Trees, Fruit, Evidence, Knowledge

E-COMMERCE REPORT
Questioning Eziba's Decisions
By BOB TEDESCHI

Which creditors should a financially troubled company pay first, Rwandan widows or its bank?

“When Eziba, an online retailer, declared bankruptcy last year, it left behind more than the usual amount of financial pain.

The privately held company had built a considerable business by selling hand-made goods from local artisans around the world through catalogs, stores and its own Web site. But hundreds of those suppliers were left unpaid when Eziba encountered financial trouble. Some of the company's critics, including those at Overstock.com, which later bought the company's assets, are now questioning Eziba's decision to forgo payments.

Since its debut in 1999, Eziba was never shy about publicizing the benefits it bestowed on vendors around the world. The company said it paid a total of $10 million to groups like Rwandan basket weavers, many of them widows of that country's war, and South African papier mâché artists.

But when Eziba's financial fortunes soured late last year, the company paid off a $500,000 bank loan instead of paying hundreds of artisans more than $100,000 it owed them.

Eziba said that paying off the loan was the best business practice - a contention disputed by some bankruptcy law specialists.

Shortly after paying the loan, the company entered a voluntary liquidation process in hopes of paying off creditors like the New York public relations firm Ruder Finn, among others. (According to Emmanuel Tchividjian, a Ruder Finn senior vice president, his company, which was owed $11,000, was more concerned with protecting the interests of the Rwandan artisans, whose work Ruder Finn publicized, than recovering its money.) The bankruptcy proceedings are continuing.

But the creditors then petitioned for Chapter 7 bankruptcy proceedings after a liquidation attorney told them that a bankruptcy trustee might be able to recover the $500,000 payment - which it subsequently did - and thereby increase the amount available to pay themselves and the artisans.

Overstock.com, the publicly held online seller of discount merchandise, bought Eziba's assets from the bankruptcy trustee for $500,000, a price unrelated to the bank loan, and announced that it would pay the artisans in full, even though it is not legally obliged to do so. Overstock further said that it would try to revive their businesses by selling their goods on Worldstock.com, an Overstock division with a mission similar to Eziba's.…

Patrick Byrne, Overstock's chief executive, said last week that Overstock had already begun identifying and paying artisans, although he welcomed Eziba's help. Earlier this month, for instance, Overstock paid a debt of $23,000 that Eziba owed to the Rwandan widows. But Mr. Byrne also said he felt that Mr. Sabot and Eziba committed grave ethical lapses by not paying its artisans when it had the money to do so.

‘I smell skunk,’ Mr. Byrne said. ‘Even if Eziba really did have to repay the bank loan when it did, which I don't believe, the fact remains that they had eight months to pay the Rwandan widows $23,000 and they chose not to.’ ”

…Elizabeth Warren, a professor of law at Harvard Law School and a bankruptcy law specialist, said Eziba was not legally obligated to pay the bank first.

"Until it filed for bankruptcy, company management decided the order of payment," she said in an interview. "They preferred the bank, while the artisans were shut out. They may have had business or personal reasons for doing that, but they didn't have legal reasons."

The bankruptcy trustee handling Eziba's case, Jack E. Houghton Jr., did not return calls seeking comment. Mr. Sabot said he could not fully account for the fact that Eziba had not paid the Rwandan widows for baskets that had been shipped in May. He referred questions to Mr. Miller, who, through last fall, was engaged in a last-ditch effort to engineer a holiday sales season big enough to keep the company afloat.

"I was operating a company under very difficult circumstances," Mr. Miller said. "And we were operating under the assumption that there was another round of financing coming in so we could keep the company going and pay off everyone. Unfortunately, that didn't happen." He added that the widows, among others, had been paid about $100,000 to that point for baskets they had produced starting in 2003.

The delinquent $23,000 in payments still represented a considerable hardship for the widows, according to Kaliza Karuretwa, the counselor for trade at the Rwandan Embassy in Washington, who has been in contact with the artisans. For every basket they sold to Eziba for $18 (which was in turn priced at $55 by the company), the widows could feed a family of six for two weeks, Ms. Karuretwa said.

Also left unpaid was a cooperative of South African artisans called the African Art Factory, which was owed $80,000, according Janet Pillai, the Art Factory's chief executive. Artisans in Afghanistan, Bolivia, Bosnia and the Middle East were also owed thousands of dollars.…

http://www.nytimes.com/2005/04/18/technology/18ecom.html