A $50 Million Heating Unit Manufacturer

Chapter 11 bankruptcy with continuing ownership

HAMSTREET ROLES:  Assessment, Operational Turnaround, Financial Restructuring

SUMMARY:  A malfunctioning heater switch resulted in a deadly and highly-publicized fire. Subsequent class-action lawsuit and government-ordered recall threatened to destroy this family business. Hamstreet negotiated a multi-party agreement, including governmental support for the client’s new product, and enabled a full recovery.

THE BACKGROUND:  The client manufactured and sold wall-mounted electric heaters. Due to the failure of the thermal safety switch in one of its units, a fire resulted in the deaths of two children in a low-income housing complex. In the wake of wide and deeply emotional public attention, the U.S. Consumer Product Safety Commission (CPSC) ordered the client to recall two million heaters, despite no other material instances of malfunction. The recall amounted to 85% of the client’s sales over the previous 15 years. To make matters worse, a class-action law firm solicited thousands of consumers to file suit against the company. The gravity of this predicament exceeded the client’s ability to recover and forced the company into bankruptcy.

THE CHALLENGE:  Brought in by the client’s founder, Hamstreet determined through an assessment that the company could handle the recall if it could limit its future product-liability exposure in a new line of products. That prospect seemed impossible, however: the client was under attack on every front. Bad press, the government’s aggressive stance on liability, and impending lawsuits combined with unhappy distributors and nervous lenders to drive the company steadily towards a liquidation that would benefit no one. If the company went under, no consumer claims would be satisfied.

THE RESULTS:  Our client needed a powerful ally. To find one, we turned in the unlikely direction of the firm’s largest perceived enemy, the CPSC, and asked for help in designing a new product that would win its support. Through persistent effort, we found the right person to work with, forged a successful alliance, and won the agency’s endorsement of the client’s new products. Meanwhile, market studies revealed that surprisingly high levels of confidence in our client’s name persisted among consumers. These successes helped us enlist the company’s distributors to support a recall and reorganization plan whose payoff defied all previous expectations. At the conclusion of our work, a newly reorganized and confident entity rose up from the remains of a battered and demoralized company. Our client regained its financial footing, worked its way through the recall, and laid the groundwork for a profitable future.