In re Nine W. LBO Sec. Litig.

• Decision Date: 04 December 2020
• Docket Number: 20 MD. 2941 (JSR)
• Parties: IN RE: NINE WEST LBO SECURITIES LITIGATION Pertains to All Associated Actions
• Court: U.S. District Court — Southern District of New York

505 F.Supp.3d 292

IN RE: NINE WEST LBO SECURITIES LITIGATION Pertains to All Associated Actions

20 MD. 2941 (JSR)

United States District Court, S.D. New York.

Signed December 4, 2020

OPINION AND ORDER

JED S. RAKOFF, U.S.D.J.

Familiarity with the general background to this case is here assumed. In re Nine West LBO Sec. Litig., 482 F. Supp. 3d 187 (S.D.N.Y. Aug. 27, 2020). As relevant here, plaintiffs -- consisting of Marc Kirschner, as trustee for the Nine West Litigation Trust representing unsecured creditors (the "Litigation Trustee"), and Wilmington Savings Fund Society, FSB, as successor indenture trustee for various notes issued by Nine West (the "Indenture Trustee") -- brought these consolidated actions against former officers, directors, and shareholders of the fashion retail company The Jones Group, Inc. ("Jones Group" or "Company"), claiming breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraudulent conveyance, unjust enrichment, and violations of 15 Pa. Cons. Stat. §§ 1551 and 1553, arising out of the bankrupting, and bankruptcy, of the Company in connection with a 2014 leveraged buyout (the "2014 Transaction").

On August 27, 2020, the Court dismissed the fraudulent conveyance and unjust enrichment claims with respect to payments made in connection with certain shareholder transfers that were made as part of the 2014 Transaction. Dkt. No. 317. Thereafter, the director defendants and the officer defendants brought a second set of motions to dismiss plaintiffs’ remaining claims. Dkt. Nos. 322 & 325. By bottom line Order dated November 3, 2020, the Court granted in part and denied in part those motions. Dkt. No. 381. This Opinion and Order provides the reasons for that ruling.

I. Background ¹

A. The 2014 Transaction

Before 2014, Jones Group was a publicly traded global footwear and apparel company, selling brands such as Nine West, Anne Klein, and Gloria Vanderbilt to retailers across the country like Macy's, Lord & Taylor, and Walmart/Sam's Club. Compl. ¶ 45. In the years leading up to 2014, Jones Group struggled: revenue was flat, target earnings were missed, and store counts were down. Id. ¶ 46. One bright spot, however, was the performance of its Stuart Weitzman and Kurt Geiger brands, which had "increased in value since they were purchased between 2010 and 2012" and were "substantially exceeding" projections. Id. ¶¶ 86, 114.

In July 2012, the Board began to consider selling all or part of the Company. Id. ¶¶ 48-53. The Board retained Citigroup Global Markets ("Citigroup"), an investment bank, to serve as its advisor. Id. ¶ 48. Among other things, Citigroup advised the Board that, in the context of a transaction where Jones Group retained all of its businesses -- including the Stuart Weitzman and Kurt Geiger brands -- the Company could support a debt to EBIDTA ratio of 5.1 times its estimated 2013 EBIDTA. Id. ¶ 107.

Around April 2013, the private equity firm Sycamore Partners Management, L.P. ("Sycamore") expressed interest in transacting an arrangement with Jones Group, and, after some negotiation, offered to buy Jones Group for $15 per share, reflecting an implied enterprise value of $2.15 billion. Id. ¶¶ 52-58. The Merger Agreement involved five integrated components that would "occur substantially concurrently." Id. ¶ 61.

1. The Merger. Jones Group would merge with a Sycamore affiliate, and, as the surviving corporation, be renamed Nine West Holdings, Inc. ("Nine West"). Id.

2. The Sponsor Equity. Sycamore (along with another private equity firm) would contribute at least $395 million in equity to Nine West. Id.

3. The Additional Debt. Nine West would increase its debt from $1 billion to $1.2 billion. Id.

4. The Shareholder Transfers. The Jones Group shareholders would be cashed out at $15 per share, for a total of approximately $1.2 billion. Id.

5. The Carve-Out Transactions. The Stuart Weitzman and Kurt Geiger brands, along with another business unit, Jones Apparel (collectively, the "Carve-Out Businesses"), would be sold to other Sycamore affiliates for substantially less than their fair market value. Id.

The Merger Agreement also contained a "fiduciary out" clause, which allowed the directors to withdraw their recommendation in favor of the 2014 Transaction if they determined, "after consultation with counsel, that withdrawal ‘could be required by the directors’ fiduciary duties under applicable law." Id. ¶ 110.

On December 19, 2013, the Board unanimously voted to approve the Merger Agreement. Id. ¶ 65. While the Board's approval purported to exclude the Additional Debt and the Carve-Out Transactions, the Merger Agreement included provisions that obligated the Company to assist Sycamore in planning the Carve-Out Transactions and in syndicating the Additional Debt. Id. ¶¶ 66-70. To that end, many officers participated in rating agency presentations and prepared offering memoranda for the Additional Debt. Id. ¶ 65.

