In the heart of the pandemic, when thousands of the nation’s retail stores were closed, the stationery chain Paper Source paid its top seven executives a combined $1.47 million in bonuses. Now that the company is in bankruptcy, its executives are seeking an additional $1 million in potential bonuses at the same time that many of the vendors it works with — largely greeting card companies run by women — are struggling to be repaid as little as $5,000.
The details of Paper Source’s executive bonuses came to light in a federal bankruptcy meeting of creditors late last week. On that same day, John P. Fitzgerald III, acting United States trustee, also submitted a 19-page objection to Paper Source’s request for executive bonuses and cited the case as an example of how excessive bankruptcy bonuses had become.
The case illustrates why Congress made sweeping changes to the bankruptcy code in 2005, he wrote, adding, “The Debtors have failed to meet their burden to demonstrate that the proposed bonus plan overcomes the restrictions Congress implemented.”
The card shop filed for Chapter 11 bankruptcy on March 2 in the Eastern District of Virginia, allowing it to restructure its more than $100 million in debt and shed expensive leases, which cost the company $36 million annually, without completely shutting its doors. The company, founded by Susan Lindstrom in 1983, began as a single store in Chicago and, as of its filing date, grew to 158 locations. Weeks before the coronavirus pandemic hit in March 2020, Paper Source bought 30 stores from its competitor Papyrus, following that company’s liquidation. Now, the company will close 11 of its stores but continue operating its other retail locations and e-commerce website.
But since its filing, dozens of greeting card vendors have come forward to say the company placed unusually large orders right before bankruptcy and then failed to pay them, leaving them owed thousands of dollars. Three vendors interviewed for this article say they are struggling to be repaid $5,000 to $20,000.
“Without any explanation or rationale about why the top executive would be entitled to bonuses, bonuses make no sense,” said Barbara Yong, an attorney with the law firm Golan Christie Taglia, who is representing 35 stationery vendors owed money by Paper Source.
When asked in the April 8 meeting of creditors why Paper Source paid those bonuses when the company was struggling, Paper Source Chief Financial Officer Ronald Kruczynski told the court that “it was to recognize, certainly, members of management for navigating the organization through the unprecedented pandemic.” He added that the bonuses were all designed to incentivize executives to stay.
During 2020, as Paper Source stores started to close, the company still paid its top five executives a combined $1.9 million in salaries, $560,000 in bonuses related to a deal with Papyrus and a $910,000 in year-end bonuses, according to bankruptcy filings. The company’s CEO, Winnie Park, received a $552,000 annual salary, a $250,000 bonus related to the sale of Papyrus stores and a $390,000 year-end bonus. Park is also a board director at Dollar Tree Stores and Express.
As Paper Source progresses through bankruptcy, it proposed to the bankruptcy court that it pay its top seven executives a combined additional $1 million in bonuses if they met certain benchmarks.
Park did not respond to questions about the bonus payments made to executives through the pandemic. But she said in a statement, “The pandemic had a very profound impact on our stores’ business as they were closed during the shelter-in-place order for three months followed by gradual reopening with strict capacity constraints to protect our customers and employees.”
Park also stressed that Paper Source had been pursuing alternatives to the Chapter 11 bankruptcy, initiating a sale process in January to find new capital investors. When that didn’t materialize, the company and its board on March 1 decided to file for bankruptcy. It did so the following day with a first bid from MidCap Financial to purchase its assets, providing continuity as a business through the pandemic and after, Park said.
The stationery store chain is one of many companies that have declared bankruptcy since the start of the pandemic, joining big-name clothing retailers JCPenney, Neiman Marcus and J. Crew on the long list. In court documents, Paper Source cites government-mandated shutdowns and restrictions during peak holidays like Easter and Mother’s Day, along with wedding cancellations, as damaging factors to its sales figures. It is also one of many companies like Fairway Market and Neiman Marcus that sought approval for executives paying themselves large bankruptcy bonuses as their companies were restructuring.
But Nancy B. Rapoport, a professor at the William S. Boyd School of Law at the University of Nevada, Las Vegas, noted that the request by Paper Source’s executive team was exceptional because it rewards them for meeting a relatively low bar in directing the company. She noted that in bankruptcies the court ultimately decides these bonuses.
“Inside bankruptcy, what people are arguing is that the world is completely different and they have to work harder just to keep up. We’re all doing more to keep up in the pandemic,” she said. “Why should they be treated differently?”
Rapoport added that paying large bonuses and not small amounts to unsecured creditors like greeting-card-makers sends a troubling message.
“They’re going to argue it wouldn’t change the distribution of dollars to unsecured creditors,” Rapoport said. “But these are real people. These are small-business owners. It does matter to them. They’re not people who pull in half a million dollars a year.”
