Law360 (July 23, 2021, 4:09 PM EDT) -- Wilmington Trust lost an appeal Thursday in Virginia federal court after a judge found it didn't have standing to challenge an order of the local bankruptcy court that the lender didn't have the ability to force formerly bankrupt clothing retailer Lord & Taylor to pay $30 million of rent to its landlords.
In an opinion written by U.S. District Court Judge John A. Gibney Jr., the court said Wilmington Trust didn't have standing to bring the appeal because its financial interests were not impacted by the bankruptcy court's October 2020 ruling that its right to compel payment of rent by the then-bankrupt retailer didn't exist.
Wilmington Trust had argued that the bankruptcy court's decision could impact ongoing state court litigation in New York involving the landlords that borrowed money from Wilmington Trust and the new tenants of the 24 stores covered by existing leases to which Lord & Taylor was a party. Citing the doctrine of res judicata in its pleadings, the lender said its rights to seek rent payments in the New York action would be precluded under the bankruptcy court's ruling.
Judge Gibney said those concerns are not fully fleshed out and don't pose any immediate risk to Wilmington Trust.
"Because the possibility of claim preclusion or collateral estoppel is too remote to pose a direct and adverse pecuniary harm to the Trust, the Trust does not have standing to appeal the bankruptcy order," the opinion said.
Even if it had standing, the court said the appeal is moot on constitutional and equitable grounds because Lord & Taylor's bankruptcy plan has been confirmed and mostly consummated, creating a situation where there is no live dispute involving the former debtor and if there were, it would be impossible to unwind the complex reorganizing transactions included in the plan.
Representatives for the parties could not immediately be reached Friday for comment.
In early August 2020, Lord & Taylor and affiliates filed for Chapter 11, struggling from the consumer shift away from brick-and-mortar shopping with their woes hastened by the COVID-19 pandemic. The company came into bankruptcy with $138 million in secured debt and a plan to market and possibly sell its assets as a going concern if a buyer emerged.
However, a couple of months into its case, Lord & Taylor announced it was commencing going out of business sales at all of its remaining 38 locations in a process led by the joint venture of Hilco Merchant Resources and Gordon Brothers.
In October, U.S. Bankruptcy Judge Keith L. Phillips entered his order in the rent dispute, saying Wilmington Trust— which had provided an $848 million mortgage loan to 24 affiliates of Lord & Taylor parent Le Tote serving as landlords for the retailers stores — found the lender didn't have standing to force payment of rent by Lord & Taylor because it wasn't a party to the master leases governing those stores.
The trust was seeking payment of rent owed at the time Lord & Taylor filed for bankruptcy, which amounted to about $30 million.
Granting Wilmington Trust an "expanded" right enabling it to compel payment of rent when landlords "may have negotiated a resolution with the debtors that does not please the trust, is unworkable," as "until such time as the trust has established its authority as the controlling party under the master lease, it may be heard only as an interested party," Judge Phillips said in his bankruptcy ruling.
After acquiring Lord & Taylor in 2019, Le Tote — also a debtor in the bankruptcy cases — was responsible for rent for the 24 stores involved in the dispute for a period of three years. When COVID-19 hit, Lord & Taylor defaulted on its lease payments, and Le Tote subsequently defaulted on its mortgage obligations to Wilmington Trust.
Le Tote and Lord & Taylor are represented by Michael A. Condyles, Peter J. Barrett, Jeremy S. Williams and Brian H. Richardson of Kutak Rock LLP and Steven N. Serajeddini, David L. Eaton and Jaimie Fedell of Kirkland & Ellis LLP.
Wilmington Trust is represented by Andrew Behlmann and Colleen Maker of Lowenstein Sandler and Paul A. Driscoll of Zemanian Law Group.
The appellate case is Wilmington Trust et al. v. Le Tote Inc. et al., case number 3:20-cv-00878, in the U.S. District Court for the Eastern District of Virginia.
The bankruptcy case is In re: Le Tote Inc. et al., case number 20-33332, in the U.S. Bankruptcy Court for the Eastern District of Virginia.
--Additional reporting by Rose Krebs. Editing by Amy Rowe.
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