Before the closing, Sycamore made changes to the deal terms. Sycamore reduced its equity contribution from $395 million to $120 million and correspondingly arranged for additional new debt that would increase Nine West's total debt from $1.2 billion to $1.55 billion. Id. ¶¶ 103-06. This new structure meant that the Company's debt would be 7.8 times the Adjusted EBIDTA calculated by the Company's management and 6.6 times the Adjusted EBIDTA figure produced by Sycamore -- both higher than the 5.1 multiple that Citigroup had advised the Board that the Company could sustain in a scenario where it retained all its businesses. Id. ¶ 108.

Because the Merger Agreement contemplated that Sycamore would sell off the Carve-Out Businesses to other Sycamore affiliates, Sycamore retained Duff & Phelps to render a solvency opinion as to "RemainCo" -- that is, the Nine West businesses that would remain following the Carve-Out Transactions. Id. 84. Sycamore created "unreasonable and unjustified" EBIDTA projections for RemainCo, and instructed Duff & Phelps to use those numbers for its analysis. Id. ¶¶ 84-86. Sycamore did so, according to plaintiffs, because the more value that was attributed to RemainCo, the easier it would be to justify a low purchase price for the Carve-Out Businesses. Id. ¶ 71. Eventually, Sycamore settled on a $1.58 billion valuation of RemainCo - a number just above the $1.55 billion in debt that RemainCo would take on. Id. ¶¶ 71, 75. While the officers and directors were not directly aware that Sycamore had "manipulated" the projections of RemainCo, they "received updated reports and projections from Jones Group management on a monthly basis and were therefore aware of the decline in actual and projected performance of the businesses that would comprise RemainCo, and the glowing projections for the performance of the crown jewels that would be sold to Sycamore affiliates." Id. ¶ 95.

The Merger closed on April 8, 2014. Id. ¶ 4. Upon the Merger's closing, Sycamore's principals, Stefan Kaluzny and Peter Morrow, became the sole directors Nine West. Id. ¶ 43. As part of the closing, Kaluzny and Morrow caused Nine West to sell the Carve-Out Businesses to newly formed Sycamore affiliates for $641 million, a price substantially below their fair market value of at least $1 billion, id. ¶ 136, and even below the $800 million that Jones Group had paid to acquire the fast-growing companies a few years earlier. After the Merger closed and upon the termination of their employment, most of the officers and certain employees received "change in control" payments in amounts ranging from $425,000 to $3 million. Id. ¶¶ 39-40.

B. 2014 Litigation

In early 2014, after the announcement of the 2014 Transaction but before the closing, several stockholders filed suit in New York state court against Jones Group, its directors and officers, and Sycamore, among others. See In re The Jones Group Inc. S'holders Litig., No. 650096/2014 (N.Y. Sup. Ct. Mar. 7, 2014). The complaint asserted direct and derivative claims against the directors. Dkt. No. 327-2 (the "2014 Complaint"), ¶¶ 1, 43. Specifically, the shareholder plaintiffs alleged that the directors breached their fiduciary duties to the Company in connection with the process leading up to their decision to sell the Company to Sycamore, resulting in the "inadequate consideration of $15 per share." Id. ¶¶ 1, 11.

As part of the putative derivative claim, certain plaintiffs made a demand on the Company, as required by Pennsylvania law. Id. ¶ 44. In response, the Board formed a special litigation committee (the "SLC") to investigate the claims. See Stipulation of Settlement, Dkt. No. 327-3, at 3. The investigation focused on the events leading up the signing of the Merger Agreement in December 2013. Report of the Special Litigation Committee, Dkt. No. 327-1, Table of Contents.² The SLC found "that the Board has acted on an informed basis in good faith and in the best interests of [Jones Group] in agreeing to the merger agreement with Sycamore," that it "was focused at all times on maximizing return for shareholders" and that the Company "should not pursue the shareholder claims against the Board because they lack merit." Id. at 3-4, 118.

The plaintiffs and the defendants thereafter entered into a Stipulation of Settlement. Dkt. No. 327-3.³ As a part of the settlement, the "Releasing Persons" agreed that they would be barred from suing any "Released Person" for "any Settled Claims and from commencing, prosecuting or participating in the commencement or prosecution of any Settled Claims in any other action, suit, or proceeding." Stipulation and Settlement at 16. "Releasing Persons" was defined as "Plaintiffs and all members of the Class." Id. at (A)(1)(r). "Plaintiffs," in turn, was defined as "individually and collectively," the six named plaintiffs in the action"; and the "Class" was defined to exclude "Defendants." Id. at (A)(1)(b), (o). "Released Persons" was defined to include the Company, and its officers and directors. Id. (A)(1)(q), (...