April 18, 2005
Questioning Eziba's Decisions
HEN Eziba, an online retailer, declared bankruptcy last year, it left behind more than the usual amount of financial pain.
The privately held company had built a considerable business by selling hand-made goods from local artisans around the world through catalogs, stores and its own Web site. But hundreds of those suppliers were left unpaid when Eziba encountered financial trouble. Some of the company's critics, including those at Overstock.com, which later bought the company's assets, are now questioning Eziba's decision to forgo payments.
Since its debut in 1999, Eziba was never shy about publicizing the benefits it bestowed on vendors around the world. The company said it paid a total of $10 million to groups like Rwandan basket weavers, many of them widows of that country's war, and South African papier mâché artists.
But when Eziba's financial fortunes soured late last year, the company paid off a $500,000 bank loan instead of paying hundreds of artisans more than $100,000 it owed them.
Eziba said that paying off the loan was the best business practice - a contention disputed by some bankruptcy law specialists. Shortly after paying the loan, the company entered a voluntary liquidation process in hopes of paying off creditors like the New York public relations firm Ruder Finn, among others. (According to Emmanuel Tchividjian, a Ruder Finn senior vice president, his company, which was owed $11,000, was more concerned with protecting the interests of the Rwandan artisans, whose work Ruder Finn publicized, than recovering its money.) The bankruptcy proceedings are continuing.
But the creditors then petitioned for Chapter 7 bankruptcy proceedings after a liquidation attorney told them that a bankruptcy trustee might be able to recover the $500,000 payment - which it subsequently did - and thereby increase the amount available to pay themselves and the artisans.
Overstock.com, the publicly held online seller of discount merchandise, bought Eziba's assets from the bankruptcy trustee for $500,000, a price unrelated to the bank loan, and announced that it would pay the artisans in full, even though it is not legally obliged to do so. Overstock further said that it would try to revive their businesses by selling their goods on Worldstock.com, an Overstock division with a mission similar to Eziba's.
Eziba's former chairman and co-founder, Richard Sabot, said last week that he and a handful of former Eziba executives would help Overstock pay back at least part of what was owed to the artisans out of their own pockets. Mr. Sabot said the two companies reached a tentative agreement to "cooperate together in insuring that all the overseas creditors, the artisans, are paid in full."
Patrick Byrne, Overstock's chief executive, said last week that Overstock had already begun identifying and paying artisans, although he welcomed Eziba's help. Earlier this month, for instance, Overstock paid a debt of $23,000 that Eziba owed to the Rwandan widows. But Mr. Byrne also said he felt that Mr. Sabot and Eziba committed grave ethical lapses by not paying its artisans when it had the money to do so.
"I smell skunk," Mr. Byrne said. "Even if Eziba really did have to repay the bank loan when it did, which I don't believe, the fact remains that they had eight months to pay the Rwandan widows $23,000 and they chose not to."
In measuring the legacy of Eziba, a loan of $500,000 from Vermont's Chittenden Bank could loom large. Mr. Sabot, an emeritus professor of economics at Williams College and the former co-founder of Tripod, a pioneering Internet business that Lycos bought in 1998 for $64 million, said the company was obligated to repay the loan at the height of Eziba's post-Christmas cash reserves. If the company failed to repay Chittenden before March, the bank could claim Eziba's cash and other assets.
According to Mr. Sabot and others familiar with the terms, the loan contract also stated that if those assets were not enough to pay back the loan in full, the bank could raise the rest by claiming personal assets of Mr. Sabot, and those of Bill Miller, Eziba's chief executive, and Michele Gilbert, the company's vice president of marketing.
Executives at Chittenden declined to comment, but Mr. Sabot strenuously objected to suggestions that the company might have paid off the loan to protect his personal assets, and those of Mr. Miller and Ms. Gilbert. Mr. Sabot said that if it had paid other vendors rather than a secured creditor like Chittenden, Eziba would have been risking what is known in bankruptcy law as a preferential payment, or a payment made to creditors who may not have as valid a claim to the company's assets as others.
Since bankruptcy judges can order the return of preferential payments pending a fuller hearing of all creditor claims, Mr. Sabot said Eziba was essentially acting in the interests of its artisan vendors by not exposing them to possible litigation. "Anyone who claims that we acted out of self-interest is simply ignorant of the facts or willfully distorting them," he said.
But Elizabeth Warren, a professor of law at Harvard Law School and a bankruptcy law specialist, said Eziba was not legally obligated to pay the bank first. "Until it filed for bankruptcy, company management decided the order of payment," she said in an interview. "They preferred the bank, while the artisans were shut out. They may have had business or personal reasons for doing that, but they didn't have legal reasons."
The bankruptcy trustee handling Eziba's case, Jack E. Houghton Jr., did not return calls seeking comment. Mr. Sabot said he could not fully account for the fact that Eziba had not paid the Rwandan widows for baskets that had been shipped in May. He referred questions to Mr. Miller, who, through last fall, was engaged in a last-ditch effort to engineer a holiday sales season big enough to keep the company afloat.
"I was operating a company under very difficult circumstances," Mr. Miller said. "And we were operating under the assumption that there was another round of financing coming in so we could keep the company going and pay off everyone. Unfortunately, that didn't happen." He added that the widows, among others, had been paid about $100,000 to that point for baskets they had produced starting in 2003.
The delinquent $23,000 in payments still represented a considerable hardship for the widows, according to Kaliza Karuretwa, the counselor for trade at the Rwandan Embassy in Washington, who has been in contact with the artisans. For every basket they sold to Eziba for $18 (which was in turn priced at $55 by the company), the widows could feed a family of six for two weeks, Ms. Karuretwa said.
Also left unpaid was a cooperative of South African artisans called the African Art Factory, which was owed $80,000, according Janet Pillai, the Art Factory's chief executive. Artisans in Afghanistan, Bolivia, Bosnia and the Middle East were also owed thousands of dollars.
Mr. Byrne, who holds a Ph.D. in moral philosophy from Stanford University, said that if his growing company ever failed at some point in the future, all artisans would be paid before other creditors. "We'd stretch out the lawyers and bankers and the electric company, maybe, but not our artisans," he said. Worldstock sold $10 million worth of goods last year and provided jobs for more than 1,500 artisans in 70 countries, Mr. Byrne said.
In accordance with company policy, though, Worldstock operates on a break-even basis and contributes nothing to Overstock's bottom line. "There are many times when we tell our Worldstock vendors they're selling goods too cheap," he said. "Many times we've given them capital to buy raw materials, or we'll pay them up front."
"It's an odd relationship, but it's got to be paternalistic," Mr. Byrne added. "They might be on the other side of the table from you, but the reality is, you're holding all the aces."
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Willa Shalit Women in Rwanda weave traditional baskets that were to be offered for sale by Eziba. |
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