“Generally speaking, companies get into bankruptcy as a kind of meritocracy. Somebody made some sort of big mistake, to get into bankruptcy, and very often, a part of the mistake is too much leverage.” Wilbur Ross (Leveraged Buyout Extraordinaire.)
Bankruptcy
No one wants to go bankrupt. No business begins with a goal of bankruptcy. It is a last resort, and at times, the end of one’s dream or goal. As a society, we want people to recover from mistakes, learn from these mistakes, and get back to being productive within society. That is part of the reason we have bankruptcy protections available to individuals and businesses alike. People make mistakes, especially financial mistakes, and sometimes these mistakes cannot be fixed without some help.
While bankruptcy is not the end of the world, it is not something to celebrate or reward. For a business, bankruptcy means that you have failed. The sole purpose of a for-profit business is to make a profit. While other purposes may exist (e.g. grow the sport/community), those are indirect benefits of a business fulfilling its main purpose. Bankruptcy means that you have not only failed at the sole purpose of business, but that you also cannot fix your failure without significant help and assistance from a Court and Counsel.
Industry Leaders
The purpose of this opinion is not to vilify TriSports, Mr. Claggett, or anyone personally involved with TriSports. I’ve purchased products from TriSports without issue, I’m aware of the support they provide the sport I love, and I genuinely have no bias against them. However, I take issue with the fact that an organization of like-minded industry leaders felt inclined to reward a failed business model.
“Our mission is to leverage the knowledge, talent, and resources of industry leaders in triathlon to the benefit of the sport. The mission will be achieved by increasing and retaining advocates of triathlon and by fostering a positive image of the sport.” (Triathlon Business International’s “TBI” Mission Statement.)
I’m at a complete and total loss at how an organization like TBI with the above mission statement could somehow reward a business that was still in the process of Chapter 11 bankruptcy reorganization. This makes no sense whatsoever when the stated purpose of TBI is to benefit the sport and foster a positive image of the sport. Let’s be clear – a business in bankruptcy should never be the model for others in the industry to follow. Moreover, a business in bankruptcy does not “foster a positive image of the sport.”
Debt
Generally speaking, businesses do not get “forced” into bankruptcy overnight. In my experience and understanding, banks do not “call” notes in the context given in the interview between TRS and Mr. Claggett. In reviewing TriSports Chapter 11 filings, this becomes much more clear.
As others have written about, TriSports’ list of creditors (i.e. people/businesses it owed money to) includes many titans of the industry, as well as Bank of the West and American Express. According to documents accessed on pacer.gov (public access to court electronic records), at the time of petitioning for bankruptcy protection, Trisports owed $1.7 million to Bank of the West and $111,835 to American Express. Industry creditors included:
- TYR ($273,752),
- 2XU ($262,116),
- Quintana Roo ($135,038),
- SRAM ($70,638),
- Pearl Izumi ($102,990),
- Orbea ($140,773),
- K2 ($172,477),
- Cervélo ($73,000) and
- QBP ($55,503), amongst others.
On paper, this shows that TriSports was significantly over-leveraged – they took out significant debt (e.g. Bank of the West loan) to fund expansion of their business (post-2007/2008 market crash) and then also incurred significant debt by continuing to order product from vendors and running up a healthy tab with Amex. This was a decision TriSports made – it relied solely on debt financing in hopes that it would somehow be able to a) pay back the debt in the provided period, or b) restructure the debt and carry it for years to come. While I cannot comment on whether TriSports may have sought equity investment (i.e. providing an ownership interest to investors) or why it chose debt financing over equity investment, it is clear that TriSports made a decision at some point to stick with a bank (Bank of the West) and take out considerable amounts of debt to finance improvements it deemed necessary.
Bank of the West
After its initial petition was filed in June 2013, TriSports went on the offensive against Bank of the West, alleging that Bank of the West breached various contracts, misrepresented matters, committed fraud, breached the implied covenant of good faith and fair dealing, and objected to Bank of the West’s claims as a creditor. This is referred to as an adversary proceeding and is a separate lawsuit that is related / somewhat part of TriSports bankruptcy proceedings. In the interview, this is where Mr. Claggett mentions that his legal counsel is on contingency (i.e. payment of legal fees is contingent upon recovery) and that they are very confident in their claims. I’ll go into that a bit more, but first, the claims.
