Creditor Corner

for the week ended February 16, 2024

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Robertshaw LME sh*tsh*w, WeWork Examiner Sought, Boy Scouts stopped in their tracks, Ergen against the ropes, Private credit versus broadly syndicated market, Houston continues to have a PO Box issue,  and much, much more!

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Ed Neiger & Nick Brown Speak Up
Committee Standing

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Bruce Richards on the Markets:

Retail Sales Fall

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Earlier this month a Delaware bankruptcy judge ruled that a creditors’ committee has standing to pursue breach of fiduciary duty claims on behalf of a Delaware limited liability company’s bankruptcy estate against the company’s officers.  This holding is significant because at least three prior Delaware bankruptcy court cases held that creditors were barred from pursuing such derivative claims by operation of Delaware state law. 

Prior to the court’s decision in In re Pack Liquidating, LLC, bankruptcy courts in Delaware had rejected creditors’ requests for derivative standing to bring lawsuits belonging to an LLC’s bankruptcy estate.  Those courts pointed to the Delaware Limited Liability Company Act, which expressly requires that a member or assignee of the company must bring such claims.  These decisions left few vehicles for recovering on claims of managerial misconduct where the managers themselves remained in control of the debtor.  Without the ability to pursue such claims derivatively, creditors hoping to monetize these claims were forced to consider more extreme avenues such as appointing a trustee or converting the case outright. 

Breaking with his peers, Judge Goldblatt found that the Bankruptcy Code implicitly authorizes courts to grant derivative standing to pursue estate causes of action which the estate’s fiduciaries refuse to bring.  Judge Goldblatt relied on the Third Circuit’s decision in In re Cybergenics, which held that a committee’s standing is derived from federal bankruptcy law.  As such, a state statute imposing limitations on derivative standing has no impact on the bankruptcy court’s authority to grant standing to a creditors’ committee to pursue claims on behalf of the bankruptcy estate.  

The decision in Pack Liquidating furthers bankruptcy’s goal of maximizing value for the benefit of the estate and is a victory for creditors.  It remains to be seen if other bankruptcy judges will follow this court’s lead, however, Judge Goldblatt’s opinion makes a compelling case that the bankruptcy court’s authority to grant derivative standing to committees is dictated by binding Third Circuit precedent and the Bankruptcy Code itself.

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One to Watch

Houston has a P.O. Box Issue Part 2

U.S. Trustee seeking to dismiss Sorrento or transfer the case because Jackson Walker created venue just hours before filing for BK.

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Bruce Richards on the Markets

Retail Sales Stall

Retail sales dropped by 0.8% in January, well below the consensus (-0.2%). Net revisions from the prior two months were -0.5%, despite the +0.7% uptick for food (restaurants, grocery). Retail Sales for in-store declined even sharper, -3%. While LVMH, Gucci, and Hermes and department stores such as Neiman Marcus are performing well while capturing the high-end wallet, successful online clothing retailers such as Temu, who gamifies shopping and gets the medal for biggest spend on Super Bowl Sunday ads ($21 million), and Mytheresa are also capturing greater market share. In contrast, low-income consumers, are starting to tighten their belt given their inflation pinch and this is being felt by retailers who service this cohort. Under-capitalized/highly leveraged/sub-scale retailers are experiencing a more challenging time. For example, Express Inc. has retained law firm Kirkland & Ellis to consider how to restructure ~$280 million of debt amid declining sales while its equity share price is down 98% from 2021 (price decline from 125 to 2.5).

Buyer Beware: When investing in distressed, my rule is to seek Good Company, Bad Balance Sheet opportunities since you can fix a balance sheet by restructuring, but it’s too hard to fix a company that is going through structural decline. When a Good Company emerges from bankruptcy, it should not only be a going concern, but it should also be on a path of profitability and with strong operating margins. It has been my opinion, that highly levered apparel/household goods retailers perform poorly post-bankruptcy, that impairs the unsecured creditors, even when they re-cap the company. Conclusion, avoid low-end retailers who are in the process of/have filed for BK.

Stressed Retailers’ Watchlist: (Source: Marathon Asset Management)

To follow Bruce’s thoughts on markets, investing, and more follow @bruce_markets

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