The U.S. trustee overseeing the liquidation of Merry-Go-Round Enterprises said yesterday that former Chief Executive Officer Richard P. Crystal mismanaged the business in its final days, costing the retailer millions of dollars by making unrealistic projections, failing to prepare for the sale of assets and leaving the company in disarray.
U.S. Bankruptcy Court Judge E. Stephen Derby issued a second 10-day restraining order blocking Mr. Crystal from drawing on nearly $2 million under his contract after interim trustee Deborah Hunt Devan asked for more time to look into the matter. The first restraining order was set to expire today.
Merry-Go-Round, a once-thriving national apparel chain based in Joppa, collapsed Feb. 2, less than seven months after the arrival of Mr. Crystal, a veteran merchant from New York brought in to resuscitate the retailer. But Ms. Devan alleged in a complaint filed in court yesterday that Mr. Crystal compounded the problems in one of the nation's largest Chapter 7 bankruptcy cases. The trustee said that Mr. Crystal:
"Failed to have adequate contingency plans for an orderly liquidation."
"Produced operating projections which were unrealistic and which other responsible employees of MGRE advised Richard Crystal were not achievable."
"Caused such unrealistic projections to be given to the various creditor groups and parties in interest."
"Failed to exercise the judgment and management skills required of a reasonably prudent corporation president."
"As a direct result of Crystal's failure to actively conduct an inventory, the estate incurred losses of upwards of $3 million," Ms. Devan said in her court filing. "These losses are directly attributable to Crystal's lack of diligence and he is therefore responsible for them."
Ms. Devan, who assumed control of the company March 2, said before the hearing: "Why didn't the company know what was happening?"
Mr. Crystal, making a rare appearance in court yesterday, declined to comment. He is still on the company payroll, making about $54,000 a month. John M. Callagy, one of Mr. Crystal's three attorneys in court, dismissed the trustee's findings as "nebulous wrong-doing" and "vague innuendo" that would damage Mr. Crystal's reputation. He called on the judge to restrain what parties said to the media. The judge did not.
Mr. Callagy also insisted that his client had the right to draw on the estimated $1.9 million agreed to in Mr. Crystal's contract, a sum backed by a letter of credit in the event of Merry-Go-Round's liquidation.
Ms. Devan, however, asked the court to reconsider Mr. Crystal's compensation.
"It was not foreseeable that Crystal would have such a complete lack of success in his reorganization efforts," she said in her filings. "Therefore the court should disallow compensation previously authorized."
Price O. Gielen, attorney for the trustee, said there is a question about whether Mr. Crystal gave proper notice of his resignation on Feb. 15, and at what point after giving notice he could draw on his letter of credit.
Mr. Gielen said Mr. Crystal "basically washed his hands" of the company after Feb. 15 and the trustee has been "inundated with allegations with potentially improper and certainly very, very poor decision-making."
In the trustee's complaint, Ms. Devan said she found "all aspects of MGRE's business liquidations were in substantial disarray" when she assumed control of the company March 2. In addition, she said, she found that Mr. Crystal unnecessarily delayed taking inventory of the retailer's assets, then created more costs and confusion by allowing the inventory to be shipped while taking inventory.
Questions over Mr. Crystal's compensation come as the trustee is conducting the retailer's going-out-of-business sale and winding down an operation that now has about 280 stores and 1,200 employees left.
"I'm doing whatever I can to preserve the assets of the estate for creditors," Ms. Devan said before yesterday's hearing. "We are in a situation, given the timing, that the [$1.9 million letter of credit] can be drawn down by Mr. Crystal before we have an opportunity to investigate all the facts. My view of the business operation is, he's the president and the buck stops at his desk."
Some former Merry-Go-Round employees said they agree.
"There are many employees who are hurting financially right now; Richard Crystal is not," said Keith Krabbe, a former merchandise planner. "He should be held accountable somewhat for whatever mistakes he made while he was CEO." A hearing is scheduled at 10 a.m. March 21.
Pub Date: 3/13/96