Lauren James, First Security Reach Settlement in Lawsuit

by Mark Friedman  on Monday, Feb. 11, 2019 12:00 am   5 min read

Lauren and Lance Stokes started the Lauren James Co. in Fayetteville in 2013. Several settled suits tell a complex version of the brand's founding, one that differs from company lore. (Beth Hall)

First Security Bank of Searcy last week settled its lawsuit against Lauren James Enterprises Inc. of Fayetteville, ending a legal battle that included allegations that the women’s clothing company conducted a sham foreclosure sale in August to avoid paying the bank.

The terms of the settlement weren’t disclosed in the Feb. 5 filing in Washington County Circuit Court.

First Security’s attorney, Gary Jiles of Conway, didn’t return a call. Attorney Conner Eldridge Jr. of Eldridge Brooks PLLC of Rogers, who represents LJ Apparel LLC, the new owner of Lauren James, declined to comment. The settlement included LJ Apparel’s counterclaim against First Security, alleging it had interfered with the company’s business relationships.

LJ Apparel bought the assets of Lauren James in August and has continued to operate the company as Lauren James.

“Business is still being conducted under the new ownership, new management,” David Lee of the law firm Pak & Lee of Garden Grove, California, an attorney for LJ Apparel, told Arkansas Business last week.

Lee said he wasn’t authorized to talk further about the company, and a representative from LJ Apparel didn’t respond to a request for comment left with Lee.

The settlement ended the most recent scrutiny of Lauren James, which was founded in 2013 by Lauren Stokes. Within four years, the company blossomed into a $13 million Southern women’s lifestyle line with national reach and national media attention.

Stokes has often told a story of the founding of the company that included drawing dress designs to pass the time while pregnant and on doctor-ordered bed rest. After her son was born in 2013, her husband, Lance Stokes, suggested she leave a nursing career for fashion design. So she did.

In January 2018, Arkansas Business uncovered settled lawsuits that told a more complicated version of the company’s founding. A lawsuit filed in April 2014 by Lance Stokes’ former business partner, Chelsea McShane of Fayetteville, accused him of breach of fiduciary duty, saying he shared her clothing designs with his wife, who was also named as a defendant. Lance Stokes denied the allegations, and the case reached a confidential settlement in July 2016.

A few months after the article appeared, Lauren James’ financial problems first surfaced in the lawsuit filed by First Security Bank.

Loan Default Alleged
In June, First Security filed a lawsuit against Lauren James and the Stokeses seeking nearly $330,000 for defaulting on a business loan. The couple had personally guaranteed the loan, which was first taken out in February 2017 for $500,000.

The loan, which was to provide liquidity for Lauren James, was renewed several times. The last note, for $400,000 on April 20, had a due date of June 5.

The bank said in the complaint that it was entitled to take immediate possession of Lauren James’ collateral, which was valued at $1.35 million and used as security for the loan.

While the bank’s lawsuit was in the early stages, Lauren James also owed money to Legacy National Bank of Springdale. Legacy said it was the first-position lien holder and was owed $650,000, according to the filings.

Legacy had the right to foreclose and repossess the retailer’s collateral “but instead decided to work with Lauren James to resolve its debts and allow the business to continue as a going concern,” LJ Apparel said in its court papers.

There was another creditor as well: LJ Apparel’s parent company, which Lee wouldn’t name and which has never been identified in court papers. Lee, LJ Apparel’s attorney, told Arkansas Business that Lauren James owed the parent company “a lot of money” — more than $330,000. That debt was unsecured.

“We had to think about how are we going to get our money back,” Lee said.

The strategy, he said, was to form a company and contact the first-position lien holder, Legacy National Bank.

LJ Apparel paid Legacy National Bank $650,000 on July 27 for Lauren James’ promissory note, which included Legacy’s interest in Lauren James’ collateral.

Then LJ Apparel moved forward with a foreclosure sale in August. “We took every step that it was done the right way,” Lee told Arkansas Business in August.

Bank Questions Sale
First Security Bank objected to the sale and went to court to block it, calling the sale “a sham.” It also questioned how LJ Apparel became a lien holder.

“The transaction between Legacy and LJ Apparel, and LJ Apparel’s foreclosure of its purported lien, were not arms-length transactions but rather were transactions of an insider done solely for the express purpose of circumventing First Security’s lien in the Inventory and Accounts,” the lawsuit said.

The sale was allowed to go forward and be conducted by sealed bid with a minimum bid of $700,000. The sale also required that the personal property be sold in bulk rather than individually or in lots.

LJ Apparel, through its manager, Michael Chung, was awarded the assets with a credit bid of $800,000 and continued operating the company as Lauren James.

Another factor that persuaded First Security that the sale was a sham was this: Lance Stokes, who owned Lauren James with his wife, and Chad Dickinson, an officer of Lauren James, continued working for the company after it was acquired by LJ Apparel.

Lee said in August that Stokes and Dickinson were kept as employees. “This is a brand that they built, so we kind of need their help,” he said.

Lauren Stokes also is featured on the company’s website along with her story of the founding of the company. The website says that the company “has now evolved into a style empire with preppy clothing apparel featured in 450 specialty retail locations, and online at LaurenJames.com.”

First Security wanted an order saying the foreclosure sale was a sham and not conducted in good faith. It also asked for other unspecified damages against LJ Apparel.

LJ Apparel’s Claim
In a counterclaim filed in September, LJ Apparel said that after the foreclosure sale, First Security continued its attempt to collect money from Lauren James’ vendors. LJ Apparel said the collection tactics were hurting its business. LJ Apparel said the bank’s “constant communications and misrepresentations to some of Lauren James’” biggest vendors have caused some of them to freeze their payments and insist on a court order before they are released to anyone, the lawsuit said.

“This interference has also caused LJ Apparel to lose some business relationships altogether, as their name and the Lauren James Brand has been tainted by First Security’s misrepresentations and efforts to interfere,” the lawsuit said.

It said the bank had received about $16,000 intended for Lauren James.

LJ Apparel wanted an order preventing the bank from contacting the retailer’s customers or anyone with whom it has a business relationship.

In December, First Security asked for a jury trial. But before a date could be set, both sides agreed to dismiss the case.

On Feb. 5, Washington County Circuit Judge Doug Martin entered his order dismissing the case with prejudice, meaning it can’t be refiled.

 

 

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