Neiman Marcus
Marble Ridge Complaint Seeks Avoidance of MyTheresa Transfer, Appointment of Receiver; Neiman Says ‘Is Not and Has Never Been in Default’
Mon 12/10/2018 13:09 PM
Relevant Documents:
Complaint
Release
Marble Ridge filed a complaint on Monday in the District Court of Dallas County, Texas, asserting that Neiman Marcus Group Inc. orchestrated an “integrated two-step scheme” to "loot" its subsidiary Neiman Marcus Group LTD LLC by transferring approximately $1 billion in myTheresa assets to the parent “for no consideration.” Marble Ridge’s lawsuit seeks to avoid the transfers made to the parent and/or to subsequent transferees as an intentional or constructive fraudulent transfer and also seeks to recover such assets. Additionally, Marble Ridge seeks the immediate appointment of a receiver pursuant to Texas law.
Neiman responded to the complaint with the following statement to Reorg: “For the last three months, Marble Ridge has made numerous false statements in the press, and has repeated them in this complaint. The Company will defend itself vigorously against these false allegations. Neiman Marcus is not and has never been in default, and is in full compliance with the terms of its debt agreements.”
The company noted: “Neiman Marcus Group just completed its fifth consecutive quarter of positive sales and adjusted EBITDA was up 10.6% from the same quarter in the previous year. All Neiman Marcus and Bergdorf Goodman stores are EBITDA positive and the Company has $620 million in liquidity.”
Below is a summary of the claims and allegations in Marble Ridge’s complaint.
Complaint’s Four Counts
Marble Ridge’s complaint includes the following four counts:
Relief sought by Marble Ridge includes avoidance of the transfer of the MyTheresa assets, setting aside such transfer and all underlying assets, return of the transferred assets to the company and damages based on the diminution of value of obligations owed by the company. As previously noted, Marble Ridge also requests the immediate appointment of a receiver for the company and Mariposa Intermediate Holdings LLC. The appointment of a receiver would permit a neutral third party to address the allegations by, among other things, bringing claims with respect to the misconduct alleged in the complaint, says Marble Ridge.
Complaint’s Allegations
According to Marble Ridge’s complaint, Neiman has been “deeply insolvent since the Fall of 2016” and the transfer of MyTheresa was undertaken as part of a scheme “to remove valuable assets from the Company, where they could have been used to satisfy the claims of the Company’s creditors,” instead placing them “beyond the reach of the Company’s creditors in order to hinder and delay creditor recovery.” The complaint details that loans under the company’s credit agreement mature in October 2020 and that unless these loans are repaid and/or refinanced three months prior to maturity, a springing maturity on the company’s revolver takes effect, causing that tranche to mature in July 2020.
Marble Ridge says that the scheme was "perpetrated for the benefit of" Ares Management LP and the Canada Pension Plan Investment Board, which together are LBO sponsors and indirect beneficial owners of Neiman Marcus. Marble Ridge asserts that “[b]ecause the Company is insolvent, in a bankruptcy, unsecured creditors will recover only a small fraction of the par value of the Company obligations that they hold.”
The complaint asserts that the first step of the alleged scheme was the company’s removal of certain controlled subsidiaries from the restrictions placed on the company by its creditors. The second step of the alleged scheme was distributing the myTheresa assets indirectly to the parent for no consideration, according to Marble Ridge.
The complaint lays out the following images to describe the pre-scheme ownership of the transferred assets.
The complaint details the March 2017 designation of certain restricted subsidiaries as unrestricted subsidiaries under the unsecured note indentures. The newly unrestricted subsidiaries included the entities that owned myTheresa, as well as a subsidiary that owned certain real properties in Texas and Virginia. The designation of the subsidiaries as unrestricted was “met with concern, even alarm, by Plaintiffs and other creditors of the Company, as reflected by the plunging prices at which the bonds and loans of the Company traded in the subsequent months.” Marble Ridge says that Neiman has “deliberately chosen to conceal the data and calculations upon which it purportedly relied in effectuating the Redesignation.”
The complaint notes that following the designation of the subsidiaries as unrestricted, the entities, “at a minimum, continued to provide meaningful credit support for the Company’s debt.” However, in September 2018, the company “executed on its Scheme to cause the direct owners of the redesignated entities to distribute the equity of the redesignated entities up the corporate structure.”
