Relevant Document:Hearing Agenda
In a sharp turn of events, Marble Ridge Capital elected to withdraw its
motion seeking the appointment of an examiner in the Neiman Marcus chapter 11 cases at the conclusion of a hearing today. The decision came after Judge David Jones outlined the constraints he would impose on an examiner, if appointed, and gave Marble Ridge the opportunity to withdraw its motion, which was done without prejudice to its ability to raise the request again in the future.
Judge Jones
said that he would grant the motion, then indicated that he would significantly curtail the scope of the examiner’s duties and budget from that proposed by Marble Ridge and the unsecured creditors committee, which
supported the examiner request. Specifically, Judge Jones said that the examiner would have a budget of $100,000 and his or her duties would be limited to “a three-week examination of whether the independents are doing their job with another week to do a report," referencing the investigation already being undertaken by Neiman's disinterested managers.
After a recess to allow Marble Ridge to consider the court’s offer, Marble Ridge decided to withdraw the examiner motion after determining that it would “ultimately be in the interest of not only our own parochial concerns but also the estates in general.”
Marble Ridge and the UCC had asked that an examiner be appointed to do his or her own investigation of claims relating to the
MyTheresa transactions, including potential fraudulent transfer claims against LBO sponsors Ares and the Canada Pension Plan Investment Board, or CPPIB. Marble Ridge and the committee also proposed that the examiner be provided with a $3.5 million budget, have the ability to retain its own advisors and be given 45 days, or until July 15, to prepare an examiner report. UMB Bank, indenture trustee for certain of the senior notes, had also voiced
support for the motion.
Chad Husnick of Kirkland & Ellis, counsel for the debtors, opened today’s proceedings by providing a case update, noting that there are currently 12 Neiman and Neiman Marcus Last Call stores open for pick-up and appointment shopping. There continues to be “substantial uncertainty” about when other stores will be open, but the debtors expect “many” to be open “on or about July 18,” he said. Husnick added that the debtors satisfied their May rent payments and intend to pay all of their June rent payments. In addition, consistent with the timeline outlined under the
restructuring support agreement, he said that the debtors have been working “diligently” to draft a plan and disclosure statement and anticipate filing the first versions of the documents by the June 6 deadline under the DIP order.
In granting Marble Ridge’s motion earlier in the hearing, Judge Jones said that he is “in the position of having to appoint an examiner for something that I shouldn’t have to,” after commenting earlier in the hearing that “the issues that have to be examined are extremely straightforward.” The court also remarked that Marble Ridge’s motion was a “strategic pleading” not filed in good faith. However, Judge Jones said that the statute does not require the movant’s good faith. He stated that section 1104 of the Bankruptcy Code, which governs the appointment of an examiner, provides that appointment of an examiner is mandatory, not discretionary, when requirements in the section have been satisfied.
The court also heard testimony today from Marc Beilinson, one of Neiman’s two disinterested managers.
Judge Jones said that during Beilinson’s examination, “it became very apparent to me that I have a huge problem” in the case. He stated that he was “extremely concerned about what I heard today. I could not imagine anything worse,” describing the testimony as “uneducated, unprepared and borderline incompetent.”
Judge Jones warned, “If I hear that again, my respect for Willkie Farr[, counsel for the disinterested managers,] will not keep me from issuing a show cause order,” appearing to refer to the appointment of a chapter 11 trustee.
Earlier, Judge Jones interjected during Beilinson’s testimony on the disinterested managers’ investigation of prepetition transactions, asking, “when you’re looking at a transfer, what matters?” Beilinson responded that he would assess “how the recovery would benefit or not benefit the bankruptcy estate” and “whether it should impact the currently negotiated RSA,” which has the support of a “substantial amount” of the debt structure. The judge responded, “let me just tell you that that was completely wrong,” later calling Beilinson’s answer “a line of bull.” The judge commented that Beilinson needs to “understand his job and not simply give lip service to knowing a bunch of buzzwords.” If it wasn’t for his confidence in counsel for the disinterested managers, Judge Jones said, “we would be scheduling a hearing with an entirely different implication.”
