Life After Foreclosure

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November 14, 2008
Life After Foreclosure
By Ivan Solotaroff - Modern Jeweler

David Nygaard lost his stores and his house when his bank called in his line of credit. Here's what you can do to make sure it doesn't happen to you.

The incoming call on David Nygaard's cell is one of the few he wants to take these days: his wife, calling about company at home tonight for Friday pizza. "I can even pay for the pizza!" he deadpans, draining the last of his iced tea as we sit at a terra-cotta table outside Nygaard Fine Jewelry in a Chesapeake, Virginia mall. "We sold a carat FVS2 emerald today." Later, he tells me he was thinking of how narrowly he could boast of having a house to serve the pizza. Wachovia, which holds his business and personal loans, put his Dutch Colonial up for auction yesterday. There were no bids. So while packing at home continues for his family of eight, Nygaard knows where they're sleeping tonight. "All in all, a good day," he tells me, a little less deadpan. "Fed my kids this morning."

Inside, Nygaard's father, a retired Navy captain helping both financially and at the shop, is preparing to close up well before five. The 700 square foot shop, owned by Nygaard's wife and father, is what's left of a seven door, 38 employee mom and pop that some saw as an exemplar: heavily branded, accentuating private label fine cuts, and a luxurious retail experience at a strip mall level. And Nygaard, through interviews, panel appearances, industry position, and by example, had been a public figure. It all imploded on June 26, when Wachovia called Nygaard's loans and took possession of his inventory. He closed his doors five days later.

"Screening calls may be the hardest thing for me to get used to," Nygaard says in somber tones as he surveys neighbors and foot traffic in this very busy part of coastal Virginia. He's a very public figure here, and his David Nygaard Fine Jewelers a personality driven brand that for a decade has generated millions in annual sales on the strength of his good name and community presence. He's been equally front and center, even upbeat, about his failure, but the bulk of callers now are out-of-state creditors, and he has little to offer them. "I owe just about everybody," Nygaard says, such as debts to vendors, suppliers, and former employees that he ballparks in the $350,000 range.

That figure seems small, considering the number of vendors (some of whom have received subpoenas regarding their trade with Nygaard) currently clamoring for goods or money, principally loose diamonds on memo. "The problem," Nygaard amplifies, "is that while my vendors own goods on memo to me, under UCC [Uniform Commercial Code] regs, that ownership does not automatically secure their interest on them. Mailing me a diamond with terms does not keep it safe from liens on me-or anyone for that matter. That's just consignment, or a form of exculpated interest. It's up to them to protect their inventory by filing searchable UCC documents informing any bank holding the lien on their clients' property that, while that it may be a blanket lien, it does not apply to those specific goods. Modest UCC paperwork and fees, but unfortunately, not the way our handshake industry works."

He also owes former employees their last two weeks of pay, which he'd promised in good faith toward the end of June, knowing the end was near. The bank holding those funds, however, froze his assets the day after Wachovia closed him. "That's the bad part of being a public figure," Nygaard says. "I did eight interviews when our doors closed-enough for the bank handling our day-to-day finances to learn about it and freeze us. Otherwise, I would have at least been able to make payroll. The money's all there."

So are the memo goods, which sit in the safe of his flagship store in Virginia Beach alongside Nygaard's owned inventory. He estimates total cost of the goods at roughly $800,000, of which 35 percent by value are loose memo. Their replacement value, however, given the soaring costs of diamonds and precious metals, is north of $1 million. "What makes it particularly bad for the vendors," Nygaard sympathizes, "is they're not just out the dollar value of their goods, but their ability to borrow against the replacement value."

How then can he owe so little? "That's the silver lining, I guess." A private label branding pioneer who has long argued for "owning your merchandise, at the right price," Nygaard owned or had created the bulk of the goods in that safe.

A GOOD LOAN RISK

That debt figure, of course, also excludes his major creditor, Wachovia, which called in $1.6 million in two fixed notes and credit lines on June 26. Less than two years ago, after Nygaard left Carolinas and Virginia-based BB&T, his bank of 10 years, the multinational had been courting Nygaard. Aggressively.

