Lender sues shareholders of LoveSac

WASHINGTON — A company that lent bankrupt furniture maker LoveSac Corp. $2.8 million has sued some of the company's shareholders for fraud.

In a lawsuit filed Wednesday in the U.S. Bankruptcy Court in Wilmington, Del., G&G LLC, a lender based in McLean, Va., said a group of LoveSac shareholders engaged in fraud by wildly overestimating the value of property in an appraisal G&G used when it lent the money to LoveSac in 2003.

Salt Lake-based LoveSac makes "oversize" stuffed furniture, similar to bean bags.

In making the loan, G&G said it relied on an appraisal provided the shareholders that said the property, in Weber County, was worth $34 million.

G&G later learned the property pledged as collateral was worth just a fraction of its appraised value because its water rights weren't included in the deal.

Named in the lawsuit were the property's original owner Neilson Livestock LLC, appraiser Phillip Snell and LoveSac director Craig Cox.

According to the suit, in 2003 the shareholders contributed real estate to LoveSac to make it creditworthy. LoveSac then pledged it as collateral to G&G. In return, Neilson and Cox received 20,000 shares of LoveSac common stock.

Following LoveSac's Chapter 11 filling, G&G said it learned that the water rights to the property hadn't been transferred to LoveSac. G&G said it doesn't expect to be able to sell the property for more than $450,000.

G&G claims it has lost about $3.3 million. It's seeking to recover that amount as well as treble damages.

An initial hearing on the dispute is scheduled for Sept. 25 in the Wilmington bankruptcy court.

LoveSac, dragged down by overexpansion and a heavy debt load, filed for Chapter 11 protection in Wilmington in January. The privately held company listed assets of $11.5 million and debts of $14.5 million.

At the time of its filing, the company had 78 stores and about 400 employees.

LoveSac was founded in 1995 by Shawn Nelson, who gained a measure of fame after winning the top prize in Virgin Group founder Richard Branson's "Rebel Billionaire" reality TV show.