Since Paper Source filed for bankruptcy on March 2, vendors said the company placed exponentially larger orders with vendors than usual — sometimes quadruple the size — weeks before declaring bankruptcy. Some card vendors believe it was done on purpose, leaving them with sizable unpaid invoices for filled orders.
They include Olga Krigman, founder and owner of Los-Angeles-based Offensive+Delightful, who worked with the company for the past decade. Right before Paper Source filed for bankruptcy, the company placed an order four times larger than normal, Krigman said in an interview.
Paper Source usually places orders of approximately $2,000 each month with Offensive+Delightful but in February made an $8,000 order. Paper Source owes her about $12,000. So far Paper Source paid her $900, which is less than 10 percent of what the company owes her.
“It's just even so much more disappointing because we've just held them up in such high regard for so long,” Krigman said.
Emily Wismer, owner of Lady Pilot Letterpress in Durham, North Carolina, said in an interview that Paper Source owes her over $5,000 — the cost of six months' rent for her — after the company made a $1,600 order in January and a $3,500 order in February. Wismer said the February order was “unusual” because it came on the heels of January’s and was three times the size of a typical order, with a shorter shipment timeline. Wismer said Paper Source so far paid her 10 percent of the total outstanding balance.
“We didn’t feel we could turn down such a small payment after 2020, which was extremely rough,” she said.
Paper Source’s Park said the company has been down approximately 20 percent in card inventory since last October and had been ordering large quantities from vendors since that fall. Park added that Paper Source’s e-commerce business alone grew over 1,000 percent in cards in 2020 due to the pandemic, fueling the need for greater inventory.
“The January and February orders were in line with what had been ordered to re-stock eCommerce and our stores, including 27 new Papyrus stores, which are primarily card stores,” she wrote.
Like Krigman, Wismer learned from fellow vendors in a Facebook group who said Paper Source had also placed larger-than-normal rushed orders shortly before declaring bankruptcy.
“By the time I shipped that order to them, they had to know that they were declaring bankruptcy, and that feels like a kick in the gut,” Wismer said.
Lisa Mohar, the founder of paper goods company Rhino Parade in New York City, who has been working with Paper Source for the past two years, said that while she liked working with the company, the buying team notoriously paid late and negotiated prices often. Unlike her other buyers, Paper Source also asked for bulk discounts and requested she agree to terms like allowing the company 60 days to pay for orders once received. Mohar’s counsel advised her not to disclose the specific amount owed to her by Paper Source.
“If you want to work with one of the biggest buyers in your industry, it’s kind of like you don’t have a choice,” she said. “I'm a one-woman operation here, so the fact that I could fulfill a big order to get to, you know, 150 stores that my mom can go to and brag about, like that's major.”
When told about Paper Source’s bonus request, Mohar said she has tried to impose stricter terms with the company going forward to protect her business.
“It feels and it sounds like stealing. But it’s totally legal,” Mohar said about the bonuses. “It’s something I will hold with me going into other deals and negotiations.”
Paper Source spokesperson Noreen Heron said in an email that “Paper Source has retail industry common practices regarding billing, which include negotiated payment terms from receipt date. All terms are negotiated up front as is standard with any retailer. We respect and support our vendors.”
Park also said the company started paying back vendors the week of March 8. She said Paper Source had been assured that certain vendors’ claims would be paid in full, which addresses almost all the shipments received in February. The balance will come from a critical vendor fund, which was approved by the court on March 3. For vendors to receive a critical vendor payment, however, Paper Source requires they confirm they will continue shipping their products to the company. Park does not dispute that Paper Source is offering vendors as little as 10 percent of what they are owed.
“We made an effort to pay as many vendors as possible on the first round,” Park said. “We continue to work with vendors who responded and would like to continue working with us moving forward.”
For now, the latest news that Paper Source had requested such large bonuses while so many vendors are struggling confirms suspicions these vendors have had for a while. Alex Gagné Glover, who started Chez Gagné Letterpress in Los Angeles, said Paper Source owes her $20,000 after placing orders of nearly $9,000 in January and $12,000 in February. She filed a claim for payment herself, choosing not to hire an attorney because of the cost. But she has not been paid for those January or February orders. She said she declined the partial payment Paper Source offered her because it was too low to justify continuing to do business with Paper Source.
While Chez Gagné Letterpress had a financial buffer after taking out an emergency disaster loan last year amid the pandemic, that missing $20,000 is still critical to her four-person operation.
“That's almost two months of operating expenses. I mean that's our rent, that’s payroll, that's me getting paid, that's making sure my nanny can get paid,” she said. “You can’t ask for million-dollar bonuses knowing that your vendors need to pay for their kids’ child care, not their third car.”