Southern Season expansion faltered early, new lawsuit reveals

Former Southern Season executives Clay Hamner and Brian Fauver won a federal lawsuit accusing them of financial fraud stemming from the company’s 2016 bankruptcy. The flagship store in Chapel Hill has since been purchased by Calvert Retail and is under new ownership.
Former Southern Season executives Clay Hamner and Brian Fauver won a federal lawsuit accusing them of financial fraud stemming from the company’s 2016 bankruptcy. The flagship store in Chapel Hill has since been purchased by Calvert Retail and is under new ownership. News & Observer file photo

Southern Season, the Chapel Hill-based gourmet food emporium that filed for bankruptcy last year, ran into financial problems soon after it opened its Richmond store and restaurant in 2014, according to new details disclosed in a lawsuit filed in federal district court in Virginia.

Southern Season’s landlord in Richmond invested in the money-losing operation based on incomplete financial information, according to the lawsuit. The landlord, GGC Associates, is now seeking to get its money back and also is seeking punitive damages from two former company executives.

The executives contend the lawsuit is groundless and should be dismissed.

The Richmond store was part of Southern Season’s ambitious strategy to replicate the specialty food business’ success in Chapel Hill throughout the Southeast. Instead, the expansion into Virginia and South Carolina ultimately forced the entire company into bankruptcy, prompting a fire sale to new owners.

Two months before the bankruptcy filing, however, the 53,000-square-foot store in Richmond was shut down last year, less than two years after it opened, and the building remains vacant.

“It just didn’t ramp up as fast as we thought it would,” W. Clay Hamner, Southern Season’s former CEO, said in a phone interview. “We lost less money being closed than being open.”

In the federal lawsuit, GGC is seeking $450,000 from Hamner and Brian Fauver, Southern Season’s former chief financial officer, both of whom live in Chapel Hill and oversaw the ill-fated expansion. GGC says it had agreed to invest in Southern Season because the Richmond store was struggling, making late rent payments and seeking reductions in its monthly rent.

Today Southern Season is operating under new ownership, Calvert Retail, which acquired the Chapel Hill store and related assets for $3.5 million last year. Calvert Retail isn’t involved in the $18.3 million bankruptcy proceeding being handled under the name SSI Liquidation, which involves Southern Season’s debts to vendors before the company was sold.

A slow financial start is not unexpected for a new business in a new location, and three years ago Southern Season executives estimated they would need at least two years to achieve its profitability target in Richmond, Hamner said. At the time, Southern Season was plotting a Southeast blitz with stores in Asheville, Charleston, S.C., and Richmond.

Southern Season established a following in Chapel Hill drawn to the retailer’s blend of gourmet cuisine, upscale food market, specialty kitchenware and cooking classes.

According to GGC’s lawsuit, Southern Season had signed a 20-year lease in Richmond but “struggled to pay rent as agreed, failing to make its first three payments on time.”

The store was paying about $98,000 a month in rent, said Hamner, Southern Season’s CEO from 2011 until last year. He said Southern Season was sometimes late on rent but never missed a monthly rent payment.

Hamner said the Richmond store got off to a strong start in 2014 because it opened in August, before the Christmas season, the company’s busiest period, with much fanfare and heightened customer interest. But the attention quickly waned and there was no loyal customer base in Richmond as there was in Chapel Hill, where the flagship store opened in 1975. By 2015, the Richmond store was losing more than $1 million a year, Hamner said, and the losses got worse in 2016.

Trying to salvage the operation, the food retailer asked its Richmond landlord for a reduction or deferral in rent, or a release from its $550,000 letter of credit, which is a bank document that served as a security deposit. As long as the letter of credit was valid, Southern Season couldn’t take out additional loans because it was on the hook for the deposit, the lawsuit says.

GGC agreed to help out by making equity investments of $25,000 a month in Southern Season for 12 months, totaling up to $300,000, equivalent to a 25 percent reduction in Southern Season’s rent. GGC made its initial investment 11 months before Southern Season declared bankruptcy. Hamner said GGC made the monthly payments when Southern Season paid rent on time, within the first 10 days of the month; the lawsuit indicates only four investment payments were made, suggesting that most months the rent payments were late.

The Richmond landlord says it made the investments on the belief that the letter of credit was still valid. In April 2016, the month that the Richmond store was closed, GGC found out the letter of credit was no longer in place, the lawsuit says.

GGC is seeking to recover the $100,000 it invested plus $350,000 in punitive damages – the maximum allowed in Virginia – from the two executives for allegedly misleading GGC about the status of the letter of credit. GGC filed its case in Henrico Circuit Court in April and moved the case last month to the U.S. District Court for the Eastern District of Virginia.

Hamner said that when Southern Season was informed the letter of credit had lapsed, the company simply paid a cash deposit to GGC in lieu of the letter of credit, and GGC continued making monthly equity investment payments.

Fauver, Southern Season’s former chief financial officer, could not be reached for comment. Lawyers for Fauver and GGC could not be reached or declined comment.

In court filings, Fauver is asking the court to dismiss the case against him, saying in court pleadings this month that GGC’s lawsuit doesn’t identify him as making untrue statements about the letter of credit.

Hamner’s filings deny he misled GGC about the letter of credit.

John Murawski: 919-829-8932, @johnmurawski