This incident in the Neiman Marcus bankruptcy case is admittedly a sideshow in this “world turned upside down” era, yet it also reflects how Covid-19 is producing all sorts of unexpected side effects. Plus societally-beneficialy departures from form should be applauded.
Regular readers and lawyers likely have heard of the concept of fraudulent conveyance in bankruptcy. In layperson terms, that means siphoning off assets even though the people in charge know a bankruptcy is baked in. In principle, those assets were improperly transferred and should be clawed back for the benefit of the creditors.
In reality, the way this principle is applies diverges wildly depending on whether you are an individual or a moderate to big corporate wastrel. If you max out on your credit cards within six months of filing for personal bankruptcy, expect to be raked over the coals. You need a very convincing story (better yet with contemporaneous evidence) to argue why you weren’t abusing your lenders.
By contrast, private equity firms keep paying themselves “money for nothing” fees and even more aggressive forms of looting of wobbly companies right before they go tits up. Yet creditors have had a difficult time in asserting claims of fraudulent conveyance successfully. Here’s one example: Delaware Bankruptcy Court Declines To Dismiss Fraudulent Transfer Suit Filed Seven Years After Challenged Transaction Occurred. The plaintiffs have only surmounted the summary judgement challenge.
Another frustrating element of the way big corporate cases often unfold is that well-credentialed experts are too often treated with undue deference, even when their arguments are obviously strained.
Now to the Neiman Marcus sighting. Even though the storied retailer had been expected to file for bankruptcy for some time, it pulled the trigger on May 7, in the Southern District of Texas. Since Neiman was headquartered in Dallas, there’s some logic in filing for bankruptcy in a Federal court in state. However, most big corporate bankruptcies are filed in the Southern and Eastern districts of New York, and venue preferences like that tend to become self-sustaining. The judges, by handling so many cases with common elements, become adept in the typical legal and procedural moves. Most competent attorneys prefer to deal with a knowledgeable juror.
Nevertheless, a legal eagle reader pointed out that the recent spate of bankruptcy filings were being made almost entirely in Texas, and attributed it to antipathy to spend time in the coronavirus leper colony of New York City. As indicated earlier, I have no idea whether Neiman might have been filed in New York given that many bankruptcy attorneys, in normal times, would lodge the petition there. But regardless of why Neiman has filed there, the judge is already making waves.
The Financial Times recounts the , um, “roadblock” thrown by Judge David Jones. Although the article does not spell it out, the timetable for when Neiman hoped to have its plan approved by the court says it files what is called a “pre-pack”. The debtor has already negotiated with its creditors the haircuts each of them will take and presents it to the judge to bless.
The problem with a lot of pre-packs is judges are not a complaint bunch. It is pretty common for bankruptcy judges to question some features of the pre-pack as unfair, either due to creditors who think they’ve been shafted making arguments that persuade the court, or even upon occasion the judge kicking the tires harder than the various parties anticipated. Unless the judge is satisfied pronto, the supposed pre-pack morphs into a long-form process.
With Neiman, a bone of contention was the way Neiman executed a restructuring so as to remove its online operation, Mytheresa.com, from the bankrupt estate, even though it had previously been pledged as collateral for loans. A hedge fund objected to this asset shuffle and wanted the court to appoint an independent examiner to investigation. That motion was nixed but Judge Jones blasted Neiman’s proposal to resolve the matter. From the Financial Times:
Neiman had argued that the investigation could be left to two “experienced and seasoned restructuring experts”, Marc Beilinson and Scott Vogel, who were appointed to the retailer’s board in April. Mr Jones asked Mr Beilinson to summarise his progress and explain the issues he was investigating.
“What he gave me was a line of bull,” the judge said afterwards….
“If he’s going to serve in this capacity he needs to understand his job and he cannot simply give lip-service knowing a bunch of buzzwords,” Mr Jones said in court on Friday. “I do not want to see a fiduciary to this estate ever appear to me again uneducated, unprepared, and borderline incompetent.”
Needless to say, it looks as if Neiman bit off more than it can chew:
The extraordinary exchange suggests Neiman will face intense scrutiny on a restructuring proposal that would see most of its equity pass to secured creditors, all but wiping out Ares and the Canada Pension Plan Investment Board, which together acquired the retailer for $6bn in 2013.
Time we had fewer passive judges. And I wonder if some of those lawyers who filed bankruptcies in Texas are now wondering if they are going to be spending a lot more time in the Lone Star State than they anticipated.
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It was my understanding the lawyers did not want to do the case in NYC because of Covid-19. I’ve done several chapter 11s in Detroit and Chicago and have to say the utterance of “I do not want to see a fiduciary to this estate ever appear to me again uneducated, unprepared, and borderline incompetent.”, is about right and what I normally hear. Lots of threats by the judge are the norm. You just don’t want to be the subject of one. B-court is not like any other court in the land. A bankruptcy judge can hold a murder trial if its in the course of business. All the B-court judges meet weekly to discuss the status of their cases, so the district as a whole is very uniform. Then there are the US Trustees- a justice department lawyer that represents the “money”. They can exceedingly difficult to deal with. I have never seen any entity get away with ‘ fraudulent conveyance’, as in law it is ‘a fraud in fact’. Doesn’t have to be proven. Statue says x if you do x your guilty. Typically, the trustee wants your client thrown in jail, the judge all wise will suggest a deal on some sticking point. As to pre-packaged, mostly today, each judge has a pre-packaged, fill-in-the-blanks, plan you are to use after you. All of these judges are very smart and crafty and all of all precedents matter. So it’s a bit like chess. Lastly, judges tend to get annoy with summary judgement motions, if point in fact the case is not overwhelming. As judges will not rule from the bench – meaning you have to write up an order w/logic and opposing counsel gets to respond, they are a waste of time. With one exception misconduct. Neiman‘s are terrible to deal with, I hope they are pounded to dust,
BSoder,
While I appreciate your comment, I have to note that the spread of topics in which you comment claiming specific expertise is increasingly not credible. Even reader Shamanic Fallout has noticed this:
I think you may have only claimed to have assembled a few MRIs. Nevertheless…
Your comment regarding fraudulent conveyance in large corporate bankruptcies is simply false. Corporations regularly make large payments to executives and private equity general partners shortly before BK and these are virtually never challenged successfully.