The complaint explains that the distribution of the equity of relevant entities up the corporate structure “was misleadingly disclosed as an ‘organizational change’ of the Company.” In fact, says Marble Ridge, it was a removal of assets from Neiman Marcus Group LTD LLC.
Because the entities that hold the assets used in the myTheresa business are no longer subsidiaries of Neiman Marcus Group LTD LLC, if Neiman Marcus Group LTD LLC defaults on its obligations to creditors, creditors will not be able to access, through liquidation or other means, the assets of the transferred entities to satisfy their claims, says the complaint.
The complaint details that in order to move the transferred entities from the company to the parent, the transferred entities were distributed upward in the corporate structure (as shown above). The steps of the transfer were “[f]irst to each Transferred Entity’s immediate parent, then to the parent of that transferee and so on until the Company became the direct owner of the Transferred Entity. Once the Company became the direct owner of a Transferred Entity, the Company then further distributed each Transferred Entity to Holdings. Holdings then further transferred the entity to Parent or, possibly to affiliates of Parent.”
The complaint asserts that the Neiman parent “paid nothing for ownership of the MyTheresa assets,” and since the parent is privately owned, “the creditors of the Company that financed the acquisition of myTheresa and oversaw its initial success and growth no longer even have access to information about the ownership of the Transferred Entities or Transferred Assets.” The complaint adds that “the Transferred Entities or the Transferred Assets [may] have been further transferred to one or more entities owned or controlled by the Parent or the LBO Sponsors.”
Marble Ridge says in its complaint that upon information and belief, the parent has no material creditors, “meaning that the result of the two-step scheme is that the LBO Sponsors now beneficially hold the full value of the Transferred Assets.” Further, the complaint says that the company “has refused to disclose a commercial justification for the so-called ‘organizational change’ or to adequately answer any of Plaintiffs’ inquiries regarding the independence of the Board of Directors and their advisors involved in the Scheme and the Company’s purported solvency at the time of the Scheme.” Marble Ridge points to this refusal to explain the commercial purpose of the transaction as evidence of “a conscious and deliberate decision to conceal, defraud, hinder and delay.”
Badges of Fraud
In relation to Marble Ridge’s claim for intentional fraudulent transfer, the complaint alleges that the following badges of fraud occurred: transfer to an insider, the retention of control by the company, the concealment of the transfer and the absence of the exchange of reasonably equivalent value.
With respect to the “transfer to an insider” badge of fraud, Marble Ridge contends that the purpose of the defendants’ scheme was to benefit the LBO sponsors and/or the parent and that as a result of the scheme, these insiders will directly and indirectly hold the transferred assets free and clear of the liens of the company's creditors.
As for the “retention of control by the debtor” badge of fraud, Marble Ridge points out that despite the transfer, the myTheresa assets will continue to be operated by Neiman and its management. “From an operational aspect, the Scheme was a complete sham in that it had no operational effect or other legitimate, articulated business purpose,” adds the complaint.
The “concealment of the transfer” badge of fraud, says Marble Ridge, is demonstrated by the company’s, the LBO sponsors’ and the parent’s alleged refusal, “despite repeated requests,” to provide information to Marble Ridge that would permit the plaintiff to ascertain whether the scheme transfers amounted to a breach of the indebtedness. “This willful silence is sufficient basis to conclude that the Company is well aware that it has acted in violation of the covenants of its debt instruments,” asserts the complaint.
Finally, Marble Ridge says that the absence of the exchange of reasonably equivalent value is yet another badge of fraud that evidences Neiman’s intent to hinder, delay and defraud creditors. Here, the complaint reiterates that the company received no consideration for the transferred assets.
Complaint
Release
Marble Ridge filed a complaint on Monday in the District Court of Dallas County, Texas, asserting that Neiman Marcus Group Inc. orchestrated an “integrated two-step scheme” to "loot" its subsidiary Neiman Marcus Group LTD LLC by transferring approximately $1 billion in myTheresa assets to the parent “for no consideration.” Marble Ridge’s lawsuit seeks to avoid the transfers made to the parent and/or to subsequent transferees as an intentional or constructive fraudulent transfer and also seeks to recover such assets. Additionally, Marble Ridge seeks the immediate appointment of a receiver pursuant to Texas law.
