Two directors and six senior executives have resigned since early last month. Although the reasons for the moves vary, at least two of those departing said they were uncomfortable with internal discussions involving the handling of customer deposit money when bankruptcy seemed imminent last month.
Furniture.com executives were debating whether to continue mixing customer deposits with operating expenses--a standard business practice in a healthy company--at a time when it appeared unlikely that the company could fulfill all customer orders, sources said. Eventually, Furniture.com decided to separate the customer money in escrow.
When a company files for bankruptcy, all its assets, including customer deposits for products they have ordered, are frozen. Customers would then have to try to get their money back through bankruptcy procedures, just as any other creditors would.
"Someone suggested that, should the business close, customers would be reimbursed by their credit card companies," said Michael Barach, chief executive of MotherNature.com and a board member who resigned last week. "I wasn't totally comfortable with that...I didn't have the same comfort level that other people had."
Such issues are likely to confront many other companies that have seen their fortunes change with the ongoing consolidation in the Internet economy. Furniture.com, which had filed papers to go public in January, is one of several dot-com firms that have shelved IPO plans since the stock markets began to plummet this spring.
Barach said he left the company out of concern over potential legal liabilities should it go bankrupt. He said he had also grown weary of Furniture.com's continual search for funding.
A Furniture.com executive shared Barach's concerns over the customer deposit issue and left the company for that and other reasons. The executive, who asked not to be identified, said several executives implored Furniture.com chief executive Andrew Brooks to put the customer money into escrow well before it decided to do so.
"At the end of the day, nobody got hurt," Barach said. "Was it a close call? You bet."
Regulators maintain specific guidelines dictating how a company should operate when facing a possible closure, said Bob Sherman, a partner at the Boston branch of law firm Greenberg, Traurig and the former chief of consumer protection at the Massachusetts attorney general's office.
Companies can legally combine customer deposits with operating expenses, he said. But companies are supposed to cease that practice when it becomes clear that they may go out of business.
"Different states' attorneys general have sued companies for taking deposits at a time when they should have known that they may not be fulfilling those orders," Sherman said. "Consumers have the right to expect that when they're paying a deposit to a company, the company will produce the goods."
Furniture.com was able to stave off bankruptcy with a last-minute $27 million infusion from CMGI and other investors but has gone through two rounds of layoffs since filing papers in January to go public.
CEO Brooks declined to comment on the issue of credit cards but said that the company acted properly.
"As soon as there was any question about what was to be done with customers' money, we contacted our attorneys," Brooks said. "When our attorneys gave us an indication that it was prudent to begin escrowing customer deposits, we began doing so."
Another former board member, Joanna Strober, agreed with Brooks. She said she resigned from the board recently for personal reasons.
"I was on the calls with the attorneys and they told us to segregate," said Strober, a partner in venture capital firm Bessemer Ventures, which maintains a stake in Furniture.com. "That's what we did...There is no question we acted to protect the customers' money."
Brooks and Strober acknowledged that the company had met with bankruptcy attorneys but could not remember the dates of those discussions. Several former company executives began worrying about a closure by mid-May.
"I thought about resigning six weeks ago," Barach said, "but I would have been leaving in the middle of the battle."