Mon 10/15/2018 06:20 AM
Share this article:
Relevant Documents:
UCC Motion
Golden Declaration
Replacement Page to Declaration

On Saturday, Oct. 13, the official committee of unsecured creditors in the Nine West chapter 11 cases filed a motion requesting the court grant the UCC standing to commence and prosecute the certain claims on behalf of the debtors’ estates. The UCC contemporaneously filed the declaration of Daniel Golden in support of the motion. According to the motion, the UCC asserts that it would prosecute fraudulent transfer and other claims for “well over $1 billion … excluding pre-judgment interest of about $350 million (and growing)” that debtor Nine West Holdings, Inc., or NWHI, “has unjustifiably refused to assert against Sycamore and other potential defendants” (emphasis added).

The standing motion says that it appeared such a motion “might be unnecessary” as the two major unsecured creditor groups, the unsecured term lenders and the holders of unsecured notes due in 2019 and 2034, “believed” they had resolved their disputes in favor of a plan that would gather support of all creditors and the debtors. However, the UCC understands that the debtors are likely to release the claims against Sycamore “for a small fraction of their value, before even filing a complaint detailing those claims.” Moreover, the filing states that the debtors have barred the UCC from participating in settlement negotiations with Sycamore, so the committee only knows the “range of settlement consideration under discussion.” A settlement within the proposed range, and even at the top end of that range, would represent “a small fraction of the value of the claims against Sycamore,” according to the filing (emphasis added).

The standing motion also reasons that a settlement of such minimal proportions “would constitute a breach of the Debtors’ fiduciary duties,” and be contrary to the interests of NWHI and its creditors. The UCC argues that “until those claims are firmly in the control of a determined and truly independent adversary - the Committee - Sycamore will toy with the parties and the bankruptcy process itself in its desperate attempt to avoid answering for its myriad of pre-petition wrongs and breaches of duty to NWHI.”

According to the UCC, the majority of the proposed claims, detailed in the proposed complaint attached as Exhibit B to the motion, came from the leveraged buyout of Jones, Inc. “engineered” by Sycamore. Sycamore designed the LBO transaction to “unfairly deflect the risk of the LBO from Sycamore to NWHI’s creditors,” says the filing, which charges that the result was Sycamore reaping a “massive financial windfall” and NWHI and its creditors losing upwards of $1 billion. The filing highlights that Sycamore funded its LBO by separating Jones Inc. into five business segments, causing NWHI to sell three of those segments, deemed “carve-out assets,” to Sycamore affiliates at “prices hundreds of millions of dollars below their true value,” thereby adding more than $800 million of LBO debt onto NWHI’s balance sheet, and “causing NWHI to turn the bulk of the loan and sale proceeds - more than $1.2 billion - over to Jones Inc.’s former shareholders in exchange for no value.” After the LBO transactions, the UCC argues, NWHI remained with a “crushing debt burden of $1.5 billion” and had been “stripped of its most valuable assets.” The filing notes that it sometimes refers to NWHI as “RemainCo” throughout it.

The standing motion contends that the “lynchpin of Sycamore’s scheme” was to strip the carve-out assets away from NWHI and transfer them to Sycamore affiliates at under-market prices set by Sycamore. Sycamore Fund I was the “ultimate beneficial owner of all of Sycamore’s interests in both RemainCo and the carve-out assets,” says the motion, which also notes that Sycamore’s equity investment in RemainCo was a “sliver of the more than $1.5 billion in debt RemainCo was left with after the LBO.” The UCC asserts that Sycamore financed the carve-out assets transactions with a “much higher proportion of equity to debt,” which allowed for Sycamore to “virtually” guarantee making a profit on the LBO even if RemainCo failed as long as Sycamore set the prices paid for the carve-out assets by Sycamore affiliates were “far enough their true value.” After the LBO and carve-out transactions took place, Sycamore “siphoned” off dividends from the carve-out assets, and then resold them for “almost double (about $1.1 billion) the amount paid by the Sycamore Affiliates in the LBO ($641 million),” says the standing motion. As a result of these transactions, even after RemainCo filed for bankruptcy, “Sycamore still reaped a nearly $300 million net windfall on the LBO,” according to the filing.

