Thu 07/23/2020 16:47 PM
At a hearing on the unsealing of dueling reports on the propriety of Neiman Marcus’ controversial MyTheresa transaction, Brian Lennon of Wilkie Farr, counsel to independent manager Scott Vogel, announced that Vogel has been investigating the transaction separate and apart from the existing, sealed reports and has concluded that there are viable fraudulent conveyance claims related to the transaction that would likely survive a motion to dismiss. According to Lennon, the independent director has been involved in talks toward a resolution of the claims, and some form of settlement is achievable before Friday’s disclosure statement hearing.


As discussed below, it appears that sponsor Ares Management Corp. and Vogel are close to an agreement, but the official committee of unsecured creditors has not been party to direct talks with Ares.


In addition, the dueling reports from the UCC, on the one hand, and Ares and Canada Pension Plan Investment Board, on the other hand, will be unsealed and filed publicly on the docket, subject to redactions to protect Ares’ internal valuations that Judge David Jones determined did not need to be publicly disclosed at this time.

Vogel Determination and Settlement Discussions


In introducing Vogel’s determination that the fraudulent conveyance claims are viable, Lennon noted that the sponsors - Ares and CPPIB - contend in their currently sealed report that the MyTheresa transaction was completely appropriate, whereas the UCC has concluded in its own preliminary report that there are a variety of viable claims against the “litigation targets” - nondebtor parent Neiman Marcus Group Inc. and its affiliates, directors and equity sponsors.


After noting that his team and Vogel have been silent on the issue up until now but have been “working very hard” behind the scenes to evaluate the issues, Lennon announced the determination that there are viable claims and posited that this provides three “paths” forward: litigation now, settlement, or a plan construct that preserves the claims. Saying that litigation now does not appear to be in the best interest of the estate, Lennon announced that a “great deal of time” has been spent on settlement, but the “parties aren’t there yet.”


When Judge Jones suggested giving the parties the “weekend” to work on a deal that might make sense, Lennon asked that the court keep Friday’s disclosure statement hearing as scheduled to provide added pressure on the parties to reach a deal. Lennon added that he would “like to think” a “global” settlement is possible, but it is also possible that there could be a deal with “some but not all stakeholders.”


Alan Kornfeld of Pachulski, for the UCC, said he “appreciated” Vogel’s position, but there is a “grand canyon” between the committee’s position on solvency and the sponsors’ views on that topic. Near the end of the hearing, Kornfeld cast some doubt on the scope of settlement talks, saying that there have been “no” talks between the committee, Ares and CPPIB. The two sides remain “far apart,” he said. While Lennon and the independent manager have been conducting talks, the amount Vogel and the sponsors may agree to could be “too low,” according to Kornfeld. The committee “thinks the [independent] manager could have been more helpful but is not,” he added.


“If I sound frustrated, I am,” Kornfeld added.


When Lennon suggested that all sides need to get together and talk, Judge Jones ordered counsel to the sponsors, Lennon and Kornfeld to “Zoom” this afternoon.

In an indication that the sponsors and the independent manager may indeed be close to a resolution, Andrew LeBlanc of Milbank, speaking for Ares, said that Ares “has negotiated extensively with the party that asked to negotiate with us, and we are at the number they wanted us to be at.”

Earlier in the day, LeBlanc, for Ares, noted that the “vast majority” of value at MyTheresa has “come back to the estate” via the “amend and extend process” and that discussions are “about the return of even more Series B.” LeBlanc added here that estate would have to realize such value in an “IPO or sale.”

Document Sealing


The committee report and supporting documents were filed under seal on the docket on July 17. A responsive report by Ares and CPPIB was filed, also under seal, early this morning.


Kornfeld spoke at length in support of the UCC’s motion to unseal its report on the MyTheresa transaction, including the UCC’s report, an initial expert report by the Michel-Shaked Group and related document appendixes. Brigade filed a statement ahead of the hearing joining in the unsealing request.


At various points during his presentation, Kornfeld alluded to the substance of the still-sealed reports, including that contemporaneous evidence supports the committee’s position on solvency and that the sponsors have not obtained an expert report on valuation to counter the Michel-Shaked report lodged by the committee. Kornfeld also alluded to a document from inside Neiman criticizing its forecasting “culture.”


In substance, the sealing dispute today was limited to internal valuation documents prepared at Ares. The parties had stipulated to unseal most of the other aspects of the reports.


As to the Ares reports, Kornfeld implied that they lead to a conclusion that supports the UCC’s position on solvency, by “hundreds of millions of dollars.” Kornfeld argued that they should be unsealed because they are not sufficiently proprietary or unique to put Ares at a competitive disadvantage if they were released.


LeBlanc, for Ares, disputed the conclusions reached by the UCC on the substance of the documents and countered that the “purely internal” valuations would reveal the “Coca-Cola recipe” level “secret sauce” behind what Ares does.


Judge Jones pushed Kornfeld why the actual documents had to be revealed now and whether there might be a “strategic” consideration by the committee that he is not being told. Ultimately, the judge said he was “uncomfortable” changing the status quo as it stands now and would not order the release of the Ares documents. However, the judge warned that they may be revealed in the public record if and when they come up in an evidentiary hearing.


The parties said they would work to redact the reports accordingly and file them publicly with such redactions.
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