Bloomberg News

Borders Faces Objections From Creditors, Kobo to Liquidation

July 19, 2011

(Updates with response by Borders in 10th paragraph.)

July 19 (Bloomberg) -- Borders Group Inc. faces objections as it heads to liquidation from creditors, landlords and e-book maker Kobo Inc., which called the sale process “hurried and confused.”

Borders will wind down its remaining 399 stores starting July 22 after it couldn’t reach an agreement with an earlier bidder, Najafi Cos., about an offer to keep the company running. The company won’t hold an auction as there have been no proposals to keep the company operating, it said in a statement yesterday.

“We were all working hard towards a different outcome, but the headwinds we have been facing for quite some time, including the rapidly changing book industry, eReader revolution, and turbulent economy, have brought us to where we are now,” said Borders Group President Mike Edwards in a statement.

Liquidators led by Hilco Merchant Resources and Gordon Brothers Retail Partners LLC, who were the opening bidders for the planned auction, will now buy the chain’s assets and liquidate them, subject to bankruptcy court approval. The deadline for bids passed yesterday without any offers.

Borders has about 10,700 employees, and a phased rollout will close its stores by September. The company said it will complete the wind-down under Chapter 11 and expects to be able to pay its business partners.

Business Contracts

The sale to liquidators, still subject to bankruptcy court approval, leaves no one to assume the company’s business contracts, creditors said in objections filed in Manhattan bankruptcy court yesterday.

“The debtors are proposing a hurried and confusing sale process that leaves parties such as Kobo uninformed as to precisely what will be sold or how the debtors intend to proceed,” lawyers for Kobo wrote.

Kobo, a Toronto-based maker of electronic books, said it should have the right of first refusal for any transfer of Borders’ 11 percent stake in its equity, and Borders’ shouldn’t be allowed to sell information that Kobo has licensed to Borders.

The new sales motion isn’t consistent with Borders’ past practices and violates “critical landlords rights and protections” under leases, said lawyers for Macerich Co. and other landlords.

Responding to landlords’ objections that they should be given seven days advance written notice of a store closing sale, Borders said in a filing today that all sales will start on July 22 and landlords had been on notice about that date since June 30. No further notice should be required, the filing said.

Texas Objections

The Texas comptroller objected to Borders’ motion to liquidate because it doesn’t contain a requirement that the liquidators of Borders pay federal and state tax. In the bankruptcy of Ultimate Acquisition Partners in Delaware, about $2 million of sales tax collected under Gordon Brothers’ and Hilco’s watch went unpaid, lawyers for the Texas authority wrote.

The book chain, which once operated more than 1,000 stores, lost business as customers switched to e-readers such as Amazon.com Inc.’s Kindle, introduced in 2007. Barnes & Noble invested in its own Nook device to attract customers.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

--With assistance from Matt Townsend in New York. Editors: Peter Blumberg, John Pickering

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net


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