For the bankrupt Ann Arbor retailer formerly known as The M Den, there were serious money problems long before last month's Chapter 11 filing.
In February, University of Michigan athletic director Warde Manuel wrote a letter to one of the retailer's co-owners, detailing how the university's audit of the business's accounting records found M-Den to have been insolvent since as far back as December 2020.
The audit also found the retailer made cash distributions to its owners of over $1 million in 2022 and $790,000 for the year through November 2023 — even as the business owed millions in unpaid royalties to U-M and millions more to merchandise vendors.
The retailer then "dropped" a $3.8 million check at a reception desk at the U-M athletic department on Jan. 31, according to Manuel's letter, but without alerting anyone that the envelope contained such a big check.
But when the university later tried to cash the check, it was twice rejected for insufficient funds.
At the time of the Feb. 7 letter, M-Den was still the "official" retailer of the U-M athletic department with rights to operate "The M Den" name. Under terms of that agreement, U-M could immediately cancel the deal if the retailer became insolvent for two months.
"Your correspondence ... states an interest in preserving your relationship with the University of Michigan, but M-Den's conduct proves otherwise," Manuel wrote in the letter to M-Den co-owner Scott Hirth, which was shared in a recent bankruptcy court filing. "Despite M-Den's assurances, its conduct suggests that M-Den is wasting assets, bleeding cash out of the business rather than paying its vendors or paying down its obligation with the university."
The athletic department ultimately gave M-Den several extensions before terminating the "official" retailer deal last month and issuing a cease and desist on Aug. 15 over use of "The M Den" name. The following day, the retailer — now known as Heritage Collegiate Apparel — filed for reorganization bankruptcy.
U-M went on to announce it had handed off rights to the "M Den" name to a new "official" retailer: the private equity-backed Legends Global Merchandise, headquartered in New York. Legends is now up and doing business at the website MDenshop.com
The now-bankrupt Ann Arbor retailer had held the M Den contract almost continuously since the early 1990s.
The athletic department has the largest unsecured creditor claim in the retailer's bankruptcy — $8.8 million for unpaid royalties, documents show. The bankruptcy filing estimated the retailer's liabilities as between $10 million and $50 million and the number of creditors between 100 and 200. It once employed 151 people before closing stores last month.
Bankruptcy documents say ownership of the retailer had been split between Hirth, Julie Corrin and Steve Horning.
A lawyer for the retailer, Kim Hillary of Schafer & Weiner, said Monday that the cash distributions to M-Den owners referenced in the athletic director's letter were for covering the business's tax bills in 2022 and 2023. That is a common arrangement for businesses structured as S Corporations, she said, and is how the retailer historically paid taxes.
The letter also questioned repeated payments to a firm called "SSJ Holdings." According to the retailer's lawyer, those payments were for credit card processing fees and loan repayments.
Heritage Collegiate — the former M Den — is now racing to sell itself so that its buyer gets the financial benefit of NCAA football season merchandise sales. The latest timeline for the sale process shows a Sept. 13 deadline for submitting bids and a Sept. 17 auction date.
The two known bidders so far are Legends and Lids Holdings, according to court documents.
Lids' opening bid, known as the stalking horse bid, is 62% of the cost value of the retailer's inventory on hand at the time of the sale's closure date, estimated to equal about $4.25 million. Legends' bid would pay 64% of the inventory cost value, court documents say.
'Cash overdraft position'
U-M's athletic director said in the February letter that by the end of 2020, M-Den's total liabilities exceeded its assets by nearly $2 million, putting M-Den in "a cash overdraft position."
As of last November, M-Den had a $389,758 bank balance and $14.7 million in liabilities — nearly half of which was money owed to U-M, according to the letter.
Manuel told Hirth in the letter that the university was open to rescinding its potential termination of the official retailer deal if M-Den could immediately provide U-M with a $6.4 million bank check.
"We cannot overstate the importance of your immediate attention to this matter," Manuel wrote.
A U-M athletic department official did not respond Monday afternoon to a message seeking comment for this article.
Hirthrecently describedin court documents how the pandemic and related supply-chain issues among vendors plunged the business into a deep financial hole, one so deep that even surging sales from the football team's 2023 national championship season couldn't lift it out.
More:M Den co-owner blames pandemic for retailer's bankruptcy
Contact JC Reindl: 313-378-5460 or jcreindl@freepress.com. Follow him on X @jcreindl
