Paper Source Bankruptcy Squeezes Small Greeting Card Sellers

(Bloomberg) -- The bankruptcy filing of Paper Source Inc. is squeezing small vendors the stationery chain uses to stock its shelves with greeting cards.

Paper Source placed unusually large orders with greeting card suppliers in the months and weeks preceding the bankruptcy, according to interviews with two vendors and an outpouring of online complaints. The bankruptcy filing means that payment for those orders may be delayed and, in some cases, possibly never repaid in full.

“If they were worried that we wouldn't ship to them, they should've just paid up front for the product,” said Janie Velencia, owner of The Card Bureau in Washington, D.C. “$15,000 to them, that's nothing. To a small business like me, that's payroll, that's rent.”

Paper Source ordered more from The Card Bureau in a 60-day period than it had in all of 2020, according to Velencia. The chain ordered $5,000 worth of merchandise within 20 days of the filing and $10,000 in the weeks before that, she said.

Vendors were asked for larger-than-usual orders after the holidays because Paper Source needed to stock 27 new stores it acquired from Papyrus, another stationery chain that went bankrupt last year, Chief Executive Officer Winnie Park said in an emailed statement. Most of the orders will get a higher repayment priority in bankruptcy because of their proximity to the filing, Park said.

“We apologize for the inconvenience this brings to the community of makers for Paper Source,” Park said. “This is a difficult time for the entire Paper Source community, our company and its makers. We care tremendously about our makers, especially as many of them are small business owners.”

Read more: Paper Source Sets Sale to Apollo-Backed Lender in Bankruptcy

Paper Source filed for bankruptcy this week with plans to sell itself to lenders. The retailer, currently owned by Investcorp International Inc., has 158 stores across the U.S. and about 1,700 employees. It has more than $100 million of debt.

Last year, after temporarily shutting its stores amid the Covid-19 pandemic, Paper Source sought rent breaks from landlords and stretched payment terms with vendors in light of dwindling liquidity, court papers show. Its bankruptcy filing included fresh financing, and the company said in a statement Tuesday that it has ample liquidity to pay vendors going forward.

Exactly when Paper Source received the pre-bankruptcy orders will likely play a large role in how much money vendors like Velencia will recover. Under bankruptcy rules, orders received within the 20 days of a bankruptcy filing can become so-called administrative claims, which puts the supplier's claim higher in the repayment line and increases the likelihood of it being paid in full. Prior to that period, though, vendors may be considered general unsecured creditors that often get just pennies on the dollar after months or years of legal proceedings.

Steel Petal Press, a Chicago-based greeting card maker, has five open invoices from Paper Source, owner Shayna Norwood said in an interview Friday. Two of the orders are from more than 20 days ago, she said.

“We're still recovering from the pandemic and 2020, so to have to deal with this puts a wrench in the works,” Norwood said, adding that she is aware of more than 200 small vendors affected by the bankruptcy. “It's going to be a less-smooth transition.”

The case is Paper Source Inc., 21-30660, U.S. Bankruptcy Court for the Eastern District of Virginia (Richmond). To view the docket on Bloomberg Law, click here.

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