Neiman responded to the complaint with the following statement to Reorg: “For the last three months, Marble Ridge has made numerous false statements in the press, and has repeated them in this complaint. The Company will defend itself vigorously against these false allegations. Neiman Marcus is not and has never been in default, and is in full compliance with the terms of its debt agreements.”
The company noted: “Neiman Marcus Group just completed its fifth consecutive quarter of positive sales and adjusted EBITDA was up 10.6% from the same quarter in the previous year. All Neiman Marcus and Bergdorf Goodman stores are EBITDA positive and the Company has $620 million in liquidity.”
Below is a summary of the claims and allegations in Marble Ridge’s complaint.
Complaint’s Four Counts
Marble Ridge’s complaint includes the following four counts:
- Count I - Intentional fraudulent transfer: Marble Ridge says that the transfers at issue were made with the “actual intent to hinder, delay or defraud” creditors of the company. In connection with this count, Marble Ridge contends that the alleged scheme at issue included transfers made after the company incurred obligations to lenders and participants under the credit agreement, that the transfers had “no legitimate business purpose” and demonstrated the badges of fraud discussed in the complaint (and in further detail below), and that the company engaged in “an effort to hinder, delay or defraud creditors, including Plaintiffs, in their exercise of rights and remedies against assets of the Company.”
- Count II - Constructive fraudulent transfer: Marble Ridge contends that the transfers at issue were made by Neiman without receiving “reasonably equivalent value” in connection with the transfers and that Neiman was insolvent at the time or became insolvent as a result of the transfers.
- Count III - Fraudulent transfer: The plaintiff asserts that the transfers at issue were “made (a) without receiving a reasonably equivalent value in exchange for the transfer, and (b) the debtor was engaged in a business for which the remaining assets of the debtor were unreasonably small in relation to the business of the debtor.”
- Count IV - Appointment of a receiver: Marble Ridge seeks the immediate appointment of a receiver pursuant to Texas Business Organizations Code section 11.410 “in the event the District Court determines … that circumstances exist that necessitate the appoint of a receiver even if a receiver has not been appointed by another court.”
Relief sought by Marble Ridge includes avoidance of the transfer of the MyTheresa assets, setting aside such transfer and all underlying assets, return of the transferred assets to the company and damages based on the diminution of value of obligations owed by the company. As previously noted, Marble Ridge also requests the immediate appointment of a receiver for the company and Mariposa Intermediate Holdings LLC. The appointment of a receiver would permit a neutral third party to address the allegations by, among other things, bringing claims with respect to the misconduct alleged in the complaint, says Marble Ridge.
Complaint’s Allegations
According to Marble Ridge’s complaint, Neiman has been “deeply insolvent since the Fall of 2016” and the transfer of MyTheresa was undertaken as part of a scheme “to remove valuable assets from the Company, where they could have been used to satisfy the claims of the Company’s creditors,” instead placing them “beyond the reach of the Company’s creditors in order to hinder and delay creditor recovery.” The complaint details that loans under the company’s credit agreement mature in October 2020 and that unless these loans are repaid and/or refinanced three months prior to maturity, a springing maturity on the company’s revolver takes effect, causing that tranche to mature in July 2020.
Marble Ridge says that the scheme was "perpetrated for the benefit of" Ares Management LP and the Canada Pension Plan Investment Board, which together are LBO sponsors and indirect beneficial owners of Neiman Marcus. Marble Ridge asserts that “[b]ecause the Company is insolvent, in a bankruptcy, unsecured creditors will recover only a small fraction of the par value of the Company obligations that they hold.”
The complaint asserts that the first step of the alleged scheme was the company’s removal of certain controlled subsidiaries from the restrictions placed on the company by its creditors. The second step of the alleged scheme was distributing the myTheresa assets indirectly to the parent for no consideration, according to Marble Ridge.
The complaint lays out the following images to describe the pre-scheme ownership of the transferred assets.
