Probe Looks Into Pillowtex Collapse

By Brent Felgner -- Home Textiles Today, 5/2/2005 12:00:00 AM

Wilmington, Del. — —

Wilmington, Del. — Pillowtex creditors have launched an investigation into the events leading up to the defunct mill's second bankruptcy and effective liquidation, including the dealings of former CEO David Perdue and a dozen current and former officers and executives.

Among other things, the probe seeks to focus on the relationships between the mill and Oak Tree Capital Management, one of the nation's largest private equity companies, during the 14-month period between the mill's two bankruptcies.

At issue is whether the actions — or inactions — of the mill's directors and executives improperly diminished the recovery values or played to the advantage of one creditors' group over others.

A federal bankruptcy court judge authorized the examination of the management and financial dealings under the sweeping powers of the bankruptcy code, including Rule 2004. It enables the committee of unsecured creditors to conduct wide-ranging discovery and depositions of the individuals and companies named.

It will also seek to determine if Perdue had any conflicts of interest during his eight-month tenure as CEO, including whether he negotiated and received extra bonuses and perks at the same time he was negotiating for the CEO's position at Dollar General.

Purdue left Pillowtex in mid-March, 2003 — with more than three years left on his contract — to become the retailer's chairman and CEO. Several calls left for Perdue at his Dollar General office went unreturned.

“Perdue received certain significant supplemental benefits, in addition to those provided in his employment agreement, for little or no consideration during a time when the Debtors were struggling financially,” the creditors' court filing stated. “Perdue also received certain cash payments from the Debtors to offset federal and state taxes payable on stock that he received as part of his signing bonus that effectively became worthless due to the Debtor's poor performance. These reimbursements resulted in a windfall to Perdue,” who also kept the worthless stock, gaining a shelter from future capital gains.

Among other things, the probe seeks to uncover the relationship between Oak Tree and Pillowtex, and whether the VC company's interests were accommodated before those of other creditors.

The investigation was unopposed by attorneys for Pillowtex, although they did win a concession limiting the scope of the examination. The creditors must provide 10 days notice and receive court approval to expand the group being investigated.

“(Pillowtex) stated that it didn't believe that there was any basis for a claim of wrongdoing or of other sorts against the officers because of pre-petition activities,” offered Pillowtex attorney Richard Hahn, of Debevoise and Plimpton. “We didn't object because the committee fairly has the right and obligation under the bankruptcy code to conduct some sort of investigation of the events leading to the bankruptcy. We don't question that, and we intend to cooperate with any reasonable requests.”

The probe will also examine Pillowtex's accounting, sales accrual, trade allowance and sales incentive programs, among other issues.

“I think the fact that the second bankruptcy followed relatively quickly on the heels of the emergence from the first is what raises questions in their minds,” Hahn offered. He said he expects a plan to be confirmed for the company by the end of this year.

Pillowtex reorganized and emerged from its first bankruptcy in May 2002, then refiled for Chapter 11 in July 2003, immediately announcing it would liquidate. At the time of its 2002 emergence, Oak Tree became a 20 percent controlling shareholder in the mill in a partial transfer of debt to equity. Three Oak Tree executives became directors of Pillowtex, and led the CEO selection process that brought in Perdue, according to court and Securities and Exchange Commission records.

Pillowtex effectively liquidated under a Section 363 bankruptcy auction in October 2003, in which the consortium GGST, LLC emerged as the successful bidder, paying $121 million for substantially all of the company's assets.

At the time, there was considerable optimism that unsecured creditors would receive substantial recoveries of their pre-petition claims. But nearly 19 months later, there has still been no distribution because of a variety of pending administrative claims, including many from alleged WARN Act violations.