UPDATE: February 6, 2019: The bankruptcy trial of Nine West Holdings commenced Monday with some of the bondholders saying that $115 million, proposed by Sycamore to settle allegations that the company drained Nine West of value, is insufficient, and Nine West's lawyers insisting that there's no good alternative, according to a report of the proceedings from the Wall Street Journal. Bondholders also said the company is at risk in part because department store Belk, also owned by Sycamore, could refuse to buy from the brand if the settlement isn't approved, a situation the bondholders' lawyer characterized as a threat to divide the lender groups and thereby propel agreement to an untenable deal.
The Securities and Exchange Commission and the U.S. Trustee for the New York Region on Jan. 11 each filed objections to the bankruptcy plan proposed by Nine West Holdings, according to court documents filed at the United States Bankruptcy Court for the Southern District of New York. Requests for comment from Retail Dive to the brand's legal adviser Kirkland & Ellis and other consultants at Lazard Freres & Co. and Alvarez & Marsal North America LLC were not immediately returned. Nine West and private equity owner Sycamore Partners each declined to comment to Retail Dive.
At issue are releases within the plan that William Harrington, U.S. Trustee for Region 2, said improperly shield professionals — consultants, financial advisers and others — from claims of "fraud, gross negligence, or willful misconduct" and serve as "merely a backdoor to administrative expenses," according to his filing.
"The Court should strike the Releases from the Plan or, alternatively, the Plan should be amended to state the Releases will not bind impaired unsecured creditors ... and the Releases should be amended to include a carve-out for governmental claims and a carve-out for gross negligence, willful misconduct or fraud," the SEC said in its filing, also saying, "[T]he Releases represent a forfeiture of the rights of those who have claims against the released parties and they do not meet the standard for approval" under Federal bankruptcy rules.
The bankruptcy plan that will be considered by the court later this month involves just a vestige of the Nine West footwear and apparel company, which filed for bankruptcy protection in April after years of sales struggles and financial difficulty. The namesake Nine West brand itself, along with the Bandolino footwear brand that was also part of the Nine West Holdings stable, were sold in a July bankruptcy auction to Authentic Brands Group for $340 million.
Millions of dollars are still at stake, however. A restructuring plan that Nine West in October said had the support of parties holding 85% of its secured debt and 80% of its unsecured debt — a deal that would have wiped $1 billion off its loan balance while paying secured lenders in full — failed to hold late last year. Amid ongoing objections from some lenders, Nine West Holdings filed for an extra $22 million in debtor-in-possession funds in light of delays to its Chapter 11-protected restructuring.
Meanwhile, a group of its unsecured creditors asked a federal bankruptcy court for permission to sue Sycamore Partners over an alleged fraudulent transfer and other claims totaling "well over $1 billion," according to an earlier court filing. That group has also claimed further that Sycamore, by carving out valuable pieces of the Jones Group, netted some $300 million from its leveraged buyout as Nine West careened toward bankruptcy, according to those earlier court documents.
The contentious nature of the bankruptcy process is unsurprising in an era of private equity-ownership that often gives retailers and brands, under pressure to respond to challenges in an evolving market, precious few resources to execute the necessary merchandising and marketing changes. Now the Feds are also taking a stand.
"As a general matter, nondebtor third party releases contravene ... the Bankruptcy Code, which provides that only debts of the debtor are affected by the Chapter 11 discharge provisions," the SEC wrote last week. "Such releases have special significance for public investors because they enable nondebtors to benefit from a debtor's bankruptcy by obtaining their own releases with respect to past misconduct, including violations of the federal securities laws or breaches of fiduciary duty under state law."
The SEC later added that, "While such releases may be allowed in exceptional circumstances, those circumstances are not present here. In the Second Circuit, nonconsensual releases are only permitted in 'rare cases' where the injunction is important to the debtor's reorganization. This is not a 'rare case.'"