In re Leslie Fay Companies, Inc.
| Decision Date | 21 April 1997 |
| Docket Number | Bankruptcy No. 93 B 41724 (TLB). |
| Parties | In re The LESLIE FAY COMPANIES, INC., et al., Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
COPYRIGHT MATERIAL OMITTED
Weil Gotshal & Manges, L.L.P. by Alan B. Miller, Brian S. Rosen, Frank L. Eaton, and Larren M. Nashelsky, New York City, for Debtors.
Wachtell, Lipton, Rosen & Katz by Richard G. Mason, New York City, for Official Committee of Unsecured Creditors.
Wisehart & Koch, by Arthur M. Wisehart, Heather R. Boshak, New York City, for Claimants.
Lowenthal Landau Fischer & Bring, P.C. by Matthew J. Gold, New York City, for CIT.
Togut, Segal & Segal, by John A. Porges, New York City, for 1400 Broadway.
Zivyak Klein & Liss, by Jeffrey L. Zivyak, Gilbert, Segall and Young L.L.P. by Martin P. Miner, New York City, for 1412 Broadway Associates.
McDermott, Will & Emery by Barbara R. Funt, New York City, for Debtors' Special Labor Counsel.
Robinson Silverman Pearce Aronsohn & Berman L.L.P. by Susan Power Johnston, New York City, for New York Life Insurance Co.
Lacher & Fox by Joseph L. Fox, New York City, for Stanley Wax.
Bachner, Tally, Polevoy & Misher, L.L.P. by Risa M. Rosenberg, New York City, for Arthur Levine, et al.
Eric R. Kuhn, PLR Linings & Coatings Inc., Bethlehem, PA, pro se.
DECISION AND CONFIRMATION
The Leslie Fay Companies, Inc., a publicly held Delaware corporation, and most of its operating subsidiaries1 (collectively "Leslie Fay") seek to confirm a joint plan of reorganization which has garnered the overwhelming support of all their creditor classes. The debtors are joined by the other proponent of their plan, the Official Committee of Unsecured Creditors (the "creditors' committee"). A handful of former employees, Jacob V. Falbaum, Anthony E. Gill, Emile Lewkowiez, Raymond J. Terwilliger, Lee Kishbaugh and Elizabeth Michaud (collectively "the Claimants"), object to confirmation contending that the plan is not in the best interests of creditors, is not economically feasible, and was not proposed in good faith. All six of these claimants allege some form of prohibited discrimination. Five assert only prepetition discriminatory action, but all contend they are entitled to postpetition administrative damages because of the debtors' failure to rehire them. The claims assert an aggregate indebtedness of some $80 million, the bulk of which is punitive damages for willful discrimination. The claims have not yet been fully adjudicated,2 but I have estimated two of the six at a total value of $469,687.81, not entitled to priority, and three of the six at $0.3 The parties agreed to estimate the sixth at $100,000 with an administrative priority.
The Claimants oppose confirmation on essentially four grounds: (1) the continuation of current management; (2) the presence in the plan of section 37.6, a release provision, negotiated not by Leslie Fay but by the creditors' committee; (3) the plan's failure to capture for creditors a substantial amount of insurance proceeds which are argued to be available to the estate and (4) the plan's risk vis-?-vis $140 million worth of net operating losses ("NOLs"). Another former employee, Juan Kelly, objects to confirmation because, he says, the plan does not provide for payment of retiree benefits. Two shareholders of Leslie Fay contend the plan unfairly discriminates against equity because although all equity is to be cancelled under the plan, current shareholder/officers of Leslie Fay will receive options to purchase new shares of the reorganized companies, some portion of which will be granted on the effective date of the plan if it is confirmed.
Leslie Fay has been in continuous operation since it was founded in 1947 by Fred Pomerantz, the father of Leslie Fay's current Chairman and Chief Executive Officer, John J. Pomerantz. Leslie Fay is engaged principally in the design, manufacture, and sale of diversified lines of moderate and better priced women's apparel, including dresses, suits, and sportswear. Its stock is listed on the New York Stock Exchange.
