California Cos. Take Charge-Back Issue to Court
Two bankrupt Los Angeles apparel manufacturers are suing Federated Department Stores Inc. for what they claim are illegal charge-backs.
CFI/CLI Liquidating Trust, acting for the bankrupt manufacturer of the Carole Little and Chorus Line labels, filed a class- action lawsuit in December 2003 against a host of Federated-owned department stores for “unlawful and/or improper offsets and discounts.” Those stores include Bloomingdale’s Inc., Burdines Inc., The Bon Inc., Macy’s East Inc., Macy’s West Inc., Rich’s Department Stores Inc. and Stern’s-Misc. Inc.
Nick DeLeo, a Los Angeles manufacturer who filed for bankruptcy in 2003, announced on May 19 that he intends to join the class-action suit for illegal charge-backs, according to his attorney, Mark Brutzkus of Ezra, Brutzkus, Gubner. The class-action suit was filed in the Supreme Court of the State of New York.
DeLeo was president of the Royal Apparel Group, which acquired the William B. contemporary women’s label in early 2002 and was out of business by 2003.
Previously, Federated tried to have the class-action lawsuit dismissed, arguing that the company’s contracts with manufacturers allowed it to take the discounts. But in December 2004, New York Justice Bernard Fried allowed the case to go forward.
Federated has denied any wrongdoing in the charge-back issue. In a previous statement, Federated spokesperson Carol Sanger said the company was “paying higher prices upfront and then ’negotiating’ for [its] money back at the end.”
A charge-back, or markdown, is money that retailers take off the price they owe manufacturers. Charge-backs can be taken for goods arriving late or damaged or for selling at a discount. Manufacturers say that sometimes charge-backs are taken for things they never agreed to.
Clothing makers are hoping that a recent Securities and Exchange Commission investigation into Saks Inc.’s practice of collecting money from vendors will validate their long-held complaints about aggressive charge-back tactics. “I think the climate is right now in terms of what is going on,” Brutzkus said.
Ironically, it is only bankrupt manufacturers who are coming forward and filing their complaints. Many clothing makers are afraid that if they voice their discontent with the charge-back policy, they will lose their business with retail stores.
In April, the SEC began an inquiry into Saks Inc.’s collections from its vendors. The SEC’s investigation was started in part by one of Saks’ former vendors, Onward Kashiyama USA, which filed a suit against the company one year ago.
An internal investigation by Saks Inc. found that about $20 million in improper charge-backs were taken from vendors between 1999 and 2003. Saks said it will reimburse vendors for the money taken. After the internal investigation in early May, Saks asked its chief accounting officer, chief administrative officer and general counsel to resign.
Current and former vendors who wish to report their experiences or join the class-action lawsuit can call attorney Daniel Seltz at (212) 355-9500.
—Deborah Belgum
