August 11, 2020, New York – Last week, the former shareholders, officers and directors of a bankrupt footwear and apparel company, Nine West Holdings Inc., (“Debtor”) filed a motion to dismiss to end a $1.5 billion lawsuit initiated by the Nine West litigation trust, pursuant to the safe harbor of 11 U.S.C. 546(e).
Earlier, two months ago, the Litigation Trustee of the Nine West litigation trust, Marc S. Kirschner and Wilmington Savings Fund Society has initiated adversary proceedings against the former directors of “The Jones Group Inc.” for authorizing series of transactions that rendered it insolvent. These transactions were consummated on April 8, 2014, (“2014 transactions”) and significantly increased the Jones Group’s debt, decreased its assets, and rewarded its directors and officers with change-of-control payments and other substantial consideration.
The Trustee and Wilmington filed 13 separate fraudulent transfer lawsuits against Jones Group officers, directors and shareholders. According to the complaint, more than $1 billion was transferred from Nine West to Jones Group shareholders, directors and officers after Nine West’s owner, Sycamore Partners Management LP purchased the Jones Group through a leveraged buyout (LBO). The Trustee stated that after LBO, Nine West was allegedly separated from the Jones Group’s more profitable business units. This saddled the Debtor with more than $1.5 billion in debt—composed of $528 million of new debt in addition to a pre-existing debt balance of $1,022 million—which could not be repaid. As a result, the Debtor was burdened with debt, which rendered it insolvent. Thus, the 2014 transaction disbanded the Debtor’s valuable assets for very little payment.
In its motion to dismiss, the Defendants countered that the 2014 transaction at issue cannot be avoided as fraudulent conveyances because they were securities transactions handled by a bank, Wells Fargo, acting as Nine West’s agent. Therefore, they fall under the safe harbor provisions of the bankruptcy code, which covers both financial institutions and companies acting through financial institution agents.
The case is In Re: Nine West LBO Securities Litigation, case number 1:20-md-02941, in the U.S. District Court for the Southern District of New York.