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Law360 (March 3, 2021, 11:23 AM EST) -- Artisanal stationery retailer Paper Source Inc. filed for Chapter 11 protection in Virginia, blaming the COVID-19 pandemic for a reversal of fortune that stalled its aggressive expansion strategy.
In initial court filings Tuesday, the company said it intends to sell its assets as a going concern and has a stalking-horse bid in hand with senior lenders affiliated with MidCap Financial Trust pledging to bid against the $88 million in pre- and post-bankruptcy financing it has provided to Paper Source.
Founded as a single-store operation in Chicago in 1983, Paper Source grew to have 161 locations after a series of private equity owners pursued an expansion strategy for the company, according to a first-day declaration from Chief Financial Officer Ronald Kruczynski.
It also operates a 50,000-square-foot distribution center that allowed it to pivot toward satisfying unprecedented online orders once the COVID-19 pandemic began in the first quarter of 2020.
It comes to court with $103 million in debt consisting of a $15 million revolving credit facility, $55 million in first-lien term loans, $2.7 million in delayed draw term loans and $30 million in second-lien term loans, according to the declaration.
In March 2020, Paper Source completed an acquisition of 27 new stores that it purchased from bankrupt competitor Papyrus, but days later the debtor was forced to close all of its stores due to the outbreak of the novel coronavirus, Kruczynski said.
"By June 2020, the company's liquidity profile had decreased to the point where the company actively began looking for a lifeline," he said in the declaration.
At the first-day hearing for the case Wednesday afternoon, U.S. Bankruptcy Judge Keith L. Phillips approved Paper Source's motion to reject the leases of 11 stores they said are underperforming but turned down its request to immediately approve bidding procedures for the asset sale.
The U.S. Trustee's Office and some landlords had objected to the motion, saying there was insufficient notice. Judge Phillips ordered the motion postponed until March 25, saying most creditors haven't received notice of the Chapter 11 filing yet and that the case timeline in the debtor-in-possession financing agreement gives Paper Source 30 days to get the procedures approved.
Paper Source is represented by Christopher A. Jones, David W. Gaffey and Jae Won Ha of Whiteford Taylor & Preston LLP and John C. Longmire, Matthew A. Feldman and James H. Burbage of Willkie Farr & Gallagher LLP.
The case is In re: Paper Source Inc. et al., case number 21-30660, in the U.S. Bankruptcy Court for the Eastern District of Virginia.
--Additional reporting by Rick Archer. Editing by Katherine Rautenberg and Emily Kokoll.
Update: This story has been updated with more information on the Wednesday hearing.
For a reprint of this article, please contact reprints@law360.com.
