Aéropostale is asking a Manhattan bankruptcy court to force private equity firm Sycamore Partners to produce certain documents in connection with the upcoming trial. The retailer has accused Sycamore of improper trading in Aéropostale stock based on nonpublic, material information in an attempt to bar Sycamore from credit bidding on the chain’s assets. The chain on Saturday filed court documents that contained redacted information, and alleged that the private equity firm is relying on legal advice and then using privilege to shield and block discovery. Aéropostale insists the legal advice Sycamore received is relevant to its claims for credit bidding, equitable subordination and recharacterization.
Aéropostale has alleged that Sycamore affiliates controlled by Sycamore Partners and its managing director Stefan Kaluzny collectively owned more than 6.2 million shares of the retailer’s common stock, or nearly 8 percent of the shares outstanding. One of those affiliates, Aero Investors LLC, is the retailer’s prepetition lender, and Aéropostale said the private equity firm should be barred from using the loan to credit bid for the retailer’s assets. Essentially a credit bid would entail Sycamore using the dollar value of its credit claims as part of a bid for the retailer.
It also wants those credit claims subordinated because of alleged wrongful conduct, including the stock trading and its accusation that Sycamore participated in a “loan to own” scheme designed to bankrupt the debtors.
The other affiliate is TSAM Delaware LLC, which does business as MGF Sourcing U.S. LLC. Aéropostale has alleged that MGF has played a role in pushing it into bankruptcy by placing unreasonable and onerous payment terms to the chain’s orders.
Aéropostale said that when Kaluzny used advice of counsel as a defense of his trading activity of Aéropostale’s common stock, he “waived the attorney-client privilege with respect to the communications he and Sycamore Partners had with counsel concerning the transactions at issue,” adding that the retailer is therefore entitled to all documents concerning this advice.
A spokesman for Sycamore said, “Aéropostale filed a motion on August 6 reiterating its malicious claims that Sycamore engaged in improper trading activity in Aéropostale’s common stock. These unfounded claims are a continued attempt by Aeropostale management to deflect responsibility for the company’s disastrous financial performance.”
The spokesman said that “Sycamore sold its 6.3 million shares of Aéropostale common stock in early February 2016 for aggregate proceeds of approximately $1 million, or an average price of $0.17 per share. Sycamore’s sale of its Aéropostale shares complied with all applicable securities laws. Sycamore sold its stock following Aéropostale’s January 2016 announcement reaffirming guidance on yet another quarter of disappointing financial results, as a result of which the Aéropostale common stock had already priced in the prospect of the company’s potential bankruptcy filing.”
In a separate matter connected with the bankruptcy, Aéropostale is seeking court approval of $500,000 in expense reimbursement in order to facilitate a stalking horse agreement with Versa Capital, a private equity firm. Under the terms of the proposed Versa agreement, the private equity firm would acquire the debtors’ inventories, assume over 500 existing and modified unexpired store leases and continued employment for thousands of store-level and corporate employees.
Aéropostale filed its Chapter 11 petition on May 4.