HOLLAND — Before you put pen to paper in any transaction, experts say it’s important to vet the parties with whom your company does business.
The sellers of a South Carolina-based office furniture dealer that marketed Haworth Inc. products found that out firsthand.
In early 2016, Miller’s of Columbia Inc. agreed to a leveraged buyout with two Virginia-based individuals, Shirisha Janumpally and Silvija Valleru. While the transaction was meant to allow Miller’s owners to retire, the deal ended up driving the family-owned business into insolvency, causing it to fail to pay its bills to manufacturers like Haworth.
“They had control of the checkbook,” current Miller’s COO Paul Olsen told MiBiz of the buyers. “We just got to a point where manufacturers weren’t shipping to us unless we prepaid for the product. Haworth kept negotiating with them and he was making promises to pay and never paid.”
In August, Holland-based Haworth filed a lawsuit against a bevy of individuals and entities related to the leveraged buyout at Miller’s, including the buyers and Lionshead Enterprises Corp., a Virginia-based management group retained by the investors to run the business.
Specifically, Haworth alleges some members of the Olsen family, the buyers and Lionshead “drained Miller’s of cash and loaded it with debt” following the buyout, according to court documents filed in the U.S. District Court for the Eastern District of North Carolina. Moreover, Haworth accuses the new owners and Lionshead of fraud and “gross mismanagement” of the company.
While Paul Olsen was not included in Haworth’s federal lawsuit, he is named in a separate lawsuit the company filed in Kent County Circuit Court.
Allegations in the federal lawsuit claim Lionshead immediately charged Miller’s a $20,000 per month management fee; lied to Haworth, causing it to ship additional orders for which it wasn’t paid; and siphoned roughly $790,350 of Miller’s cash to other affiliated organizations.
Knowingly transferring funds from an insolvent company to other organizations is illegal under the Uniform Fraudulent Transfers Act, according to an attorney not affiliated with this case who was contacted for this report.
Haworth also alleges the new management organization severely crippled Miller’s by transferring its line of credit to a factoring company, which increased its interest rate to 16 percent compared to the 5.25 percent it paid to its former traditional lender.
All of these factors contributed to Miller’s failure to pay Haworth, according to the court documents. Haworth claims Miller’s owes it more than $1.2 million in unpaid invoices and finance charges. The West Michigan office furniture manufacturer also is seeking a total of nearly $5.3 million in damages in the case, plus attorney fees.
According to Matt Wilkins, a partner at Birmingham-based Brooks, Wilkins, Sharkey & Turco PLLC, the case represents an example of what can occur when a seller does not conduct the proper due diligence on a prospective buyer.
“It’s worthwhile for the seller to understand its buyer, which doesn’t always happen,” Wilkins said. “Try to understand their financial wherewithal (and) the buyer’s intentions for the business on the other side of the deal. Otherwise, you can end up in situations like this because of things you may not have a lot of control over.”
While the situation has caused financial headaches for Haworth, it effectively marked the demise of Miller’s, which has been in the hands of the Olsen family since the 1970s.
“We weren’t cash flush, (but) they made it worse,” Paul Olsen told MiBiz regarding the buyers and the management firm they hired to operate the company. “We were limping along and were led to believe by a reduction in prices that they would be able to provide some capital into the business, but they did it too late.”
Olsen has since reclaimed the company from the parties accused of mismanagement following the initial buyout, but the saga has severely weakened the business. As it stands, Miller’s has one remaining manufacturer willing to sell it product, and one large contract with the U.S. Air Force. The “skeleton crew” left at Miller’s currently is in talks to determine if the business should continue as a going concern, Olsen said.
Haworth cancelled Miller’s authorized dealer status as of December 2016.
Additionally, Olsen has since filed a lawsuit against Lionshead and its owners plus Janumpally and Valleru, but he notes that it has been “shelved” for now. He declined to offer specifics on that litigation.
Warner Norcross & Judd LLP, a Grand Rapids-based law firm, is representing Haworth in the dispute.
Haworth and attorneys from Warner Norcross & Judd acknowledged a request for comment and confirmed the lawsuit was taking place, but declined to comment further on the matter. Representatives for the defendants did not respond to requests for comment.
Editor’s Note: The headline of this story has been updated to note that Haworth seeks $6.5 million from the former dealer (Miller’s of Columbia) and related parties. A previous version did not mention the related parties.