The months leading up to a retailer’s bankruptcy filing can be a scramble of payments hastily made to some and withheld from others, as many vendors insist on getting paid quickly if they’re shipping at all. But those payments risk getting clawed back down the line — and in the case of Barneys New York’s bankruptcy, a joint venture linked to its lender is now seeking to collect.
When Barneys sold its assets in a $271.4 million sale to Authentic Brands Group, which teamed with lender B. Riley Financial Inc. on the deal, the agreement included a provision for something called “avoidance actions,” which refers to lawsuits that can be filed — usually either by the company in bankruptcy or a trustee — against creditors who got paid by the company before its bankruptcy filing.
The reason that the option exists at all to sue those creditors is to serve a fundamental goal of bankruptcy proceedings — spreading the losses more fairly, said bankruptcy experts.
“Because we allow debtors to make any transfer they want before they file for bankruptcy, they can make strategic or preferential payments and then file, which would allow debtors to rearrange their affairs and pay their cronies without recourse for others,” said Bruce Markell, a bankruptcy professor at the Northwestern University Pritzker School of Law, and a former U.S. bankruptcy judge in Nevada.
This prospect presents yet another conundrum for vendors figuring out how to deal with a retailer about to file for bankruptcy. Payments made by the company in the “usual course of business” are generally protected from such clawback suits, but if a vendor changes its terms in light of the imminent bankruptcy risk, say from a 30-day term to cash on delivery, that protection may no longer apply.
Vendors who were paid 20 days before a company filed for bankruptcy may be entitled to protection for their payments, and receive what is known as “administrative priority,” for their payments. But in general, bankruptcy simply means risk and losses, said Markell.
“When I was a bankruptcy judge, I used to say, ‘Welcome to the world of broken promises,’” he said. “Bankruptcies work on the fact that there’s going to be pain in the form of a discount, and that this discount is going to spread around to everybody in the group — because if everybody could be paid in full, there wouldn’t be a bankruptcy.”
The Barneys case also presents an interesting twist to this clawback dynamic. Here, it is not the estate or a U.S. trustee seeking to file those lawsuits to distribute funds more evenly among aggrieved creditors, but a joint venture involved in the Barneys liquidation.
Last week, GA Retail Inc. and Tiger Capital Group told the New York bankruptcy court overseeing the proceedings that they should be allowed to pursue those suits, since Barneys evidently handed them over as part of its sale. Tiger Capital is involved in Barneys’ liquidation sales with B. Riley subsidiary Great American Group, while GA Retail Inc. is a part of Great American. Tiger Capital and GA Retail have formed a joint venture, according to court filings.
GA and Tiger have their sights set on payments that Barneys made to creditors in the 90 days before its Chapter 11 filing on Aug. 6. Those payments amount to more than $86 million, according to court filings. GA and Tiger project that the preference avoidance actions, clawback suits that are so-called in reference to the arguably preferential treatment given to some creditors at the expense of others, have a value of $8 million.
GA and Tiger say they need to pursue these suits to help fund a roughly $27 million “wind-down” budget to tie up loose ends as the bankruptcy closes. About $2 million of that amount, for instance, was meant to pay out employee severance payments.
“Here, the agent is responsible for funding a wind-down budget to ensure the orderly liquidation of remaining assets and the wind-down of the debtor entities,” Tiger and GA said in their filing Friday, referring to themselves as the Agent.
“Crucial to that ongoing obligation is obtaining funding by prosecuting and settling avoidance actions,” they said.
A representative for B. Riley declined to comment beyond the filing.
A hearing is expected to take place on Feb. 4 in bankruptcy court in Poughkeepsie, N.Y., to address these and other issues related to the Barneys Chapter 11 plan to end the proceedings.
As part of the sale and debtor-in-possession financing orders, yet another nearly $11 million was set aside to pay professional fees, according to court filings. In a monthly operating report filed last week, Barneys’ attorneys disclosed that attorneys and advisers for the bankrupt estate and the creditors’ committee had been paid a total of nearly $10.1 million since the retailer filed for Chapter 11 protection in August.