Reading over TriSports’ lawsuit against Bank of the West reminded me of the numerous lawsuits filed by homeowners being threatened by foreclosure after the market crash. These became very common lawsuits where I practice (San Diego, CA) and my former firm would routinely get calls from potential clients on this issue. Typically, the homeowners were naïve in their dealings with their respective banks and got taken for a ride. Sometimes the homeowner should never have been approved for a loan in the first place. Other times, the homeowner misinterpreted documents, relied on oral statements from low-ranking bank employees, and/or failed to take proper action with the situation before them. The banks certainly played a major role in this, but there was always some culpability on the homeowners’ part. People are human and mistakes are often made, especially when they are not sophisticated.
However, TriSports is not a small business, per se, and they are not an unsophisticated person being offered an interest only home mortgage on their $30k a year salary. This is a million dollar enterprise that was seeking various debt-financing options (high balance credit cards, lines of credit, equipment loans, etc.) and knew what they were getting into. It is undisputed that TriSports received significant debt financing from Bank of the West. Moreover, it seems pretty clear that TriSports was never in a position to repay that debt in the initial term provided, but still went forward with encumbering the business with a large chunk of secured liabilities. TriSports knew when certain debts were going to be due in full and continued to play the game of moving debt here and there to keep things afloat. Moreover, this was all post-2007/2008 market crash, which was a typical excuse used in litigation over the years to explain why a business venture failed or why bankruptcy was required.
In the complaint, TriSports alleges that Bank of the West and one employee misrepresented the terms of some restructuring for a portion of the debt, which is certainly possible. I have no information to opine on the truth of TriSports allegations against Bank of the West and view the factual allegations in TriSports’ complaint as plausible, given how banks tend to operate in my experience.
However, sophisticated and well-run businesses would not sit and wait around for Bank of the West to come through. Perhaps I’m jaded, but if I had $1 million loan and was having issues extending out the terms of that loan, I would not sit idly waiting for the bank. If that $1 million loan placed my dream, the business I worked so hard to build, and the livelihood of my employees in the balance, I would 1) not be waiting around for a bank; 2) not accept oral statements like “still processing” from a bank employee, and 3) be looking for alternative financing/investment options throughout this process.
Lawyers
Back to the attorneys and contingency stuff, which I find most interesting and insightful. First, I was surprised by Mr. Claggett openly discussing TriSports’ fee arrangement with counsel relating to this action. That is typically something most attorneys prefer to avoid openly discussing, though it may be unavoidable in some cases. More interesting, however, is that TriSports’ contingency counsel for their complaint is the same counsel for their bankruptcy proceeding. The fact that the same firm is representing TriSports in both actions is not uncommon.
The interesting part is this – TriSports’ firm has billed them $344,931.65 for the bankruptcy proceedings and restructuring portion. These billing records are all public and accessible on pacer.gov. While the firm has not billed TriSports for the complaint portion, they have been billing away on the petition and making money nonetheless. I think it becomes much easier to take a case on contingency when you have also received close to $350k from that same client. I also think this should have been mentioned by Mr. Claggett during the interview when he proudly stated that his counsel was on contingency. A bit less than candid, in my opinion.
So what does this all mean?
Again, this is not an attack on TriSports, what the business has done for the industry, the sport, etc. This is simply about awarding a business as the #1 Retailer while it was in the middle of business reorganization due to failing as a business. TriSports will have paid out significant funds (legal fees, court costs, etc.) after all is said and done just to get out of bankruptcy. So how is that good business? How does that “foster a positive image of the sport”? How is that a business model that other retailers should strive for?
While TriSports may be a great supporter of TBI/triathlon/etc., it simply should not be winning any awards on how to run a business. If it can rebound and get out of this hole, then perhaps TBI can create a new award next year – Most Improved Retailer. But for now, it should absolutely be disqualified from any awards that involve managing a successful business.
I genuinely hope that TriSports can rebound, that it can prevail in its suit against Bank of the West, and that it can pay back all of its vendors in full, just as Mr. Claggett desires to do. But until that happens, it should not be receiving any awards for operating a business.
photo credit: Giant Gavel via photopin (license)
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