The Brooks Brothers fall 2012 presentation at the flagship store.

The dust on the Brooks Brothers bankruptcy case has settled, but the men’s wear retailer’s former principals may not be entirely off the hook. 

That’s the argument of the suit this week in New York federal court by Castle Apparel Ltd. and TAL Apparel Ltd., who were minority investors in the former Brooks Brothers entity before its bankruptcy and $325 million sale last year to a joint venture of Authentic Brands Group and Simon Property Group. 

The plaintiffs, who go by TAL in their complaint, claimed they’re owed more than $100 million because of a so-called “make-whole” provision in their stockholders agreement from 2016 that was apparently meant to protect their equity investment. 

Their suit targets the former Brooks Brothers chair Claudio Del Vecchio, his son and family trust, and argues that their alleged decisions to reject potential buyers for the retailer in 2019 and to instead put the company into Chapter 11 last year ultimately diminished its value and deprived TAL of recoveries for their investment. Del Vecchio issued a statement this week denying the allegations. 

Nonetheless, the suit shows how claims stemming from a bankruptcy can sometimes follow even after a sale and Chapter 11 plan confirmation, and target individual executives. Chapter 11 plans often include releases to shield executives from individual liability over a bankruptcy, but parties may sometimes agree to exclude certain claims from being released so that they can be addressed later, even after a bankruptcy, experts said.  

“In reorganization cases…a lot of times, they will have a plan that includes releases, not necessarily of all claims, but where directors and officers receive releases that could head off these types of complaints,” said Jarret Hitchings, partner at Duane Morris LLP, who is not involved in the case and commented generally. 

Brooks Brothers’ Chapter 11 filing in July came during a historic summer of retail bankruptcies apparently triggered by the COVID-19 pandemic. In its bankruptcy case, the more than 200-year-old retailer cited lockdowns, supply chain disruptions, and declining demand for business attire during the work-from-home era of the pandemic. The TAL suit claims, however, that the pertinent decisions not to pursue 2019 bids and to consider bankruptcy were made before the pandemic. 

The dispute also highlights features of the bankruptcy recovery process, often a source of disappointment for stakeholders who stand below a bankrupt company’s secured creditors. Secured lenders have leverage through liens and collateral, and so are prioritized for repayments in a bankruptcy. But general unsecured creditors including vendors and landlords are lower on the list for repayments, while holders of equity interests fall even further behind. 

“Equity in bankruptcy is last in line, so they’re very much at risk,” said Daniel Besikof, partner at Loeb & Loeb LLP, who is also not involved in the case, and commented generally. “Very typically, they’re wiped out in bankruptcy cases, particularly in retail bankruptcy cases, where oftentimes even unsecured creditors, who come ahead of equity, could be wiped out.”

The TAL plaintiffs see the suit as an avenue for recourse.

“TAL has filed claims for more than $100 million in the Southern District of New York against Claudio and Matteo Del Vecchio, Delfin SARL and other entities affiliated with the Del Vecchio family, alleging breaches of fiduciary duties and contractual obligations to TAL and the Lee family in connection with TAL’s investment in Brooks Brothers,” Kirkland & Ellis partner Katie Jakola, who represents the TAL investors in the suit, said in a statement. “We look forward to presenting TAL’s case in court to recover what is owed.”

Claudio Del Vecchio declined to comment beyond his statement on the complaint this week, in which he said, “the only comment we will have is that the allegations in the complaint are false and we expect that the court will dismiss the case.”