Previous articles have discussed the fiduciary duties of officers and directors of companies in financial trouble (see articles here and here). In another adversary proceeding to hold owners, officers and directors responsible for the financial demise of their companies, the Chapter 7 Trustee of Swoozie’s has filed a Complaint against the founder and former CEO of the company. Anderson, as Trustee of SWX, Inc. (f/k/a Swoozie’s, Inc.) v. Dworkin, Adv. Pro. No. 12-05556 (N.D. Ga. filed October 19, 2012) (click here for the complaint).
Swoozie’s was an Atlanta-based retailer of luxury gifts and paper products, that filed a Chapter 11 petition in the Northern District of Georgia in March 2010. Ch. 11 Case No. 10-66316 (click here for Schedules filed in case). It operated 43 stores in 15 states, and employed about 350 people, according to this article. The assets of the company were purchased in a liquidation sale shortly after the filing and the Chapter 11 Bankruptcy case was converted to Chapter 7 in October 2011, and the stores were closed. Click here for AJC article and Atlanta Business Chronicle Article.
The Trustee’s Complaint alleges in general that:
Defendant, after entering into the largest, and disastrous, expansion in Swoozie’s history; in the depths of the Great Recession; without the advice of outside accountants or financial advisors; and having recently lost the Company’s Chief Financial Officer(“CFO”)and Chief Operating Officer(“COO”), elsewhere described as “literally the only person at the company who had clear control over . . . [the]financials of the company,” caused the Company to take on the greatest amount of debt in its history in the form of $5 million line of credit. She did so, moreover, without taking steps to inform herself of the Company’s ability to service the loan, especially following a significant and unanticipated delay in securing the line of credit, which left Swoozie’s unable to prepare for its busiest season; without analysis of the consequences of default, which were costly and severe; and without taking into account the best interests of the Company or its unsecured creditors…
Defendant’s gross negligence in causing the Company to take on this line of credit resulted in substantial injury to the Company and its unsecured creditors, for which the Trustee seeks to recover in this adversary proceeding.
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By any objective measure, Defendant’s decision to enter into the line of credit was uninformed, grossly negligent, and not the product of a deliberate exercise of business judgment. And, as a direct and proximate consequence of that decision, Swoozie’s and its unsecured creditors suffered significant injury—ultimately forcing the Company to liquidate its assets in bankruptcy.
The Trustee asserted claims for Breach of Fiduciary – Corporate Waste, with damages claimed of not less than $1.6 million.
Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, creditor committees, trustees, court-appointed receivers and other interested parties in bankruptcy cases and bankruptcy litigation. For more information, click here.