Karmaloop files for Chapter 7 bankruptcy protection

Karmaloop Inc. files Chapter 7

Karmaloop Inc., the major web-based streetwear retailer headquartered in Boston, recently announced that it had received approval from the Bankruptcy Court to convert its Chapter 11 bankruptcy case to a Chapter 7 liquidation proceeding. According to a Law 360 report, the company will now face the liquidation of all its remaining assets, because it failed to develop an adequate restructuring plan to accommodate its staggering tax debt.

Karmaloop’s Chapter 11 filing falls through

In bankruptcy filings, the company cited priority taxes and administrative claims, along with failed expansion plans and a general decline in the retail clothing sector, as the primary factors that drove Karmaloop into insolvency. As a result, the firm filed for Chapter 11 bankruptcy protection in March.

At that time, Karmaloop listed more than $90 million in debt obligations, with over $30 million owed to its senior secured lenders. Further, according to a Beta Boston report, the firm cited in its first day declaration that it owed approximately $25 million in junior secured debt and $40 million in unsecured debt, which includes more than $19 million in trade liabilities.

The company’s decision to file a motion to convert its Chapter 11 bankruptcy to a Chapter 7 liquidation came after it was not able to reach a sale agreement. According to a Boston Globe report, in 2014, famous music moguls Kanye West and Damon Dash were interested in submitting bids to acquire Karmaloop, but the negotiations fell through. In turn, Karmaloop decided to file for Chapter 11 bankruptcy protection because it no longer had the finances to continue operations.

The company converts its Chapter 11 bankruptcy filing to a Chapter 7 liquidation

Despite objections from the U.S. Trustee’s Office, the bankruptcy court had provided approval for an agreement between the company and its unsecured creditors that will expedite the company’s sale to its senior secured lenders. Law 360 reported that this agreement was reached by a committee of the company’s unsecured lenders and a group of senior secured lenders. As a result of the agreement, the bankruptcy court would have approved the liquidation sale of the company to a group of its senior secured lenders in May 2016 under the name ComCap Acquisition LLC.

As part of the initial sale agreement under its Chapter 11 filing, ComCap Acquisition LLC acted as the stalking horse bidder in the asset auction with a $30 million bid. This bid served as a portion of the $30 million owed in prepetition secured debt obligations with the company’s unsecured creditors. However, no other bids came forth, so the sale was canceled.

Part of the problem with the sale was that a majority of Karmaloop’s unsecured lenders objected to it. Their objection was based on the fact that the Chapter 11 reorganization plan would have shut out all creditors except for the senior secured lenders.