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Forever 21 Accused by Creditor of Inflating Sales Projections

An Alabama mall owner is suing Forever 21 for providing misleading sales targets in leasing negotiations.

(Bloomberg)—Forever 21 Inc. can add a lawsuit to the hurdles it’s trying to overcome as it works to woo investors in time to finance its exit from bankruptcy.

An Alabama mall owner is suing Forever 21, saying it lost millions of dollars leasing space to the retailer based on misleading sales targets.

Forever 21 is accused of misrepresenting sales projections for a store it opened in Allied Development of Alabama’s Eastern Shore shopping mall, promising yearly revenue of at least $6 million but delivering only about $1.6 million its first year in business, according to court documents filed Nov. 22.

Gross Sales

In 2017, Allied Development struck a deal with Forever 21 that allowed the apparel retailer to peg its rent payment to its monthly gross sales. The store would turn over 5% of its monthly sales, as well as a bonus of 1% of yearly sales in excess of $7 million, according to the agreement.

But the retailer used false information to back up projections it gave as part of the deal, according to the filing. Forever 21 based the projections on sales at its nearby store in Mobile, Alabama, which it said had generated $6 million in 2017, Allied Development said in the court filings.

That store generated only $2 million in gross sales during 2017, according to the court documents.

Floodgates

Forever 21 is asking the court to dismiss the complaint, according to court papers filed Dec. 26. Allowing it to proceed “could potentially open the floodgates to holders of prepetition claims who are similarly unwilling to wait their turn through the claims reconciliation process.” The retailer also says the filing violates the automatic stay that halts certain actions by creditors when a company files for bankruptcy.

Allied Development is seeking damages of at least $2.1 million to reflect the capital improvements it made to the space as part of its agreement with Forever 21, as well as at least $6 million in punitive damages.

Forever 21 filed for bankruptcy on Sept. 29 with plans to cut at least 178 domestic outlets from its approximately 800 stores, after a disastrous expansion outside the U.S. A pre-trial conference has been scheduled for Jan. 27 in U.S. Bankruptcy Court in Wilmington, Delaware.

The case is Allied Development of Alabama, LLC et al v. Forever 21, Inc. et al 19-12122, U.S. Bankruptcy Court for the District of Delaware.

To contact the reporter on this story: Eliza Ronalds-Hannon in New York at [email protected].

To contact the editors responsible for this story: Rick Green at [email protected]

Dawn McCarty, Adam Cataldo

© 2020 Bloomberg L.P.

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