In any bankruptcy filing, regular customers are usually at the back of the line.
Banks and other secured creditors are the priority, and if there is any chance of a successful reorganization, suppliers must also be dealt with.
However, during the Chapter 11 process, clients generally have some protections. Return policies are usually honored, as are warranties and sometimes gift cards. However, once a company makes the decision to liquidate, all bets are off when it comes to customer protection.
Related: Owner of a major fast food chain files for bankruptcy
Regular customers usually get nothing in a settlement, and that may include goods or services they have already paid for. For example, the recent liquidation of Mitchell Gold + Bob Williams left thousands of furniture orders stranded at various delivery companies.
Customers of the defunct chain had paid for shipping, but the company had not paid its delivery partners. That led the bankruptcy court to reach a deal in which consumers were allowed to pay a second time for delivery if they wanted to receive their products.
That's not a fair solution, but it's the best consumers can hope for in a settlement. smiledirectclub, (SDC) – Get a free report An online company that sold dental aligners, an alternative to braces, went from Chapter 11 reorganization to liquidation, and that's very bad news for its customers.
Juan Sparacinoa director with McKool Smith Bankruptcy Litigation practice area, recently answered some questions from TheStreet to explain what clients can expect from SmileDirectClub.
Image source: Pixabay.
SmileDirectClub closed abruptly
The street: Is there any chance someone could buy the assets and restart the company?
Juan Sparacino: I am not involved in the case, but based on news coverage reporting on attorney statements made in court, it appears that the debtors do not believe there is any potential buyer/transaction. Based on what has been reported, I firmly believe that there is practically no possibility of sale and continuation of the business.
The street: Will existing customers be forced to look for other suppliers?
Sparacino: Yes. SmileDirect has made it clear that it will cease business operations and will no longer provide products or services to customers.
The street: Will people who paid the company for a product that was not shipped have any chance of getting money back?
Sparacino: Highly unlikely. The clients are general unsecured creditors and are after secured credits. There appears to be no possibility of recovery for general unsecured creditors.
SmileDirectClub canceled its warranty
The street: Would a new company purchasing the assets be free of collateral promises?
Sparacino: This would really be a contractual issue (and a business decision) for a buyer. According to the law, the buyer can certainly purchase free and clear of warranty obligations. However, if a buyer were interested in purchasing the business as a going concern, then an important business consideration would probably be keeping customers (happy/satisfied).
It is not uncommon for acquirers of consumer-driven businesses to adopt and assume customer obligations and seller customer benefit programs to maintain (acquire) a satisfied customer base.
A purchase agreement will define what responsibilities of the seller will be assumed by the buyer. If the buyer decides not to assume such responsibilities, then the bankruptcy sale would be free of warranty obligations.
The street: Is there something I'm missing from a consumer point of view?
Sparacino: No. Basically, the situation looks awfully bleak for SmileDirect customers in that there will be no further deliveries of products or services, and any money paid to SmileDirect in the form of prepayments, deposits or advances will almost certainly be lost.
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