Bankruptcy judge OKs ex-Ann Taylor owner's revised Ch. 11 plan

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An Ann Taylor Store "LOFT" in Encinitas, California is shown here May 20, 2008. REUTERS/Mike Blake

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(Reuters) - Ann Taylor’s former owner has obtained bankruptcy court approval for its revised reorganization plan after a judge rejected certain legal protections for people and entities connected to the company contained in an earlier version of the plan.

U.S. Bankruptcy Judge Frank Santoro of the Eastern District of Virginia signed off on Mahwah Bergen Retail Group Inc’s amended plan during a brief hearing on Thursday. Mahwah, formerly known as Ascena Retail Group, had secured approval of its prior plan last year but was forced to return to bankruptcy court in January after the plan's so-called nondebtor releases that would have shielded non-bankrupt individuals and entities from future litigation were voided on appeal.

Ascena filed for Chapter 11 protection in July 2020 with more than $1 billion in debt, part of the wave of retail bankruptcies that occurred in the first few months after the COVID-19 pandemic hit the U.S. Ascena later sold its assets, including apparel retailers such as Ann Taylor, Lane Bryant and Loft, to private equity firm Sycamore Partners.

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In January, U.S. District Judge David Novak of the Eastern District of Virginia held that the nondebtor releases contained in the plan were void and unenforceable. Novak’s decision did not interfere with the Sycamore sale, which had already closed.

In his January decision, Novak called the releases, which are a popular tool in corporate bankruptcies that have recently come under fire in high-profile cases like Purdue Pharma's bankruptcy, “shocking” and said the bankruptcy court that approved them had exceeded “the constitutional limits of its authority.”

As a result, Mahwah, which now exists solely to wind down its estate, reworked the plan to provide that the releases "should be deemed severed from the Plan,” according to court papers.

Novak’s decision was a notable win for the U.S. Department of Justice’s bankruptcy watchdog, the U.S. Trustee, which has long challenged these releases in corporate Chapter 11 cases.

The U.S. Trustee and other critics of the releases, including U.S. Senator Elizabeth Warren, a Massachusetts Democrat, argue that they improperly provide valuable benefits of bankruptcy – specifically, protection against future lawsuits – to people and companies that didn’t file for bankruptcy themselves.

The U.S. Trustee did not object to the amended plan’s approval on Thursday.

Santoro, who approved the amended plan on Thursday, replaced the judge who previously approved the plan, U.S. Bankruptcy Judge Kevin Huennekens, after Novak decided the case should be reassigned.

The case is Retail Group, Inc., U.S. Bankruptcy Court, Eastern District of Virginia, No. 20-33113.

For Mahwah: George Hicks Jr., Andrew Lawrence, Edward Sassower, Steven Serajeddini and Jack Luze of Kirkland & Ellis and Cullen Speckhart and Olya Antle of Cooley

For the U.S. Trustee: Ramona Elliott, P. Matthew Sutko and Sumi Sakata of the DOJ and John Fitzgerald III, Kathryn Montgomery and Hugh Bernstein of the U.S. Trustee's office

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Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.