Tedeschi and the New York Times Get it Wrong

Bob Tedeschi, technology reporter for the New York Times, wrote an article on Monday about the financial troubles of online craft retailer Eziba, and their implications for artisans in the developing world. (The Times article will go under a for-pay firewall in a few days – this copy in the Wilmington Star may be remain unlocked.) Tedeschi implies that Eziba’s principals acted unethically during the company’s collapse by paying off a loan to a bank in Vermont rather than paying debts to artisan suppliers, including Rwandan genocide survivors.

In other words, this is exactly the sort of story I would blog. If it were true. Which it isn’t. I call attention to it not because it’s a good piece of journalism, but because it’s a hatchet job that includes major factual errors and unfairly characterizes the motives of key figures within Eziba.

Here’s the longest disclaimer I’ve ever put on a blog post: I was an investor in Eziba. My investments, totalling in the tens of thousands of dollars, were wiped out when Eziba was forced into bankruptcy earlier this year. I am a member of the board of the Eziba Artisans Trust, a nonprofit organization funded with Eziba founder’s stock (more on that later). Dozens of friends have worked for Eziba over the years, including some who were laid off when the company closed. Dick Sabot, the founder and chairman of the company, is one of my closest friends and was a board member of Geekcorps. Sherwood Guernsey, the attorney for Eziba, is my personal attorney and also a close friend and Geekcorps board member. In other words, I couldn’t have more conflicts of interest in writing about Eziba if I tried.

On the other hand, the fact that I’m so close to the story means that it’s been fairly easy to find some of the facts Tedeschi missed or ignored. (In some cases, I’ve got documents that contradict Tedeschi’s implications.)

Starting in 2000, Eziba imported handmade craft items from around the world and sold them online at prices that allowed the business to operate as a for-profit, and provide excellent wages for the artisans who sourced goods. In late 2004, the company began stumbling badly, due to operational errors (sending a huge shipment of catalogs to infrequent rather than frequent buyers) and the loss of a major line of credit.

Tedeschi begins his piece, “When Eziba, an online retailer, declared bankruptcy last year…”. This isn’t true. What Eziba did was an assignment for the benefit of creditors. ABC’s are an attractive way of winding down a company because they’re much faster – and much cheaper – than formal bankruptcy procedures. This was important to Dick and the other Eziba principals because it meant that creditors – including Rwandan genocide survivors – would get paid more quickly than they would in a formal bankruptcy.

Unfortunately, three of Eziba’s creditors filed petitions for involuntary bankruptcy. (None of these creditors, incidently, was an artisan or artisan group – they were all well-capitalized US firms.) So Eziba was forced into Chapter 7 bankruptcy. When a company is forced to liquidate, certain debts are paid first: employee salaries, state and federal taxes, fees to attorneys and bankruptcy trustees. Then secured creditors – i.e., creditors who have access to some sort of collateral – are paid next. Bankruptcy judges decide the order of payment for the remaining “ordinary” creditors.

Tedeschi implies that Eziba paid a $500,000 loan from Chittenden Bank – instead of paying other creditors – because Dick was afraid Chittenden would seize his personal assets. This is bullshit. The Chittenden loan was secured first by Eziba’s assets (which Overstock.com paid $500,000 for) before being secured by personal assets – had Eziba defaulted, Chittenden would have seized the corporation’s assets in a bankruptcy process, because, as a secured creditor, they were first in line. Because Sabot and others were hoping to rescue the company after ABC, they needed a relationship with a bank. Had they forced Chittenden to become a bankruptcy creditor, it’s very unlikely that the bank would have lent money to them in the future. So they paid Chittenden a) because they were the first creditor in line if the company underwent liquidation and b) because they needed Chittenden on their side to attempt to rescue the company.

But what about the genocide survivors? Didn’t the company principals have a moral responsibility to pay poor artisans before paying a US bank?

As it turns out, it’s one of the worst things Eziba could have done under US bankruptcy law. Once secured creditors and other special creditors (employees, taxes, etc.) are paid, bankruptcy judges work very hard to ensure that there are no preferential payments of debts. In other words, just because you always liked ABC Paper Company and hated the bastards at DEF Shipping, you can’t pay off ABC at the expense of DEF. To prevent this from happening, bankruptcy judges look very closely at all payments a company made prior to liquidating. If the company paid back debts preferentially, bankruptcy trustees send demand letters ordering those funds to be returned to the company so they can be distributed between all the creditors.

In other words, had Eziba paid artisans and not other creditors, those artisans – including the Rwandan genocide survivors – would find themselves in a legal morass, ordered to repay monies paid to them in the hopes of getting that money back through the bankruptcy process. Tedeschi doesn’t bother to explain this in his article – instead, he quotes a bankruptcy specialist at Harvard who simply gets it wrong. Elizabeth Warren is quoted as saying, ‘”Until it filed for bankruptcy, company management decided the order of payment,” she said in an interview. “They preferred the bank, while the artisans were shut out. They may have had business or personal reasons for doing that, but they didn’t have legal reasons.”‘

Yep, the company decides order of payment up until bankruptcy. But if you know that bankruptcy is a possibility, you want to avoid making preferential payments, because once liquidation begins those payments will be recalled. In this case, the recall of those payments would have dragged a bunch of lawyerless Rwandan basketweavers into a legal hell (in another country, in a foreign language). Arguably the moral thing to do in that case is not to pay those basketweavers. Or perhaps pay them and hire some US-based bankruptcy lawyers for them as well.

But hey, the way Tedeschi tells the story is quite a bit more compelling and gives the head of Overstock – who Tedeschi reminds us has a PhD in Moral Philosophy – a chance to sneer at Eziba’s motives. (Tedeschi doesn’t bother to tell us that Dick has worked in development economics, as an academic, world bank consultant and philanthropist, for nearly his entire professional life. Guess it doesn’t fit his narrative quite as neatly as the detail about Overstock’s CEO does.)

Here’s what Tedeschi doesn’t tell you. Dick and others have been paying artisans out of their own pockets rather than forcing them to wait through the bankruptcy process. I know this because I’m on the board of the Eziba Artisans Trust and I’ve signed board resolutions designed to let us use the Trust as a vehicle to pay debts owed to artisans. And, lest you think this was done in response to Tedeschi’s insinuations, we signed the document weeks back, when it became clear how long it would take to get artisans paid through the bankruptcy process.

Nobody’s happy when a business goes under, especially a business that was explicitly designed to benefit poor people in developing nations. But implying that Eziba’s principals were somehow trying to screw over the people they’d set up a business to benefit – when the facts demonstrate otherwise – is dishonest and shameful. For the price of a good (though demonstrably false) story, Tedeschi tarnishes the reputation of a group of people who tried very hard to do the right thing. He, and the Times, should be ashamed.