The complaint details the March 2017 designation of certain restricted subsidiaries as unrestricted subsidiaries under the unsecured note indentures. The newly unrestricted subsidiaries included the entities that owned myTheresa, as well as a subsidiary that owned certain real properties in Texas and Virginia. The designation of the subsidiaries as unrestricted was “met with concern, even alarm, by Plaintiffs and other creditors of the Company, as reflected by the plunging prices at which the bonds and loans of the Company traded in the subsequent months.” Marble Ridge says that Neiman has “deliberately chosen to conceal the data and calculations upon which it purportedly relied in effectuating the Redesignation.”
The complaint notes that following the designation of the subsidiaries as unrestricted, the entities, “at a minimum, continued to provide meaningful credit support for the Company’s debt.” However, in September 2018, the company “executed on its Scheme to cause the direct owners of the redesignated entities to distribute the equity of the redesignated entities up the corporate structure.”
The complaint explains that the distribution of the equity of relevant entities up the corporate structure “was misleadingly disclosed as an ‘organizational change’ of the Company.” In fact, says Marble Ridge, it was a removal of assets from Neiman Marcus Group LTD LLC.
Because the entities that hold the assets used in the myTheresa business are no longer subsidiaries of Neiman Marcus Group LTD LLC, if Neiman Marcus Group LTD LLC defaults on its obligations to creditors, creditors will not be able to access, through liquidation or other means, the assets of the transferred entities to satisfy their claims, says the complaint.
The complaint details that in order to move the transferred entities from the company to the parent, the transferred entities were distributed upward in the corporate structure (as shown above). The steps of the transfer were “[f]irst to each Transferred Entity’s immediate parent, then to the parent of that transferee and so on until the Company became the direct owner of the Transferred Entity. Once the Company became the direct owner of a Transferred Entity, the Company then further distributed each Transferred Entity to Holdings. Holdings then further transferred the entity to Parent or, possibly to affiliates of Parent.”
The complaint asserts that the Neiman parent “paid nothing for ownership of the MyTheresa assets,” and since the parent is privately owned, “the creditors of the Company that financed the acquisition of myTheresa and oversaw its initial success and growth no longer even have access to information about the ownership of the Transferred Entities or Transferred Assets.” The complaint adds that “the Transferred Entities or the Transferred Assets [may] have been further transferred to one or more entities owned or controlled by the Parent or the LBO Sponsors.”
Marble Ridge says in its complaint that upon information and belief, the parent has no material creditors, “meaning that the result of the two-step scheme is that the LBO Sponsors now beneficially hold the full value of the Transferred Assets.” Further, the complaint says that the company “has refused to disclose a commercial justification for the so-called ‘organizational change’ or to adequately answer any of Plaintiffs’ inquiries regarding the independence of the Board of Directors and their advisors involved in the Scheme and the Company’s purported solvency at the time of the Scheme.” Marble Ridge points to this refusal to explain the commercial purpose of the transaction as evidence of “a conscious and deliberate decision to conceal, defraud, hinder and delay.”
Badges of Fraud
In relation to Marble Ridge’s claim for intentional fraudulent transfer, the complaint alleges that the following badges of fraud occurred: transfer to an insider, the retention of control by the company, the concealment of the transfer and the absence of the exchange of reasonably equivalent value.
With respect to the “transfer to an insider” badge of fraud, Marble Ridge contends that the purpose of the defendants’ scheme was to benefit the LBO sponsors and/or the parent and that as a result of the scheme, these insiders will directly and indirectly hold the transferred assets free and clear of the liens of the company's creditors.
As for the “retention of control by the debtor” badge of fraud, Marble Ridge points out that despite the transfer, the myTheresa assets will continue to be operated by Neiman and its management. “From an operational aspect, the Scheme was a complete sham in that it had no operational effect or other legitimate, articulated business purpose,” adds the complaint.
The “concealment of the transfer” badge of fraud, says Marble Ridge, is demonstrated by the company’s, the LBO sponsors’ and the parent’s alleged refusal, “despite repeated requests,” to provide information to Marble Ridge that would permit the plaintiff to ascertain whether the scheme transfers amounted to a breach of the indebtedness. “This willful silence is sufficient basis to conclude that the Company is well aware that it has acted in violation of the covenants of its debt instruments,” asserts the complaint.
Finally, Marble Ridge says that the absence of the exchange of reasonably equivalent value is yet another badge of fraud that evidences Neiman’s intent to hinder, delay and defraud creditors. Here, the complaint reiterates that the company received no consideration for the transferred assets.
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