Judge rejects legal shield in bankruptcy of former Ann Taylor parent

An Ann Taylor Store "LOFT" in Encinitas
An Ann Taylor Store "LOFT" in Encinitas, California. REUTERS/Mike Blake
  • Company must go back to bankruptcy court to fix plan
  • Judge calls protections for execs 'shocking'

(Reuters) - A Virginia federal judge has shut down legal protections for insiders of Ann Taylor’s former parent company, calling the company's use of a popular tool in corporate bankruptcies "shocking."

In an 87-page decision, U.S. District Judge David Novak of the Eastern District of Virginia on Thursday overturned a bankruptcy court’s approval of Mahwah Bergen Retail Group’s Chapter 11 reorganization plan and held that the so-called nondebtor releases are void and unenforceable. The company had said the releases, which protect non-bankrupt people and entities with ties to company, are key to the plan.

“The sheer breadth of the releases can only be described as shocking,” Novak wrote.

Novak found that the bankruptcy court that approved the deal exceeded "the constitutional limits of its authority," reflecting similar concerns raised by a judge who ruled on the nondebtor releases in the bankruptcy of OxyContin maker Purdue Pharma.

Mahwah, formerly known as Ascena Retail Group, filed for bankruptcy in July 2020 with more than $1 billion in debt and plans to close many of its stores. The company’s brands, including Ann Taylor, Lane Bryant and Loft, were later sold to private equity firm Sycamore Partners. Mahwah now exists solely to wind down its estate.

Last year, U.S. Bankruptcy Judge Kevin Huennekens approved the company's plan, which included the nondebtor releases for company insiders against litigation that had accused Ascena and former executives of securities fraud. Lead plaintiffs in the securities litigation and the U.S. Department of Justice’s bankruptcy watchdog, the U.S. Trustee, appealed.

Novak said in Thursday’s decision that nondebtor releases have become too frequent. He said the 4th U.S. Circuit Court of Appeals has “made clear” that such releases are “disfavored” and should be granted “cautiously and infrequently.”

He also referred to a Manhattan federal judge's recent reversal of the approval of Purdue Pharma’s bankruptcy plan based on similar concerns about nondebtor releases, which in Purdue’s case were intended to protect the company’s Sackler family owners. Novak said that Mahwah’s contention that the releases are critical to its reorganization is undermined by the fact that they have become so commonplace.

“As District Judge Colleen McMahon astutely observed: ‘When every case is unique, none is unique,’” Novak wrote.

A lawyer for Mahwah did not immediately respond to a request for comment.

A spokesperson said the U.S. Trustee is “extremely gratified by the court’s opinion and will continue to argue its legal position in other districts around the country.”

The case is Joel Patterson et al v Mahwah Bergen Retail Group, Inc., U.S. District Court, Eastern District of Virginia, No. 3:21-cv-00167.

For Mahwah: George Hicks Jr., Andrew Lawrence, Edward Sassower, Steven Serajeddini and John 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

For the securities plaintiffs: Mickey Etkin, Andrew Behlmann and John Schneider of Lowenstein Sandler and Ronald Page Jr. of Ronald Page PLC

Read more:

Purdue Pharma ruling targets controversial U.S. bankruptcy tactic

Bankruptcy judge approves Ann Taylor, Lane Bryant sale to Sycamore

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