Dawahare's, creditors settle lawsuit

A “global settlement” reached Friday between Dawahare's of Lexington LLC and its creditors clears the way for the clothing retailer's going-out-of-business sale to begin as early as July 18 and end about Aug. 31.

Earlier, Dawahare's announced that the sale would begin Monday, but that plan was derailed by objections from creditors that were filed in U.S. Bankruptcy Court in Lexington, where Dawahare's is in reorganization.

A definite start date will be set next week if the court approves a liquidator for the remaining 22 Dawahare's stores that are spread across Kentucky. The liquidator will be chosen in an informal auction Tuesday.

By starting the final sale in July, there is “a high probability” that enough cash will be raised to pay off Dawahare's largest creditor, Fifth Third Bank, Dawahare's bankruptcy attorney, W. Thomas Bunch, told the court Friday.

The sale, which will involve about $9 million in clothing and other merchandise, also should produce at least $300,000 for Dawahare's unsecured creditors, Bunch said.

If Dawahare's is unable to start the sale until Aug. 1, he said the stores' inventory would be reduced, and there would be “little likelihood” of repaying Fifth Third or raising any money for unsecured creditors.

Under the agreement reached Friday, Fifth Third would put $300,000 in an escrow account for the creditors, Bunch said. About two-thirds of that money would be recovered from the sale of leases, cars and life insurance policies owned by Dawahare's.

The remaining $100,000 would come from Hoover's Furniture LLC, a separate business started years ago by the Dawahare family with the financial backing of Dawahare's Inc., the parent company of Dawahare's of Lexington.

Friday's agreement also calls for creditors to drop all objections to Dawahare's liquidation, including a demand that the case be shifted from a Chapter 11 reorganization to a Chapter 7 liquidation, which would make it more difficult to sell the company's assets quickly.

Bunch also said potential buyers have expressed stronger than expected interest in Dawahare's store leases and in its three Cat Bird Seat outlets, which specialize in merchandise for alumni and sports fans of the University of Kentucky and the University of Louisville.

Cat Bird Seat stores are smaller than regular Dawahare's, he said, but they tend to have higher sales and profit margins.

Dawahare's, a 101-year-old family-owned company, filed for bankruptcy reorganization May 30, saying it had $10 million in assets and $9.3 million in debt. More than $5 million of the debt was owed to Fifth Third, the largest secured creditor.

The Lexington company had 29 stores when it entered bankruptcy protection, but seven were closed or began going-out-of-business sales immediately in an effort to save the company.

Dawahare's and its advisors soon realized there was “no reasonable feasibility” of saving the company without a major injection of money from creditors or shareholders, Bunch said. New financing could not be arranged.

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