As well they should have. Nygaard was a banker's dream, businessman of the year to the chambers of commerce of Virginia Beach, Hampton Roads, and the entire state. The state business magazines' "Success Story of the Year," "Top 40 Under 40," and owner of "Virginia's Best Place to Work." A G.G., senior/master appraiser, he sat on boards, headed a personal foundation that donated to local charities, hosted internships, assisted in church plantings, and spearheaded projects and participated in colloquia for integrating faith and ethics into business. He coached little league and his personal wealth was well into seven figures.

He reinvested much of it in his company, and securitized his loans (at Wachovia's request and now very much to his regret) by cross-collateralizing his family's home. His two notes and lines of credit performed optimally (he says he hadn't been late on a payment and had retired a tenth of the debt when the loans were called), and he did it while growing-his size, inventory and, more crucially, his business model, which was well on its way to complete vertical integration when the ax fell on June 26. Nygaard traveled to China, Thailand, and India to buy, he manufactured a line of private label designs and semi-mounts abroad, and had bench jewelers at all his doors (80 percent of his goods at any point were self-created).

Each store opening showed first year profits, as did his vertical integration, financed by a second note and credit line. "In the first year, gross margins for our vertical integration weren't just ahead of schedule," he says, "they were comparable to Tiffany, at 60 percent. Short of owning my own mine, there weren't many economies of scale and profit pools I'd left unaddressed."

What happened? "There's a 'nervous clause' in bank loans," Nygaard explains the fine print of his failure. "It's actually called that. It's a bank's ability to act, at its sole discretion, on 'material and adverse changes in the general economic and business environment.'" To be sure, Nygaard's economic and business environment had faced specific, horrific setbacks in the past year, but Wachovia's "material and adverse changes" were epic. A week after calling in Nygaard's loans, a day after closing his doors on June 30, the bank disclosed quarterly losses of $8.9 billion (later restated as $9.6 billion), losses attributed largely to the sub-prime failure. That's almost three times the losses at the far more heralded failure at Lehman Brothers.

"Wachovia needed cash immediately," he says. "They didn't get it by closing me, taking inventory they probably had no right to and certainly no clue how to handle, and by causing pay losses, job losses, career losses. From a simple perspective of their needs and the alternate courses of action available, it was just another piece of bad banking."

From Nygaard's perspective, however, it was also the end of a very troubled year for his stores; for the industry, which he feels is squeezing retailers with a 21st century diamond chain pushing rather than pulling inventory through; and for retailers at large.

The last time Nygaard faced such challenges, up and through 9/11, he expanded right into the teeth of it. He did it as well as could be done, but also likely too quickly and too often, both with his chain and inventory and with the travels and vertical integration. Given his personality driven brand, which relied on a very hands-on managerial style, he assumed either too much risk or work.

The first indication came with what he calls a "significant embezzlement," an employee theft. "We became aware of it last June, but it probably went back further. It may have been a single employee, but was more likely a 'sisterhood of thieves,' as I call them. It involved switching tags at different stores, and was fairly sophisticated." Nygaard and police managed to close it down with a sting operation, and police are still investigating the crime. Nygaard estimates as much as $300,000 to $400,000 was lost, out of an inventory of some $4 to $5 million.

The second clue he'd over-expanded came when five key employees left as he opened his fifth store. Stretched too thin, Nygaard failed to rehire and retrain sufficient replacements. Then Christmas 2007 came, or didn't, and by January 1, he could see his position was tenuous.

"Then the call came," Nygaard recalls of an early spring meeting. "Two guys who looked like stuffed suits, bland, from 100 miles up in Richmond. In the trade, they're known as the 'workout guys'-they don't want a personal relationship you might have with your own banker to interfere with this meeting. Their message was simple. Wachovia was interested in me finding another bank [to assume the risk of the $1.6 million on loan]. Sooner rather than later."

