Shawn Nelson

Salt Lake-based LoveSac Corp. on Monday filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the District of Delaware.

Shawn Nelson, who founded the company that makes "oversize" stuffed furniture, similar to bean bags, with some friends in 1998 from the basement of his mother's Millcreek home, touted his product line as "hard-core leisure."

"We're a funky lifestyle brand," Nelson told the Deseret Morning News in October 2005. "We are really serious about how people waste their time."

Now the company must get serious about its finances.

According to court documents, LoveSac's 30 largest unsecured claims total more than $3.2 million, including a number of Utah firms owed tens of thousands of dollars. Estimated assets of the company are less than $500,000.

Wayne Schmirler, president of Sino China Trading Limited, a Hong Kong registered company and one of LoveSac's unsecured creditors, said his company will end up losing roughly $1.2 million from LoveSac's bankruptcy filing.

"Who the hell is protecting us?" Schmirler said. "We didn't even get the courtesy of a phone call. We just got nailed."

Schmirler said his company acted as an agent on behalf of LoveSac, placing orders with five Chinese factories, which made the chairs and accessories. In many cases, Schmirler said, vendors bent over backward to try and help LoveSac. Now Schmirler said his family-operated business of eight years may be forced into bankruptcy itself.

"We're out $1.2 million of product that is sitting in his stores," Schmirler said. "He buys it and marks it up 10 times and then sells it, and he's being protected from us? He really has jerked a lot of money out of someplace."

Schmirler said LoveSac has always had trouble paying him. As recently as December, Schmirler said Nelson came to him and said he could not meet a payment, asking for an extension into 2006.

Calls to Nelson and Doyle Judd, LoveSac's chief financial officer, seeking comment on the bankruptcy filing were not returned Thursday.

Darrell Jakins, co-owner of Orem-based Ensign Group International, which is owed $126,000, said LoveSac's filing won't put his company out of business, but it will hurt.

"I don't know that I am going to get all of that back, but I expect I will get something back," Jakins said. "If they continue to do business, then we would certainly like to do business with them. We think that they've got an exciting brand."

A year ago Nelson came away with $1 million from billionaire Richard Branson, the owner of Virgin Atlantic Airways, after winning Fox TV's reality show "The Rebel Billionaire." Nelson said he handed his winnings over to his chief financial officer to further grow the company.

In October, Nelson said LoveSac's 2005 sales would top $30 million. LoveSac operates 74 stores, including six locations in Utah, and has roughly 700 employees.

Less than four months ago, LoveSac was named the winner of the Utah 100 awards, a ranking of the state's fastest revenue growth companies.

Devin Thorpe, founder of Thorpe Capital, a Salt Lake-based investment bank, said fast-growing companies always need more capital.

"We know that LoveSac opened dozens of stores in the last year," Thorpe said. "As Utah's fastest-growing company for the years 2000 through 2004 they raised a lot of money; much of that, however, was structured as debt."

Also this week, a bankruptcy judge ordered a consolidation into one case of three of LoveSac Corp.'s affiliates, which also filed for bankruptcy protection.

Those affiliates include LoveSac of Nevada LLC, ChillSack LLC and LoveSac Franchising Inc.

According to the American Bankruptcy Institute, Chapter 11 is available for both business and consumer debtors. The provision allows a debtor to remain in possession of a business and in control of operations while a court-approved reorganization plan is finalized.