This incident in the Neiman Marcus bankruptcy case is admittedly a sideshow in this “world turned upside down” era, yet it also reflects how Covid-19 is producing all sorts of unexpected side effects. Plus societally-beneficialy departures from form should be applauded.
Regular readers and lawyers likely have heard of the concept of fraudulent conveyance in bankruptcy. In layperson terms, that means siphoning off assets even though the people in charge know a bankruptcy is baked in. In principle, those assets were improperly transferred and should be clawed back for the benefit of the creditors.
In reality, the way this principle is applies diverges wildly depending on whether you are an individual or a moderate to big corporate wastrel. If you max out on your credit cards within six months of filing for personal bankruptcy, expect to be raked over the coals. You need a very convincing story (better yet with contemporaneous evidence) to argue why you weren’t abusing your lenders.
By contrast, private equity firms keep paying themselves “money for nothing” fees and even more aggressive forms of looting of wobbly companies right before they go tits up. Yet creditors have had a difficult time in asserting claims of fraudulent conveyance successfully. Here’s one example: Delaware Bankruptcy Court Declines To Dismiss Fraudulent Transfer Suit Filed Seven Years After Challenged Transaction Occurred. The plaintiffs have only surmounted the summary judgement challenge.
Another frustrating element of the way big corporate cases often unfold is that well-credentialed experts are too often treated with undue deference, even when their arguments are obviously strained.
Now to the Neiman Marcus sighting. Even though the storied retailer had been expected to file for bankruptcy for some time, it pulled the trigger on May 7, in the Southern District of Texas. Since Neiman was headquartered in Dallas, there’s some logic in filing for bankruptcy in a Federal court in state. However, most big corporate bankruptcies are filed in the Southern and Eastern districts of New York, and venue preferences like that tend to become self-sustaining. The judges, by handling so many cases with common elements, become adept in the typical legal and procedural moves. Most competent attorneys prefer to deal with a knowledgeable juror.
Nevertheless, a legal eagle reader pointed out that the recent spate of bankruptcy filings were being made almost entirely in Texas, and attributed it to antipathy to spend time in the coronavirus leper colony of New York City. As indicated earlier, I have no idea whether Neiman might have been filed in New York given that many bankruptcy attorneys, in normal times, would lodge the petition there. But regardless of why Neiman has filed there, the judge is already making waves.
The Financial Times recounts the , um, “roadblock” thrown by Judge David Jones. Although the article does not spell it out, the timetable for when Neiman hoped to have its plan approved by the court says it files what is called a “pre-pack”. The debtor has already negotiated with its creditors the haircuts each of them will take and presents it to the judge to bless.
The problem with a lot of pre-packs is judges are not a complaint bunch. It is pretty common for bankruptcy judges to question some features of the pre-pack as unfair, either due to creditors who think they’ve been shafted making arguments that persuade the court, or even upon occasion the judge kicking the tires harder than the various parties anticipated. Unless the judge is satisfied pronto, the supposed pre-pack morphs into a long-form process.
With Neiman, a bone of contention was the way Neiman executed a restructuring so as to remove its online operation, Mytheresa.com, from the bankrupt estate, even though it had previously been pledged as collateral for loans. A hedge fund objected to this asset shuffle and wanted the court to appoint an independent examiner to investigation. That motion was nixed but Judge Jones blasted Neiman’s proposal to resolve the matter. From the Financial Times:
Neiman had argued that the investigation could be left to two “experienced and seasoned restructuring experts”, Marc Beilinson and Scott Vogel, who were appointed to the retailer’s board in April. Mr Jones asked Mr Beilinson to summarise his progress and explain the issues he was investigating.
“What he gave me was a line of bull,” the judge said afterwards….
“If he’s going to serve in this capacity he needs to understand his job and he cannot simply give lip-service knowing a bunch of buzzwords,” Mr Jones said in court on Friday. “I do not want to see a fiduciary to this estate ever appear to me again uneducated, unprepared, and borderline incompetent.”
Needless to say, it looks as if Neiman bit off more than it can chew:
The extraordinary exchange suggests Neiman will face intense scrutiny on a restructuring proposal that would see most of its equity pass to secured creditors, all but wiping out Ares and the Canada Pension Plan Investment Board, which together acquired the retailer for $6bn in 2013.
Time we had fewer passive judges. And I wonder if some of those lawyers who filed bankruptcies in Texas are now wondering if they are going to be spending a lot more time in the Lone Star State than they anticipated.