In re Bh S & B Holdings LLC
| Decision Date | 24 November 2009 |
| Docket Number | Bankruptcy No. 08-14604 (MG).,Adversary No. 09-01151 (MG). |
| Citation | 420 B.R. 112 |
| Parties | In re BH S & B HOLDINGS LLC, et al., Debtors. Official Committee of Unsecured Creditors, on behalf of Debtors, Plaintiff v. Bay Harbour Master Ltd., et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
Robert M. Hirsh, Esq., Arent Fox LLP, New York, NY, Timothy F. Brown, Esq., Arent Fox LLP, Washington, DC, Attorneys for the Official Committee of Unsecured Creditors.
Richard P. Swanson, Esq., Arnold & Porter LLP, New York, NY, Attorneys for York Capital Management LP; James G. Dinan; and Luis Medeiros.
Israel Dahan, Esq., Cadwalader, Wickersham & Taft LLP, New York, NY, Attorneys for Bay Harbour Master Ltd.; Trophy Hunter Investments; BH S & B Inc.; Bay Harbour Management LLC; Douglas P. Teitelbaum and Scott Sozio.
Theresa A. Foudy, Esq., Curtis, Mallet-Prevost, Colt & Mosle, LLP, New York, NY, Attorneys for Hilco SB, LLC.
Owen L. Cyrulnik, Esq., Grais & Ellsworth LLP, New York, NY, Attorneys for BH S & B Finco LLC and BHY S & B Holdco LLC.
Walter Benzija, Esq., Neal W. Cohen, Esq., Halperin Battaglia Raicht, LLP, New York, NY, Attorneys for Defendants Gary Sugarman and Andrew Todd.
Arthur H. Aufses III, Esq., Kramer Levin Naftalis & Frankel LLP, New York, NY, Attorneys for YSOF S & B Investor LLC; York Special Opportunities Fund LP; York Special Opportunities Feeder Fund (Cayman) LP.
Pending before the Court are all of the defendants' motions to dismiss this adversary proceeding brought by the Official Committee of Unsecured Creditors (the "Committee") (ECF Doc. #'s 11, 16, 21, 24, 27, 31). Repeat corporate bankruptcies, sometimes by the same debtor and sometimes by a successor entity, particularly under current economic conditions, are, unfortunately, not uncommon. This case stands out, however, by the rapidity with which the debtors here, successors through a chapter 11, section 363 purchase in July 2008 of the Steve & Barry's women's clothing business for $163 million, subject to various adjustments (Compl. ¶¶ 30, 42), descended into their own chapter 11 cases in November 2008. The debtors' filing here was followed immediately by a court-approved going-out-of-business sale and the shuttering of 153 stores that the debtors' business plan had hoped to maintain, with the resulting loss of many jobs. The debtors are hopelessly insolvent. At the time of the chapter 11 filings, debtors had $90 million of first lien debt, $75 million of second lien debt, and over $5.4 million in unsecured debt from their 30 largest unsecured creditors. (ECF Doc. # s 31 (Affidavit of Richard A. Sebastiao Pursuant to Local Bankruptcy Rule 1007-2) and 46 (Consolidated List of Creditors Holding the Thirty Largest Unsecured Claims Against The Debtors).) At the present time the debtors are, or are close to, administratively insolvent.
As explained below, Steve & Barry's assets were acquired from the Stone Barn LLC Chapter 11 estate by a group of private equity investors, and a firm specializing in the liquidation of retail stores, as well as by several owners of the Stone Barn LLC debtors. Initially capitalized by $225 million, including a $125 million first lien loan provided by Abelco Finance LLC ("Abelco"), an affiliate of Cerberus, a $75 million loan provided by a subordinated second lien facility from Defendant BH S & B Finco, LLC ("Finco"), and $25 million in equity from defendant BHY S & B Holdco LLC ("Holdco"). (See Compl. ¶¶ 31, 35.) In three months of operation, in August, September and October, 2008, the acquired business rapidly burned through its available capital and the new owners declined to invest additional funds. This bankruptcy case followed.
The Committee commenced this adversary proceeding against the entities and individuals that were involved in the purchase and short-lived operations of the debtors, seeking to recover money for the estate, based on claims of piercing the corporate veil, breach of fiduciary duty and equitable subordination or recharacterization. The defendants have all moved to dismiss the Complaint. One thing that stands out here is the absence of any allegation that, during the debtors' short-lived and rapid path to bankruptcy, any of the defendants did anything to recover the money they invested or loaned to the debtors. In other words, the defendants too lost a lot of money as this venture failed.