The UCC argues that Sycamore engaged in “outright fraud” in order to sell the carve-out assets to its affiliates for below market prices. Sycamore prepared “aggressive” pro forma estimates and projections to “inflate the supposed value of RemainCo” while “driving down the implied value of and forecasts for the carve-out assets,” beginning when Sycamore made its bid to buy Jones Inc. through when the LBO closed, according to the filing. The UCC continues that Sycamore’s projections were “moving in the exact opposite direction of contemporaneous trends in the business.” Alongside the LBO transactions, NWHI issued projections that were shared with Sycamore but not disclosed publicly that “would have shown insolvency,” the UCC adds (emphasis added).

The chart below was excerpted from the motion and depicts actual EBITDA versus the pre-LBO projected EBITDA for RemainCo.
 

The UCC argues that NWHI was rendered insolvent by the LBO and that at the time of the carve-out transactions, based on market transactions, the carve-out assets were worth around $1 billion or more. This resulted in RemainCo being “worth no more than about $1.1 billion, far less than its post-LBO debt of about $1.55 billion,” says the standing motion. Sycamore’s estimates and projections of RemainCo’s performance “prevented RemainCo’s insolvency from being obvious to all,” the UCC adds. The UCC continues that the LBO lenders “knew that most of the proceeds of their loans would immediately be re-conveyed to former Jones Inc. shareholders for no value, and the obligations and liens NWHI incurred in connection with the LBO Debt should therefore be avoided.”

The standing motion charges that Jones Inc. legacy directors were “happy to cash out their own substantial stock in the company,” and that the post-LBO board of NWHI was controlled by Sycamore’s two founders, proposed defendants Stefan Kaluzny and Peter Morrow, who “would have been incapable of exercising independent judgment concerning the LBO transactions.” The UCC adds that these “facts demonstrate clear violations of each of the directors’ fiduciary duties of care, loyalty and good faith and shift the burden to the fiduciaries to demonstrate that the transactions were entirely fair to NWHI and its stakeholders.” The filing argues that Sycamore further breached its fiduciary duties when it caused NWHI to waive a “nearly $65 million working capital true-up payment owed to it by one of the Sycamore Affiliates without the slightest justification,” and more recently, when Sycamore “took a worthless stock deduction that resulted in NWHI losing the benefit of substantial tax credits in the form of Net Operating Losses.”

“Sycamore could hardly make its contempt for the rights of NWHI and its creditors, and its disregard of its own fiduciary duties, more clear if it tried,” the UCC states.

The standing motion concludes that NWHI is entitled to recover “well over $1 billion from Sycamore, not including prejudgment interest, based on Sycamore’s fraudulent transfers and other misconduct described in this motion and in the proposed complaint.” The UCC additionally requests that the liens and obligations NWHI incurred in connection with the more than $800 million in LBO debt “should be avoided, with all payments of interest on the LBO debt made by or on behalf of NWHI returned to the estate.” In addition, NWHI is entitled to recover damages related to “breach of fiduciary duty from Sycamore and the Jones Inc. directors and to recover from the directors the full amount of transfers made to Jones Inc.’s shareholders (about $1.2 billion),” according to the motion.

Lastly, the UCC requests that an award for actual damages, punitive damages and attorneys’ fees should be entered in favor of NWHI related to its claims for “tortious interference and actual fraudulent conveyance and other willful misconduct.” The UCC contends that “there can be no doubt that Sycamore believes the Debtors’ settlement range would be a steal compared to the actual value of the claims against it.”
Share this article:
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2024 Reorg Research, Inc. All rights reserved.
Thank you for signing up
for Reorg on the Record!