The parent company of Kmart and Sears is battling another supplier lawsuit over unpaid orders, this time from a former California vendor that sources clothing from Vietnam.
In a complaint filed with the Cook County Circuit Court last January, City of Industry-based Trinhnology Enterprise alleged that Transformco canceled and then refused to pay for millions of dollars worth of custom-made clothing, ordered throughout 2019 and early 2020, despite the fact the goods were finished and ready for delivery.
“This is a complaint for breach of contract, breach of implied contract, open book account and common counts arising from the parties’ formation of a number of agreements for the sale and purchase of consumer goods, specifically apparel,” the lawsuit read.
Trinhnology Enterprise maintained a relationship with Sears Holdings until the latter filed for Chapter 11 in 2018. Edward Lampert, chairman of ESL Investments, the hedge fund that delivered Kmart from bankruptcy in 2003 and then orchestrated the $11-billion merger of Kmart with Sears, Roebuck & Co. a year later, immediately snapped up Sears Holdings’ remaining assets for $5.2 billion to create Transform SR Brands, better known as Transformco.
In March 2019, Trinhnology Enterprise said it signed a new master contract “purporting to govern the new vendor relationship” with Transformco. For a while, the two companies kept up a purchaser-supplier relationship that proceeded through a “sequence of standardized communications,” including regularly dispatching sample requests and confirming pricing and quantity.
Related Stories
The relationship was running like a well-oiled machine. As soon as samples were approved, Trinhnology Enterprise would issue a so-called “wings sheet” that specified fabrics, trims and accessories and included a delivery schedule. The acceptance of a wings sheet, the complaint said, signaled the confirmation of a purchase order, upon which Trinhnology Enterprise would purchase the necessary materials to meet the delivery requirements. Once the goods were complete, Transformco would transmit an electronic data interface, or EDI, with instructions for arranging shipment and payment.
Starting in Dec. 2019, however, Transformco began refusing delivery of the ordered goods by failing to transmit the required EDIs, the complaint said. By then, Trinhnology Enterprise was preparing to ship $11.3 million worth of goods, including slub pocket tees, mesh dresses and high-waisted joggers. In April 2020, Transformco was telling Trinhnology Enterprise that it would no longer honor the outstanding purchase orders “without any monetary consequences associated with such cancelations.”
Transformco, which did not respond to requests for comment, filed a motion to dismiss the lawsuit last March, blaming the “unprecedented” impact of Covid-19, which it said brought its retailers to a “virtual standstill” in spring 2020 and forced it to shutter stores and curtail operations.
As a result, Transformco was unable to honor purchase orders placed with Trinhnology Enterprise, the motion said, adding that the two companies were “subsequently able to resolve their disputes regarding this cancellation,” later executing a confidential general release. By this lawsuit, [Trinhnology Enterprise] ignores the parties’ general release to wrongly seek further recovery” from Transformco, it said.
The following month, Trinhnology Enterprise submitted a response in opposition of the motion to dismiss, saying that Transformco has failed to demonstrate that a prior agreement signed by the parties released the claims outlined in the complaint. Transformco’s payment delays and defaults upon accepting the goods also started “well before” March 2020, when the coronavirus gained a foothold in the United States.
In January, a judge granted Transformco’s motion to dismiss “in part” and denied it, also “in part.” The case is set for further management on Feb. 23.
Trinhnology Enterprise, which declined an interview because of ongoing litigation, isn’t the only supplier to have filed a claim against Transformco, though many were made privately and not a matter of public record.
“Sears has been sued by a lot of vendors around the world,” Zachary Mazur, an attorney with the Sarachek Law Firm, which is representing Trinhnology Enterprise, told Sourcing Journal. “And these vendors were put through the wringer over and over again, starting with the bankruptcy in 2018. Even though Sears was defaulting on orders and the payments for these orders, a lot of these vendors kept supplying Sears and they kept getting burned.”
Neither should the pandemic be thrown around as an excuse. “Buyers can’t just pronounce the word Covid and not pay their creditors,” Mazur said. “Force majeure cannot be asserted by a buyer who just doesn’t want to pay. Some of the owners are not even interested in running a retail business at all. They’re interested in stripping out assets and Eddie Lampert has certainly been accused of that.”
‘Now we are subcontractors of the bank’
The Sarachek Law Firm previously helped more than 20 Bangladeshi vendors reach a settlement with Transformco after the company canceled $40 million of in-progress and finished orders in the spring of 2020. Though the exact terms of the settlement weren’t revealed, it was believed to be between 10 percent and 15 percent of the money owed. New Age, a Dhaka-based newspaper, pegged the sum at $6.3 million.
Patriot Group, which specializes in woven and knit garments, was one of the suppliers that Transformco stiffed. One of Sears’ biggest suppliers, the company had made shirts and blouses for the retailer for nearly two decades, said director Fahim Iqbal, whose father founded Patriot Group.
When Sears first declared insolvency, it took longer than usual to pay its orders, though it eventually did so for “70 percent to 80 percent” of them, Iqbal told Sourcing Journal. “They told us to continue business with them,” he said. “And we thought, alright, they’re just going through a bad time and they’ll take care of us when the time is right.”
That proved to be a miscalculation. By the time Covid-19 exploded and Transformco pumped the brakes on all its orders, Patriot Group was hanging onto $3.6-million worth of goods, some of which had already been made into clothing and shipped. Since buyers don’t typically pay upfront, Patriot Group was bearing the full cost of materials and labor, which it had managed only by taking up loans.
Before Transformco reneged on its payments, Patriot Group was running two factories, one of them almost completely dependent on Sears orders. As its creditors came calling, the manufacturer was forced to shut down one of its factories and lay off 1,200 workers. The settlement, though better than nothing, only covers the “tip of the iceberg,” Iqbal said. Patriot Group was awarded $500,000 but it has barely received half of the sum in the past year. The most recent installment was for $9,000.
The matter is “still haunting us,” Iqbal said. The sum Patriot Group negotiated isn’t enough to offset the interest of the original loans. While the supplier was able to sell some of the finished products and remaining raw materials, it has only been able to recoup a fraction of its losses. In the meantime, Patriot Group is still on the hook for the money it borrowed and the bank has seized many of its assets as collateral.
Iqbal said he wishes Patriot Group had sued Transformco instead of settling. “We used to be businessmen. Now we are subcontractors of the bank,” Iqbal said. “We are working to pay off our liability. Life is very hard.”