For the reasons explained below, with the exception of the equitable subordination claim against defendant Finco, the Court concludes that the Complaint must be dismissed with prejudice. With respect to the equitable subordination claim against Finco, the Complaint is dismissed with leave to amend within 30 days of entry of this Opinion and Order.
The facts below are taken from the Complaint (ECF Doc. # 1) and the original first, Second and Third Amended and Restated LLC Agreements of BH S & B Holdings, LLC ("Holdings"), and the Amended and Restated LLC Agreement of Holdings's indirect parent, BH S & B Holdco LLC ("Holdco") (collectively, the "LLC Agreements").1
This case arises out of the Bankruptcy Code § 363 sale of the bankrupt Steve & Barry's line of clothing stores and the subsequent bankruptcy filing by the purchaser, Holdings, and its operating subsidiaries (together with Holdings, the "Debtors"). See In re: Stone Barn Manhattan, LLC, Case No. 08-12579, ECF Doc. # 628 (Bankr.S.D.N.Y. August 22, 2008) (Gropper, J.). Steve & Barry's sold licensed university apparel and lifestyle brands, private label casual clothing and accessories for men, women and children, and exclusive celebrity branded lines of apparel and accessories. (Compl. ¶ 25.) At the time it filed for bankruptcy on July 9, 2008, Steve & Barry's, through its parent corporation, S & B Industries, Inc., operated 276 stores. (Id.) Steve & Barry's filed for bankruptcy due to a liquidity crisis caused by a host of reasons, including: delayed store openings, delayed receipts of tenant allowances, and reduced borrowing capacity arising from inventory appraisal reductions, all exacerbated by the instability in the credit markets. (Id. ¶ 27.)
On August 21, 2008, Holdings purchased a majority of the assets and liabilities of S & B Industries, Inc. in a § 363 sale in the Steve & Barry's bankruptcy proceeding. (Id. ¶ 24.) The purchase price for the acquisition was $163 million, subject to various adjustments. (Id. ¶ 30.) The Bankruptcy Court for the Southern District of New York approved the sale in an order on August 22, 2008. (Id. ¶ 24.)
Defendant Teitelbaum formed Holdings on behalf of defendants Bay Harbour Management LC, Bay Harbour Master Ltd., Trophy Hunter Investments, Ltd., and BH S & B, Inc. (collectively, "Bay Harbour") for the purposes of entering into the Asset Purchase Agreement with S & B Industries on July 28, 2008. According to the Complaint, Holdco was formed by Bay Harbour to serve as a holding company for Holdings and was Holdings's sole managing member; Holdco was eventually replaced by Intermediate Holdco, against whom plaintiff has not brought any causes of action. (Compl. ¶ 29.)
Intermediate Holdco was later interposed as an intermediate entity between Holdco and Holdings, with the same managerial powers as Holdco. However, according to the original and Amended and Restated, and Second and Third Amended and Restated LLC Agreements of Holdings, the sole initial member of Holdings was Bay Harbour Holdings LLC ("Bay Harbour LLC"), which remained the sole member until August 22, 2008. There are contradicting statements in the Second and Third Amended and Restated LLC Agreement of Holdings as to when Intermediate Holdco became the sole managing member of Holdings. According to the Second Amended and Restated LLC Agreement of Holdings, on August 22, 2008, Bay Harbour LLC "contributed, conveyed, assigned, transferred, and delivered to `Holdco' [defined therein as `BHY S & B Holdco LLC'] 100% of [its] membership interests of [Holdings]," pursuant to a "certain Contribution Agreement." (Second Amended and Restated LLC Agreement of Holdings, Dahan Aff., Ex. S.) However, the Third Amended and Restated LLC Agreement of Holdings indicates that on August 22, 2008, Bay Harbour LLC "contributed, conveyed, assigned, transferred, and delivered to `Holdco' [defined therein as `S & B Intermediate Holdco LLC'] 100% of [its] membership interests" in Holdings, making `Holdco' the sole managing member of Holdings, pursuant to a "certain Contribution Agreement" but also, that "on October 9, 2008, `Holdco' as the sole managing member of [Holdings], contributed, conveyed, assigned, transferred, and delivered to "Intermediate Holdco" [also defined as `S & B Intermediate Holdco LLC'] 100% of its membership interests in Holdings as the sole member of the Company, pursuant to a "certain Contribution Agreement."" (Dahan Aff., Ex. E.) In the Complaint, plaintiff alleges that Intermediate Holdco was interposed as an "intermediate holding Debtor of the Debtor" on or about October 14, 2008. (Compl. ¶ 49.) Furthermore, the Second Amended and Restated Limited Liability Company Agreement of Holdings also indicates that the sole Member of the Company is Holdco; whereas the Third...
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