It couldn't have come at a worse time, with banks across the board reeling from the sub-prime crisis. Nygaard staged clearance sales at all his doors, then called in New York's Silverman Group, specialists who were currently liquidating Friedman's doors. "They're very good at their job," he says. "They came down in early May for liquidation sales with their own merchandise to fill out sales, and knew how to price and promote events for maximal return." In essence, Silverman bought Nygaard two months. Unable to draw on credit lines for operating deficits, the liquidation funds paid regular expenses, some of his vendors, and the $24,000 monthly nut on the notes and credit lines. Time enough also to arrange $1 million in replacement funding from another bank, which he offered to Wachovia in lieu of the $1.6 million.

They turned him down, and in early June advised Nygaard they no longer "wished to lend him money." The formal default notice came shortly after, demanding Nygaard secure inventory as collateral against the defaulted notes and credit lines. On June 26, he delivered his seven doors' inventory to his flagship store, a Virginia Beach bank building he's rented for over a decade. Independent appraisers brought in by Wachovia received the inventory, put a dollar value on it, locked it in his safe, left with the key, and Nygaard was officially out of the jewelry business. Or not.

FROM BOOM TO BUSTED

"Watching that safe close was a bitter moment," Nygaard says, "given the irony that my inventory was in a place I'd been keeping goods in overnight for 11 years. Significantly, and equally ironic, is that Wachovia, in yet another brilliant move, lost control of my inventory the moment they put it in that safe. They don't hold the lien on furnishings and fixtures at my properties. BB&T still has that, and thus controls my inventory for now."

To Nygaard, that safe symbolized far more than inventory. It was his entrée into the business as an owner, after a dozen years of helping out in Sandy's Touch of Gold, his mother's Virginia Beach jewelry shop, where he worked summers, part-time, then full-time out of business school. "I bought her out in 1995," he recalls. "She had 2,000 square feet, and did a half-million in business, which came to maybe $50-$60,000 profit a year. This was right around the time my first son was born. So I was concerned with how limited and risky a generational business could be."

The mid-'90s saw the consolidation of the banking industry, giving Nygaard and other aspirational jewelers across the country a chance to secure a space and layout well-suited to the jeweler's business. He rebranded the store and himself as a diamond destination, and it worked. First as a pioneer in then-fledgling brands like EightStar and Hearts On Fire, then as the private labeler of his own "Passion Fire" brand. By 1999, he was up to $2.2 million, and had seven employees. "Then Christmas 2000 tanked," he recalls, "through 9/11 and beyond, really. For another two years, we shrank to $1.3 million, from seven to four employees."

It was a bad time for single store U.S. jewelers, who in those two years would lose a quarter of the market share to the big boxes or outright failures. It couldn't have come at a worse time for the Nygaards. In 2000, a newborn son had a potentially fatal heart defect, requiring four surgeries. Then twin girls came three months premature in August '01, with a disease of the placenta that gave them a 10 percent chance to come home alive. (All the Nygaard kids are now thriving.)

Nygaard, then taking part-time MBA courses, responded by "doubling down," as he puts it. With a $500,000 note/credit line from BB&T, he began expanding, first to the Chesapeake location, then to five further doors over four years, with two others in the Virginia Beach area, to Newport News, Norfolk, the tourist destination of Williamsburg. By the sixth opening, when he found himself at the wrong end of a mall after the city of Newport News suddenly changed the ingress, he had developed a modular store construction plan that enabled him to shift locations almost overnight. Timing, he'd come to understand, was as crucial to success as margins, sales ratios, inventory, and the vertical integration and economies of scale afforded by expansion. He was on his way to a stated goal of $12 million in annual sales when time ran out.

Nygaard continues, "Time was also the one thing I couldn't manufacture, or control, and the core of my business model was to control as much as I could. Not tie myself to single vendors, or to branders or designers. Looking back, if I had a do-over here? For David Nygaard Fine Jewelers, I'd stop at store number four. Anytime your business undergoes an expansion of 20 percent, a total organizational revamp is needed. For my vendors, while I could lay the onus on them for not securing goods on memo to me, I wish I'd done more to protect them. I was just so busy from April on, doing everything I could to stay alive, but if I had to do it over, probably I could have advised them of my troubles more directly. I certainly got the word out to everyone with whom I did speak. As for simply sending them back goods, which some have accused me of not doing, the simple fact is I'd have been breaking the law if I did so. Just ask the guys with subpoenas about the back-and-forth of their trade with me this year."

