Last holiday season I wrote a post on Schubach Jewelers going out of business. Since then I’ve received several phone calls from people who purchased jewelry and accompanying maintenance agreements or warranties, wondering what’s going to happen to their warranties. In each case I’ve told the caller that it depends on how Schubach’s treats those warranties, which are a form of debt to the company, in its bankruptcy. Things are more clear now.
Schubach is part of Samuels Jewelers, which filed Chapter 11 in 2018. In Chapter 11 the debtor hopes to reorganize itself and continue in business and that was Samuels’ hope. Although it closed its Schubach-branded stores as part of its reorganization, the parent intended to remain open. It scheduled a sale of its assets in its bankruptcy to raise cash so it could continue operating. Unfortunately it didn’t get bids high enough to pay Wells Fargo, who was a secured creditor. As a secured creditor, Wells Fargo is entitled to any money received by Samuels from the sale of any assets that are encumbered by Wells Fargo’s secured claim, up to the full amount of Wells’s debt.
On February 14 (appropriate for a diamond seller), Samuels cancelled its scheduled auction and accepted Wells’s credit bid. A credit bid is where Wells says, “you owe us $150 million [or whatever the debt is]. We’ll take your assets and credit those assets against the debt.” Samuels accepted this because it believed that it wouldn’t get any more than what was owed to Wells by selling to a third party. Because it sold those assets, which included inventory (all of the jewelry in all of Samuels’s stores), accounts receivable (money owed by customers who bought on store credit), contracts, intellectual property (patents, trademarks and the like) — pretty much everything of value to a business, Samuels converted its Chapter 11 to a Chapter 7, meaning it is going to abandon any hope of reorganizing and simply fade away.
The Purchase and Sale Agreement between Samuels and Wells Fargo is 47 pages long. Nothing in it talks directly about customer warranties or maintenance agreements. If a customer bought jewelry on store credit, meaning the customer still owes for the jewelry, and a warranty is included as part of the purchase, by purchasing that account, Wells Fargo is also obligated to honor the warranty. But Wells Fargo is a bank, not a jeweler. Good luck going to your local Wells Fargo branch and asking them to clean your ring. You might be able to negotiate a reduction in what you owe for that jewelry because Wells can’t perform on the maintenance contract or warranty. On the other hand, if you’ve paid for your purchase in full, you’re just out of luck now that Samuels has closed its doors.
It’s a sad tale of a long-time business disappearing. Like Sports Authority, Toys R Us, Payless Shoes, Radio Shack and others, the customer is left holding the bag.