Some dealers shout, 'Show us the money'

Home Channel News, April 2, 2001 by Brae Canlen

Freeze on stock redemption cited in two suits

CHICAGO -- TruServ Corp. faces a potential run on the bank this month when its moratorium on stock redemption expires on April 30.

The co-op's board of directors could vote to extend the freeze at their April 17 to 18 meeting. But TruServ is coming under increasing pressure from members who want to cash out and retire. Dealers who have defected to other co-ops also want their money; some have withheld inventory payments to make up the difference, while others have banded together in lawsuits that accuse the buying group of deceit, financial mismanagement and retaliatory actions.

The one-year moratorium was announced to TruServ members in March 2000, shortly after the co-op disclosed a $131 million loss for fiscal year 1999. At the same time, TruServ retailers learned that their Class B stock, which they accumulated based on warehouse purchases, had lost 65 percent of its value. The freeze also applied to Class A stock, of which all members own 60 shares.

Former TruServ dealer Richard "Bud" Howe sold his Deland, Fla., store in January 2000, two months before the coop revealed its staggering losses. His 60 shares of Class A stock are worth $6,000, and his Class B stock, worth $34,000 when he sold Super True Value Supply, is now valued at $24,000, according to Howe's estimates.

But these numbers are essentially worthless, said the 68-year-old retiree. His repeated phone calls and e-mail messages to TruServ's executives have gone unanswered. "I predict they'll pay nothing," he said, bitterly. Howe noted that he owned the store for only seven years, so he's not banking on the stock as his main retirement fund. "But what about the dealers who were with [the co-op] for 25 or 30 years?" he asked.

'Bad faith' promises alleged

Some long-term retailers, inherited by TruServ after it merged with ServiStar Coast to Coast, are part of a group of 38 plaintiffs that is suing the co-op in a McHenry County, Ill., court. Other dealers have joined a Delaware class-action lawsuit being represented by Milberg, Weiss, Bershad, Hynes & Lerach, the nation's most prominent law firm in shareholder class-action litigation.

Both complaints assert that TruServ violated its own bylaws when it placed a moratorium on stock redemption. The lawsuits also claim that the co-op reneged on its agreement to allow ServiStar Coast to Coast dealers to retain their retail identities -- a promise it allegedly made in bad faith to push through the 1997 merger between Cotter & Co. and ServiStar Coast to Coast. The merged company renamed itself TruServ Corp. and last year began an aggressive marketing campaign to bring as many dealers' stores as possible under the True Value banner.

"My clients were told to either be a True Value store or leave the fold," said Ann Kennedy, the attorney representing 38 former TruServ members operating stores in 18 states. Kennedy's clients, who wanted to retain their Coast to Coast or ServiStar identities, considered the "Power of One" initiative, as the True Value program was dubbed internally, as a de facto termination, she said. Many of these retailers were located in towns that already had a True Value store, according to Kennedy. (In several instances, TruServ encouraged her clients to become "unbranded" stores because of objections from the neighboring True Value dealer, Kennedy said.) One client in particular -- Kennedy Hardware, a Worland, Wyo.-based Coast-to-Coast store, which is owned by the attorney's brother -- was competing with a True Value dealer three blocks away.

ServiStar Coast to Coast dealers who refused to switch to the True Value banner were treated as "second class citizens," according to the Illinois lawsuit, which was filed last June 30. "TruServ supplied its True Value members with merchandise and stock first, then filled plaintiffs' orders with what was left over," the complaint states.

The suit also alleges that the co-op discontinued or failed to support, through promotions and advertising, Coast to Coast product lines. Technical and operational support diminished for dealers who didn't convert to the True Value banner and the Triad computer system, according to the lawsuit. Coast to Coast members who made the switch "reported ... to [the] plaintiffs that most of their difficulties with supply and getting help from buyers and calls returned by the company disappeared after converting to a True Value store."

Dealers call for investigation

All plaintiffs in the Illinois lawsuit have since left TruServ; most have affiliated with other buying groups such as Ace Hardware, Do it Best Corp. and United Hardware Distributors. They are suing TruServ for the expense of the conversions, as well as costs they incurred relating to the 1997 TruServ merger. The lawsuit also seeks damages for lost profits caused by chronically late shipments, poor fill rates, an inability to change prices because of a computer problem and the discontinued Valspar paint program.

Above all, the plaintiffs want to redeem their stock. And they don't want to wait until the coop lists its moratorium.