new buyers who ran it into the ground. The truth is somewhere in between.”
Art Van Furniture, founded in 1959, was a “profitable and successful family-owned and operated Midwest furniture retailer. That all changed in 2017 when the VE (Van Elslander) defendants decided to sell the business for approximately $620 million,” the lawsuit says.
Before the sale, Art Van Furniture was netting nearly $17 million in annual profits. After the deal, it would “never have a profitable fiscal year,” according to the complaint.
In March 2020, the company announced it would be closing all its stores, putting nearly 4,000 people out of work, kicking off a frenzy of liquidation sales and vacating dozens of massive shopfronts.
Related: Police order crowded Art Van Furniture store to close early: ‘We could come close to a riot’
The Van Elslanders contend Art Van Furniture was “generating cash, debt-free” when it was sold to Boston-based Thomas H. Lee Partners.
“We were promised by the buyer that the decades of commitment to employees and communities would continue as strong as ever. Those promises were broken,” a family statement 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 dollars through the sale-leaseback agreement. Those real estate sales, including the one-million-square foot headquarters in Warren, accounted for 70% of the purchase price.
This put Art Van Furniture on the hook for $877 million in future lease obligations, up from $136.5 million before the sale—an “unsustainable debt load,” the lawsuit alleges. The company owed about $33.4 million more in interest and lease expenses per year under the new owners.
“That amount far exceeded the average net earnings generated by the business and even exceeded the highest net earnings ever generated by the business,” the lawsuit said.
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 totaled $189 million.
“The target company is impoverished because it takes on all this debt that it didn’t have before,” Bartell said. “And that’s what the trustee is alleging, that the company was rendered insolvent by this transaction under 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 entities controlled by heirs 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 chief executive officer Richard Kim Yost.
After the deal, the lawsuit says Art Van Furniture was left with $2 million.
Bartell says it’s unusual to see a fraudulent transfer allegation made against a family business like Art Van Furniture where each heir got a “little or big piece” of the company. Named in the lawsuit are the 10 Van Elslander children, Yost and the Archie Van Elslander estate.
Related: Art Van Furniture founder Art Van Elslander dies at 87
“Sometimes they’re successful. Sometimes they’re not,” Bartell said. “It’s a financial assessment and you’re always looking at it in the rearview mirror. It’s very hard to say they were perfectly solvent when the transaction took place, and now they’re in bankruptcy. So how did they get from there to here.”
The Van Elslander family argues this lawsuit is an “unfair attempt” to shift the company losses.
“Make no mistake, the bankruptcy proceedings may be labeled ‘Art Van,’ but this is about the consequences of business decisions made by the company that purchased our family business in 2017,” a statement said.
The Van Elslanders said they plan to fight the lawsuit in court.
More on MLive:
Art Van Furniture sells to private equity firm
Art Van Furniture warranties to be defunct after company goes out of business
Loves Furniture files for bankruptcy less than 6 months after reopening former Art Van stores