If you continue to make things up, you won’t be welcome here.
I guess that those lawyers thought that the saying “Don’t Mess With Texas” was just an anti-littering saying.
The problem with a lot of pre-packs is judges are not a complaint bunch.
Should this read compliant bunch?
It may be a distinction without a difference here.
Thank you, Yves.
Readers won’t be surprised that the same thing happens in dear old Blighty, especially in retail. One notices that the looting and pre-packs cherry pick assets. One often gets the impression that the firm is supposed to be bankrupted as it’s the only way to cherry pick assets and dispose of inconvenient liabilities such as pension fund obligations.
Readers in dear old Blighty will be delighted to hear that Pharma Starmer*, as he’s owned by big pharma, has begun a charm offensive in the City and asked Blairite retread Pat McFadden to rebuild bridges with the 1%. Labour’s previous efforts were called the “prawn cocktail offensive”.
*This part explains Starmer’s reticence to criticise Kemal Johnson’s handling of covid-19. The creeping privatisation of the UK’s public services, including health and social care, that made the crisis worse and corporate give aways in response to covid-19 benefit donors to both Tories and New Labour.
Thank you Colonel, as a fellow inhabitant of Blighty, I could not but concur.
Sir Keir Starmer – for he is indeed a Knight of the Realm – has got off to a cracking start. His shadow cabinet is mainly just a bunch of, as you say, New Labour retreads. My own MP, Lisa Nandy, the new holder of the foreign affairs portfolio, has already said that the UK should be working more closely with the US in the battle against Covid-19, and as other members of that New-New Labour team put their heads over the parapet, I foresee more “issues” attaching themselves to Her Majesty’s Loyal Opposition, and the party setting off into history, like it’s sister European social democratic parties, such as the German SDP and French Partie Socialiste.
It’s a rum do.
Neiman separated its online business from its bricks and mortar business pre-bankruptcy, then left the online business out of the bankruptcy? Never let a serious crisis go to waste: do what you’ve wanted to do for a long time, but under cover of an unrelated crisis so as to disguise your intent.
GM did something similar in its 2009 bankruptcy: it dumped over half a million contracts and employee claims into what became the bankruptcy estate, then walked away from them, with the “new” company emerging post-bankruptcy without them, which was the whole point. All carefully pre-arranged.
The Texas court seems to be casting a refreshingly critical eye toward prepackaged corporate bankruptcies. It’s about time.
Thanks for this post. Hope going forward that many of these private equity deals will be subjected to more stringent legal interpretations regarding their asset stripping that have caused so much economic and social damage. Thought there was a statutory preference period under the bankruptcy code where if a conveyance was made during the statutory preference period of a few months, it’s pretty much automatically deemed a fraudulent conveyance. Otherwise, the debtor is presumed not to have made such a fraudulent conveyance. So this article is very enlightening. Would also like to see it applied to clawbacks of the massive corporate share buybacks that have occurred.
Good for Judge Jones. I may be wrong, but the thinking on allowing the obscene pre-petition bonuses to stand may be this: if top management leaves, and they will without bonuses, the only alternative would be the appointment of a chapter 11 trustee, which, because of the way those fees are determined, and the delay it would cause, would be more costly than the bonuses. I am not adopting that argument, but it really seems like the only one that could be made in good faith. However, I have an unrelated question for Yves. I have been reading, with some but not total understanding, about the sins of CALPERS. I know it was 9 years ago, but did it make any sense for the Canadian Pension Fund to become a major shareholder in Neiman- Marcus? That seems like an awfully odd investment. I’m a relative newcomer to your site, so maybe I missed that discussion when it took place.
You’ll soon learn that everything is like CalPERS of you keep reading this blog.
The entire economy is now fraudulent expert conveyance. An expert system cannot be geared to nature. The corporations always cut operational leverage to grow financial leverage when unimpeded; that’s their function. CEOs get paid to grow debt, to leverage shareholder value under the law. A + L + OE.
Congress ceded its responsibilities to expert tribes, allowing them to write the laws and propagate the results with best practice, fueled by MMT for themselves in a positive feedback loop. And they destroyed the laboratories of democracy in the process.
The nexus lies in the university system, guided by MIC, which knows it is required to sustain the fiat system. The more the educated experts depend upon fiat, the larger MIC becomes. And common core completely destroyed what was left of K-12 – any deviation from the status quo.
From the perspective of MIC, the professors are useful idiots. And from the perspective of tech, MIC is a useful idiot. It’s a bad marriage, with expectable results.
Voting is now irrelevant to anyone not fighting for a spot at the MMT trough because SCOTUS is inherently corporate. No one on that bench has ever worked. They are all corporate experts. There is no Bill of Rights, when it does not serve the interests of 5 judges. That’s why those appointments are the critical path.
But among the comedy of errors, the greatest error was removing the certification of skills from labor and handing it over to politicians who have never worked a day in their lives, to the end of seeking the cheapest labor on the planet to keep this mess rolling downhill. The symptoms are a function of demographics.
Quite the show though.
My experience with being called for jury duty makes me think that statement may not be correct. Perhaps what was meant is “a knowledgeable jurist” since a judge’s actions are the subject of the article?
I will revise to clear the matter up, but bankruptcy cases are decided by judges.