By Rose Krebs

Law360 (May 6, 2020, 11:00 AM EDT) -- Menswear retailer John Varvatos Enterprises Inc. hit Chapter 11 in Delaware on Wednesday with plans to sell its assets to a secured lender as store closures caused by the coronavirus outbreak spiraled the already struggling retailer into bankruptcy.

The luxury menswear brand, founded in 2000 by American designer John Varvatos, hit Chapter 11 with plans to sell its assets and a stalking horse offer in place from an affiliate of private equity firm Lion Capital LLP, a secured lender. Lion has submitted a credit bid to use $76 million of debt it is owed to buy the assets, according to court filings.

A sale to Lion, whose offer also includes assumption of certain liabilities, is subject to better offers from other bidders. Lion is also set to provide post-petition financing of up to $20 million, the retailer's first-day declaration said.

"The agreements with Lion represent a critical step in our process to transform our business to drive long-term, sustainable growth," company founder John Varvatos said in a statement. "We have taken decisive action to respond to the challenges that all retailers face in the present environment and we remain extremely confident that our brand, celebrating its 20th year in business, will emerge even stronger."

As with the rest of the retail industry, John Varvatos Enterprises was hard hit by store closures caused by the coronavirus pandemic, the company said in a statement.

"In the months immediately preceding the pandemic, John Varvatos Enterprises established a talented new executive leadership team," the statement said. "In response to the rapid and exponential spread of COVID-19 as well as relevant governmental orders, the company's leadership took difficult yet prudent steps to temporarily close all store locations and conserve cash."

The John Varvatos brand, which "fuses contemporary style with a 'rock n' roll' culture," according to the first-day declaration of company Chief Financial Officer Joseph Zorda, was founded by Varvatos, the former head menswear designer for Calvin Klein.

"The rebel spirit inherent in the brand imbues confidence in the man who wears it," the declaration said.

According to Zorda's declaration, the company has in recent years "experienced consistent declines in retail and ecommerce revenues as a result of certain cost cutting measures that involved altering the brand's clothing to attract customers in the mass market, which did not resonate with the brand's existing customers."

Also, certain wholesalers ended their relationship with the brand, and retail chain Nordstrom partially removed the John Varvatos brand from its stores in 2018, the declaration said.

Last year, John Varvatos Enterprises made changes to its leadership team, looked to sell certain assets, and attempted to negotiate rent reductions. The sale and lease negotiations were unsuccessful.

With a new CEO in place at the end of 2019 tasked with trying to turn the company's financial prospects around, the company said it started to see some promising results early in 2020.

However, the COVID-19 outbreak in the United States and "the resulting, state-imposed limitations and prohibitions on non-essential retail operations destroyed the debtors' blossoming success," the declaration said.

Due to the public health crisis and store closures, the company said it had to furlough 226 employees — 76% of its workforce — for a period of time and reduce wages to certain employees. Also, three executives took voluntary salary reductions, the declaration said.

Forced to rely "almost exclusively" on its e-commerce business, the company has not been able to keep up with its rent and debt payments, Zorda said.

John Varvatos Enterprises Inc. and two affiliates hit Chapter 11 with roughly $19.5 million in debt owed on a credit agreement administered by Wells Fargo NA, $95 million owed in secured notes, and roughly $26 million in unsecured debt. The company also has three foreign affiliates that are not included as debtors in the Chapter 11.

The John Varvatos brand is sold through various collections, including namesake John Varvatos Collection and John Varvatos Star U.S.A., the declaration said. It includes suits, jackets and waistcoats, jeans, jewelry, boots and leather jackets. The company sells its merchandise through its website and 27 brick-and-mortar locations, according to the declaration.

U.S. Bankruptcy Judge Mary F. Walrath has been assigned to the Chapter 11 case, according to court records.

John Varvatos Enterprises Inc. is represented by Derek C. Abbott, Matthew O. Talmo and Andrew R. Workman of Morris Nichols Arsht & Tunnell LLP.

Lion Capital LLP is represented by Krishna Veeraraghavan, Rita-Anne O'Neill, Andrew G. Dietderich, James L. Bromley, Ari B. Blaut of Sullivan & Cromwell LLP and Pauline K. Morgan and Sean T. Greecher of Young Conaway Stargatt & Taylor LLP.

The case is In re: John Varvatos Enterprises Inc. et al., case number 1:20-bk-11043, in the U.S. Bankruptcy Court for the District of Delaware.

--Editing by Marygrace Murphy.

Update: This story has been updated with counsel information, case information and more details from the declaration.

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