Many of the more than 100 vendors at Rock Paper Scissors, a consignment store on Newport Avenue in Ocean Beach, have been clamoring for their money after the business stiffed them when it closed in early February. Several of the vendors report that, in the first few days after the closing, the store’s operator, Jeff Fagan, said the company was going into bankruptcy. Upon requests for the name of his attorney, however, he claimed there was no need to go bankrupt after all, since the company had no assets.
“That’s his word,” Shelter Island resident Jim Grant tells me. “One of the purposes of bankruptcy, as I understand it, is to shed light on all the company’s finances.”
Grant, a photographer, was one of the last vendors to sign up for space at Rock Paper Scissors. “All I had was a few feet on a wall for hanging my photos,” he says, “and I only paid $75 a month for that.” Vendors put down a deposit, paid monthly “license fees” for a space, and the following month were sent their profits, minus a 13 percent commission for the store.
“Before agreeing to the lease,” Grant continues, “I asked what the traffic was like, how business was going. They said great. So it shocked me when, less than two months later, they were closing up shop. I was one of the lucky ones, losing less than $400 — my deposit and the profits I earned in January. When I came in after hearing the store closed, Jeff and I got into it. He said I should just write off the money I lost on my next tax return. I told him, ‘Why don’t you pay what you owe me and claim that loss on your taxes?’ ”
Fagan began telling vendors to retrieve their inventory as soon as Rock Paper Scissors closed. Later in February, he sent them a letter with fuller explanations of what happened. “We were forced out of business due to the unprecedented economic calamity which has befallen both the United States and the entire world economy…,” he wrote. “The total collapse of the 2008 Holiday shopping season left us in an impossible cash flow bind, as a result of which we were unable to meet our operating expenses. This, combined with the nearly complete unavailability of commercial credit, as a result of the continuing financial meltdown, left us no choice but to close our doors.”
Additionally, Fagan cited “the loss of certain high volume vendors” and “somewhat lax management, motivated primarily out of compassion for our vendors.” The compassion came in the form of “impractically low” license fees, allowing some vendors “to slide” on the monthly payments, not enforcing late fees, and “allowing too many vendors the option of operating on a commission only basis.”
Fagan apologized for the financial losses the store’s closing was costing vendors. At the same time, he informed them in no uncertain terms that they’d not squeeze a cent out of him. As an owner of a limited liability company, Fagan told them, he would be protected by California law from any requirement to pay off company debts. “Persons or entities which are owed money by Rock Paper Scissors need to look solely to the Limited Liability Company for payment,” Fagan wrote.
The letter made mention of another business Fagan planned to open in Ocean Beach. “Ocean Beach will once again have a great store back in their community,” he wrote. “It will not be called Rock Paper Scissors. The name has yet to be determined.”
By the beginning of March, Fagan had opened the new business across the street from the former Rock Paper Scissors. The new name? Rock Paper Scissors Wholesale. In the next few weeks, Fagan traveled to Thailand to purchase inventory for the new business.
Jean Vavra is a Clairemont resident who began selling bath and body products at Rock Paper Scissors in mid-2007. She was paying $430 a month in rent until December, when she doubled her square footage. Then she started paying $960, though she says Fagan tried to get $1100.
“I don’t believe limited liability companies are designed for [what Fagan’s done]. Thailand and the store across the street are where the lost assets went,” says Vavra, who lost roughly $1300 in rent, profits, and deposit when Rock Paper Scissors closed.
Vavra is running a cottage industry. “I started my bath and body business in the kitchen of my house in 2000, and it was just street fairs in the beginning. Now I have reps around the country. I started doing the retail — these little co-op stores like Rock Paper Scissors — to help my sales and to better know what products were moving and how to merchandise and sell my line better.”
A number of other stores in the San Diego area follow a business model similar to the one Rock Paper Scissors used. Vavra sells in three of them: Pangaea Outpost in Pacific Beach, Eye of Buddha in Hillcrest, and Leaping Lotus of Solana Beach. “All of them operate on the up-and-up,” says Vavra.
“I started doing it for fun,” she continues. “I made soap for years, then gave it away for Christmas one year, and people later said that it helped them with their eczema and they wanted to order it. So I started selling it on the side, and I got tired of the corporate world — I was the manager of the accounting department for a title insurance company. In 2000, I quit my job and started this full-time.
“We have different things we make from scratch. And we have some things we get a lab to make for us. We then just add our scents and colors and put it in our packaging. I doubled, or nearly doubled, the first four years and had double-digit growth every year since, even last year with this economy. Then I started buying other lines. Now I resell for other companies as well.
“So it’s really disheartening what Fagan’s done,” says Vavra, “because vendors have to have absolute faith that the store is paying you correctly, legitimately. I would love to have him audited to see what he was putting into his own accounts.”
From her Point Loma home, Rebecca Berggren can look down on Newport Avenue. “I was one of the first vendors at Rock Paper Scissors,” she tells me. “I started selling my products there in June 2006.”
Under her business name, Karma Market, Berggren sells fair-trade jewelry and home decor. “The fair-trade movement,” she says, “markets products that are certified to have been produced justly, no child labor or debilitating working conditions involved. It means that the people who create the jewelry are all paid a fair wage. You can buy these products instead of purchasing jewelry that may have been created in a sweatshop or by kids abroad. The movement helps support artisans around the world. The reason I went into Fagan’s store was to give fair trade some exposure in local communities.”
Berggren says she experienced no problems with Fagan until the end. She was paying $300 a month until, in January, her rent rose to $500. Then came February 3, when Fagan began informing vendors that Rock Paper Scissors was closing. “By that time, I had already taken my products out of the store, so I was lucky in that way, I guess. In December, I noticed that my sales had dropped significantly versus the previous December, and I figured it was probably time, plus Karma Market is a second job,” says Berggren. Her first is marketing aquariums.
“When I received word that Fagan was closing down,” she continues, “and he told us he was going bankrupt, I hightailed it to the bank. I was hoping there still would be money in the bank to cover the December check that he wrote me.”
But the bank told Berggren there were insufficient funds to cover the check. The check was a little over $1500. By the time January’s figures came in, Berggren was owed a little over $2500.
Berggren suspects that Fagan “commingled” vendors’ profits with his own funds. “The products were never his to sell for his profit,” she says. “The money was never his to use.” The separation of vendors’ spaces in the store, she thinks, should have meant that, in bookkeeping, their profit accounts were kept separate from each other’s and any store accounts. If profits were put into and never taken out of vendors’ accounts, they would still have been there at the end. Fagan then would have been able to pay off vendors on the day Rock Paper Scissors closed.
One other vendor with whom I spoke briefly said that is exactly what happened at a similar store in which she also sold products. When the store announced it was going bankrupt, it invited all vendors in to collect their last profits and any other money in their accounts.
If Fagan did commingle funds to pay his bills, the vendors who lost money might be able to prevail in court. To check the possibilities, I place a call to Paul Graf, professor of business law at SDSU. Graf tells me that corporations and limited liability companies are different for tax purposes but similar in protecting owners from the organizations’ debts.
How about, I ask, if Fagan commingled vendors’ profits with his own funds? “Ah, commingling is a different matter,” Graf says. “If that were proved, it could allow for what’s called ‘piercing the corporate veil.’ ” Then, even in small-claims court, “where you can get good justice,” he says, the judge might want to put aside limitations on liability to enforce fairness. “Although the small-claims process for an individual takes some time, I would not want to discourage any claimants from using that process. I frankly do not know if a small-claims judge will contemplate a class action. It may be necessary to file the class action in a regular court.”
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