Edward Weisfelner of Brown Rudnick, counsel for Marble Ridge, presented the fund’s examiner motion today, saying that this case is a “textbook case” for an examiner appointment because of the existence of potential avoidance claims against insiders. He argued that a “truly independent” examiner’s report may very well “operate as a sword of Damocles” that would motivate the case parties to negotiate and reach a consensual resolution. He acknowledged that the UCC and the disinterested managers are currently undertaking their own claims investigations, but challenged whether, in context, the disinterested managers are truly disinterested. Weisfelner pointed out that the disinterested managers may be removed by the LBO sponsors and argued that the managers have substantial ties to Kirkland, which advised the debtors and the sponsors on the MyTheresa transactions.
Weisfelner repeatedly asserted that the appointment of an examiner would not impede Neiman’s restructuring or endanger the case timeline. An inquiry into the MyTheresa transfers “frankly doesn’t have that many moving parts” and if viable claims were uncovered in the course of an examiner’s investigation, such claims would either be consensually resolved or should be placed in a post-effective date litigation trust, he argued. Moreover, in contrast to the $4.5 million “completion fee” for Perella Weinberg, which advises the disinterested managers, the proposed $3.5 million budget for an examiner “pales by comparison,” Weisfelner asserted. He also said that the debtors, in opposing the examiner motion, had made the “deluded argument” that “even if we hit the jackpot and got a billion dollar judgment against the sponsors,” by the time senior creditors’ deficiency claims and other claims were paid, there would be few proceeds left to benefit unsecured creditors. Weisfelner suggested that many creditors, having earlier released claims against the sponsors, would not be entitled to the proceeds of MyTheresa-related claims.
Richard Pachulski of Pachulski Stang, representing the UCC, said that the committee “overwhelmingly supports” the appointment of an examiner, subject to the proposed limited scope and budget. He argued that a consensual resolution, not prolonged litigation, of the MyTheresa claims is needed, adding that he believes in this view “because I’m a realist.” He echoed Weisfelner’s arguments regarding an examiner appointment and report acting as a catalyst for negotiations. If the parties settle in July instead of “on the courthouse steps” in September, there is “no doubt in my mind” that we will save “multiples” of the $3.5 million proposed examiner budget, Pachulski stated.
Pachulski also argued that limiting the examiner’s role to reviewing the work of the disinterested managers and the UCC, as suggested by the objectors as the path forward if the court grants the examiner motion, “makes zero sense.” The examiner would “effectively babysit” the disinterested managers and the UCC in a “monumental waste of time,” Pachulski said. He noted that unsecured creditors committees “do typically object to examiners,” especially when a committee has already made progress in investigating claims, but this is not true of the UCC here.
Emil Kleinhaus of Wachtell, counsel for the ad hoc group of term lenders, said it was “emphatically the view” of his clients that the plan outlined in the RSA should be confirmed. The court should not permit three sets of fiduciaries to be undertaking parallel investigations, he argued, and although secured lenders may “pay freight” in chapter 11 cases, “it can't possibly be that secured lenders need to fund three ships at once.”
Husnick of Kirkland, for the debtors, likewise stated that the answer to the question of whether a third fiduciary and its advisors needs to engage in an investigation in these cases is an “unmitigated no.” Marble Ridge questioned Beilinson on the virtual stand about his disinterestedness, but the court “didn’t hear anything” about Vogel, the other disinterested manager, Husnick noted. Moreover, business connections alone cannot destroy Beilinson’s disinterestedness, and “if that were the standard, we’d all be out of jobs,” Husnick said. He asserted that Marble Ridge and UMB say an examiner is warranted because of the need for “transparency,” but this argument is just a “ruse for leverage.” If the court does appoint an examiner, the scope of the examination should be limited to oversight over the existing investigations and the budget should be limited, Husnick concluded.