Aeropostale’s Sycamore Rift Goes to Trial as Vote Proceeds

  • Teen retailer accuses Sycamore Partners of ‘loan to own’ plan
  • Judge says creditors should learn auction results before vote

A judge said that teen clothing chain Aeropostale Inc. can ask creditors to vote on its reorganization plan while also gearing up for a trial over whether a key creditor drove the company into bankruptcy to snap it up on the cheap.

U.S. Bankruptcy Judge Sean Lane in Manhattan said Monday that he’s “inclined to approve” the company’s disclosure statement, which explains how the plan would work, so creditors can vote on whether to approve it. After criticizing the plan’s lack of information about how much some creditors, such as mall landlords, stand to recover, the judge said the timeline should be changed so they can find out the results of an Aug. 22 asset auction before voting.

“It’s not perfect,” Lane said. But he called the plan the best the company could do given the deadlines imposed by lenders and Aeropostale’s failure so far to announce a lead bidder for its assets. He asked that the New York-based company file a “supplement” to the plan to let creditors known when they can expect to find out how the auction is going.

The retailer has asked Lane to disqualify New York-based private equity firm Sycamore Partners from using its $150 million debt to bid at the auction. A trial on Aeropostale’s complaint is set for Aug. 15.

No ‘Floor’

The proposed reorganization accounts for the different ways Sycamore’s claims will be treated based on how the litigation plays out. But the plan gives no estimate of what some creditor groups would recover because Aeropostale has yet to find a so-called stalking horse to make the starting bid for its assets. Lane questioned how creditors can vote when there is no “floor” for the sale.

“We’re in active discussions with parties about potential stalking-horse bidders,” Ray Schrock, a lawyer for Aeropostale, told Lane Monday. The company will announce one, or more than one, before the voting deadline, he said.

Aeropostale has said since the outset of its bankruptcy in May that Sycamore used a supplier it controls, MGF Sourcing Holdings Ltd., to drive the company into Chapter 11. On July 22, the retailer accused Sycamore of pursuing a “loan to own” strategy and said the firm and its managing partner Stefan Kaluzny traded on inside information about the company.

‘Irresponsible Fabrications’

“These claims are without merit and include numerous allegations that are nothing more than irresponsible fabrications,” Sycamore said in an e-mailed statement over the weekend. Sycamore’s lawyers said in court Monday that the insider trading claims, aside from being “unfactual,” had no connection to creditor issues and criticized Aeropostale for making them in public court documents.

Starting Feb. 3, Sycamore entities began selling their stock in Aeropostale, while just weeks later, MGF demanded onerous new payment terms, the New York-based retailer said in court papers.

‘Patently Unreasonable’

“By imposing patently unreasonable payment terms -- indeed, the harshest and most onerous payment terms possible -- Sycamore was attempting to cause the company to suffer an even further decrease in liquidity which would, in turn, cause a default,” Aeropostale said.

The company is ahead of the schedule set out under its bankruptcy operating loan and will be moving forward with its sale as the litigation goes on “in the background,” its lawyers told Lane on Monday. Aeropostale will consider bids for the whole business as well as liquidation offers, according to court papers.

Aeropostale has also asked the court to disallow or lower the priority of Sycamore’s claims. The retailer’s allegations about Sycamore would be resolved before any hearing on confirming the reorganization plan, according to the disclosure statement. 

The company listed $390 million in debt and about $354 million in assets in the Chapter 11 petition filed May 4 in Manhattan.

The case is In re Aeropostale Inc., 16-11275, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

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