On February 1, 1993, Leslie Fay announced that it had discovered certain "accounting irregularities" arising from false entries that had been made in its bookkeeping system. The irregularities encompassed significant misstatements of inventory and cost of goods sold, which were more than likely intentionally caused by at least two former members of Leslie Fay's financial department, Paul Polishan and Donald Kenia. The misstatements resulted in Leslie Fay's reporting income of approximately $81 million in excess of actual results. The irregularities came to light during Leslie Fay's annual independent audit performed by BDO Seidman & Co. ("BDO Seidman") which informed Leslie Fay that it would have to restate its earnings for the years 1990, 1991, and 1992. As a result, the New York Stock Exchange suspended trading of Leslie Fay's stock.4
The discovery of the accounting irregularities spawned several litigations, not to mention the bankruptcy cases. Shareholders initiated a class action against Leslie Fay and several members of its management and board, as well as BDO Seidman. In re Leslie Fay Securities Litigation, Civ. No. 92-Civ-8032 ("the class action").5 The class action is proposed to be settled for roughly $34 million, most of which is being covered by Leslie Fay's executive liability protection policy, but approximately $8 million of which is being provided by BDO Seidman.
There is also a stockholder derivative action which was commenced before the bankruptcies and names essentially the same defendants. Langer, derivatively on behalf of the Leslie Fay Companies, Inc. v. John J. Pomerantz, et. al., Case No. XXXXXXXXX ("the derivative action"). The derivative action alleges that the defendants breached fiduciary duties, failed to supervise operations and employees, engaged in self-dealing to the detriment of the corporation, and knew or should have known material facts relating to the sales and earnings of Leslie Fay which they failed to disclose.6
About five weeks after the derivative action was commenced, the first tranche of bankruptcy filings occurred. On April 5, 1993, the affiliated companies of Leslie Fay ?€” Leslie Fay Companies, Inc., Hue, Inc., Spitalnick Corp., and Leslie Fay Licensing Corp.?€ Leslie Fay Retail Outlets, Inc., Leslie Fay Factory Outlet (Alabama), Inc., Leslie Fay Factory Outlet (California), Inc., Leslie Fay Factory Outlet (Iowa), Inc., and Leslie Fay Factory Outlet (Tennessee), Inc.?€”followed. The nine cases were procedurally consolidated. Despite the existence of nine separate debtors, Leslie Fay operated in essentially two divisions, its core businesses (called Leslie Fay) centered around the Leslie Fay and Outlander labels and its Sassco division centered around the Nipon label.
Not long after the financial irregularities were disclosed, the Securities and Exchange Commission ("SEC") and certain other regulatory authorities began investigating Leslie Fay and other persons. On October 29, 1996, Polishan was indicted on several counts of securities, bank, and wire fraud. Kenia pleaded guilty to federal charges of false reporting to the SEC.
Subsequent to the bankruptcy filings, the committee of equity security holders, suing in the name of Leslie Fay, commenced an action against BDO Seidman alleging that the accounting firm recklessly and negligently breached its duties to the debtors in connection with analyzing internal controls, performing the audits, and providing unqualified certifications of Leslie Fay's financial statements. In June 1995, this action was transferred from the bankruptcy court to the District Court for the Southern District of New York. After the equity committee disbanded, Leslie Fay abandoned this action with the concurrence of the creditors' committee by failing to respond to BDO Seidman's motion to dismiss the complaint.
Prior to the inception of the bankruptcy cases, members of Leslie Fay's "audit committee" of the board of directors, with the assistance of their attorneys, Weil Gotshal & Manges ("Weil Gotshal"), and their accountants, Arthur Andersen LLP ("Arthur Andersen"), started and later completed an investigation into the circumstances surrounding the accounting irregularities. In late September 1993, the audit committee determined that there was insufficient evidence to believe that any current member of Leslie Fay's senior management knew of, or participated in, the perpetration of the accounting irregularities. Troubled, however, by Weil Gotshal's failure to reveal that it represented targets of its investigation when it sought appointment to represent the debtors in possession in connection with these cases, the creditors' committee questioned Weil Gotshal's disinterestedness under section 327(a) of the Bankruptcy Code. This immediately cast into doubt the reliability of the audit committee's report. In response, the debtors moved for the appointment of an examiner. I granted that motion and approved the retention of Charles A. Stillman to investigate (i) Weil Gotshal's disclosure and disinterestedness and (ii) the veracity of the audit committee's report to determine whether there were any viable claims in connection with the accounting irregularities. The examiner concluded that Weil Gotshal did not disclose disabling, simultaneous representations and was not disinterested as required by the Bankruptcy Code. Notwithstanding, however, the examiner concluded that Weil Gotshal represented the audit committee in a proper fashion and that the investigation was not tainted by the disabling conflicts.
The United States Trustee, based upon the examiner's report, moved to disqualify Weil...
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