It came as a bit of a surprise to see Nygaard at work in the Chesapeake store. Nygaard Fine Jewelers, a new LLC, 99 percent owned by Nygaard's father, owns the store, with Nygaard serving as a consultant. With a $1,600 lease, and total monthly overhead less than $5,000, Nygaard is back in business, situated to show profit, and in discussions to sell five of his other stores to a local businessman.

Even more surprising were the live diamonds in his cases. A number of dealers and manufacturers, including a sightholder melee specialist and a local loose dealer (both of whom Nygaard is heavily in debt to) have entrusted the stones on terms. Why would anyone in their right mind send memo goods to someone who's just defaulted on $1.6 million, and owes them money beside?

"They know, as any vendor who knows me well should know, that I have every intention, possibly even the means, to pay them back 100 cents on the dollar. I have also not hidden behind Chapter 7, so their goods remain under lock and key, and probably will for some time to come, short of Wachovia disposing of them." That seems unlikely. The Silverman Group offered $250,000 for the inventory; Nygaard's father offered $300,000. Silverman also proposed going out of business sales through December-with a proviso that Wachovia not touch anything until the sale's completion-and guaranteed the bank $600,000, after their own end of the sales. Wachovia turned down all the offers.

And where exactly does that leave this leading spokesman for vertical integration, expansion, private labeling, for taking charge of your business so that you can, in his own words, "thrive, not survive"?

In an interesting if scary place, actually. Nygaard has always been something of a "reluctant retailer," an idea man who valued his jewelry stores largely as laboratories for his business theories. Despite early entries into branding and private labeling, despite his exhaustive knowledge of crown angles and triple zeros, his G.G. and appraisal work, it was clear Nygaard didn't care that much about gemstones. He valued their valuations, lending added irony that Wachovia, with almost every banking specialist in valuating assets such as mortgages, failed so badly at their jobs. Though his immediate goal, short of keeping his family fed and housed, is to repay his vendors and employees, the long-term goal is to "finally get the Ph.D., start teaching, perhaps doing a bit of marketing consulting."

So what are the lessons other retailers should learn from this? "For any who may think of me as someone who took too many risks and failed, I'd certainly hope they don't use me as an excuse not to take charge of their businesses," says Nygaard. "If I have a principal regret about my risks, it would be in tying personal finances too closely to my business, my house and personal moneys reinvested. As for my performance, once I knew how much trouble we were facing? I should have foreseen my bank freezing the accounts, and written checks covering my employees' final two weeks. Big blunder there. For my vendors, I regret not getting them to securitize their inventory with me."

Is there hubris in your fall? "For a personality driven brand such as David Nygaard Fine Jewelers, it would be trusting my own skill-sets as a retailer, rather than taking a more realistic view of running a business, which at the end of the day, for a jeweler intent on growing that business, is about training systems and compensation packages. Those were the areas I failed most in as we grew. Even with the embezzlement. I felt it very strongly as a betrayal, but really, it couldn't have happened if I'd seen to my organizational revamp properly as we grew."

Any chance you'll get back into retail? Perhaps it's the sun setting on this Chesapeake strip mall, the need to get back for probably the last pizza party at his home, or simply the uncertain week around the corner, but Nygaard's not seeing it now.

"Businesspeople have been asking me for years: Is it really still viable to sell jewelry at retail? With those margins? Those sales per associate ratios? The Internet on one hand, and that overhead weight from a faulty supply chain? Two months ago, and I'm talking June, when I knew I was about to go under, I would have unequivocally said yes. It's not only viable, it's up there with the best opportunities available. I guess I still feel it's viable, but for myself, once I get this straightened out, I'd have to hope there are better opportunities out there."

 

> original story in Modern Jeweler