J. Crew Creditors Erupt Into Full-Scale Lien Fight

By Vince Sullivan
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Law360 (August 5, 2020, 8:30 PM EDT) -- The official committee of unsecured creditors in the Chapter 11 case of fashion retailer J. Crew is challenging the liens of secured lenders, saying up to $32 million of the debtor's assets are not encumbered by the liens.

The committee said in court filings Monday that it is seeking standing to contest the liens on behalf of the bankruptcy estate since J. Crew waived its challenge rights as part of a post-petition financing arrangement with the prepetition lenders.

"After review and investigation, the committee has determined that the prepetition [asset-based loan] secured parties and prepetition term secured parties failed to perfect or do not hold liens on various assets, including deposit accounts which contained approximately $32 million as of the petition date," the committee's filing said.

The committee also argued that J. Crew is intentionally undervaluing the company and its assets in an effort to blur the lines between voting classes on its Chapter 11 plan. The filings say the debtor is worth $2.94 billion but that it is only purporting to be valued at $1.75 billion in its plan. The lower valuation, the committee said, isn't enough to pay down existing term loan debt and leads to the creation of a deficiency claim held by the term loan lenders that is being classified as a general unsecured claim.

Since general unsecured creditors are largely being left out of the money in the proposed Chapter 11 plan, the committee argues that the undervaluing of the assets and the classification of the deficiency claims are being used to sway the vote of the unsecured creditors class on the plan.

The terms of the proposed plan would exchange existing term loan and note debt for the equity in a reorganized J. Crew, with those classes having allowed claims of $716 million and $400 million, respectively. Unsecured creditors will receive their pro rata share of a $3 million cash pool.

The committee is asking the bankruptcy court to properly value the company so that there is no term loan deficiency claim, or to classify the deficiency claim separately from other general unsecured claims.

Confirmation of the proposed plan is scheduled for Aug. 25 before U.S. Bankruptcy Judge Keith L. Phillips.

Representatives for the committee declined to comment on the filings late Wednesday, and representatives for the debtor could not immediately be reached late Wednesday for comment.

J. Crew was the first major retailer to succumb to the worldwide spread of COVID-19 and the resulting business restrictions placed on nonessential operations, filing for Chapter 11 protection May 4 with a plan in hand to restructure $1.65 billion of debt through the equity swap with lenders.

A $400 million debtor-in-possession financing package was provided by prepetition lenders including Anchorage Capital Group LLC, GSO Capital Partners and Davidson Kempner Capital Management LP, among others.

Founded in 1947 as a catalog retailer, J. Crew opened its first brick-and-mortar store in 1989. As of the petition date, the debtor operated 181 J. Crew stores, 140 stores for its Madewell women's clothing line and 170 factory stores, as well as e-commerce platforms for its brands, according to the announcement.

The company was purchased in 2011 by TPG Capital and Leonard Green & Partners LP for $3 billion.

Late last year it announced it was negotiating a restructuring agreement that would include spinning off its Madewell stores into a publicly owned corporation, but in its bankruptcy announcement, the company said Madewell will remain part of the company under the proposed plan.

J. Crew is represented by Ray C. Schrock, Ryan Preston Dahl, Candace M. Arthur and Daniel Gwen of Weil Gotshal & Manges LLP and Tyler P. Brown, Henry Long III and Nathan Kramer of Hunton Andrews Kurth LLP.

The committee is represented by Robert J. Feinstein, Bradford J. Sandler, Shirley S. Cho and Debra I. Grassgreen of Pachulski Stang Ziehl & Jones LLP and Robert S. Westermann and Brittany B. Falabella of Hirschler Fleischer PC.

The case is In re: Chinos Holdings Inc. et al., case number 20-32181, in the U.S. Bankruptcy Court for the Eastern District of Virginia.

--Additional reporting by Rick Archer. Editing by Haylee Pearl.

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