In re Retail Grp.

• Decision Date: 09 March 2021
• Docket Number: Case No. 20-33113-KRH
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re: RETAIL GROUP, INC., et al., Debtors.

In re: RETAIL GROUP, INC., et al., Debtors.

Case No. 20-33113-KRH

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF VIRGINIA Richmond Division

March 9, 2021

Chapter 11
Jointly Administered

MEMORANDUM OPINION

On July 23, 2020 (the "Petition Date"), Retail Group, Inc. (f/k/a Ascena Retail Group, Inc.) ("Ascena") and sixty-three of its affiliates¹ (collectively, the "Debtors") commenced the above-captioned jointly administered bankruptcy cases (collectively, the "Bankruptcy Cases") by

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each filing a voluntary petition for relief under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the Eastern District of Virginia (this "Court"). Following the Court's approval of a disclosure statement in accordance with section 1125 of the Bankruptcy Code, on February 25, 2021, the Court conducted an evidentiary hearing (the "Confirmation Hearing") to consider confirmation of the Debtors' Plan² and unresolved objections thereto filed by the United States Securities and Exchange Commission (the "SEC"), the Securities Litigation Lead Plaintiffs (as such term is defined herein); and the United States Trustee.³ Notably, while the objecting parties made argument in support of their objections, only the Debtors offered evidence at the Confirmation Hearing.

By its Order Confirming the Amended Joint Chapter 11 Plan (Technical Modifications) of Mahwah Bergen Retail Group, Inc. (f/k/a Ascena Retail Group, Inc.) and Its Debtor Affiliates entered February 25, 2021 [ECF No. 1811] (the "Confirmation Order"), the Court confirmed the Plan. In accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"), this Memorandum Opinion supplements the Court's findings of facts and conclusions of law set forth in the Confirmation Order. This Court has subject-matter jurisdiction over the Bankruptcy Cases pursuant to 28 U.S.C. §§ 157 and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia

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dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). Venue is appropriate pursuant to 28 U.S.C. § 1409.

Prior to the Petition Date, the Debtors had entered into a Restructuring Support Agreement (the "RSA")⁴ then supported by 68% of the Debtors' prepetition secured term lenders (the "Term Lenders"). Teffner Decl. ¶ 4, ECF No. 1760 at 3. The RSA contemplated a balance sheet restructuring but also provided the Debtors flexibility to consider alternative value-maximizing transactions. Shortly after the Petition Date, on July 31, 2020, the Debtors filed their Joint Chapter 11 Plan of Reorganization of Ascena Retail Group, Inc. & Its Debtor Affiliates [ECF No. 154] (the "Original Plan") to implement the restructuring transaction contemplated by the RSA. The Original Plan would have converted the debt held by the Debtors' Term Lenders into equity in the Reorganized Debtors. Original Plan, art. III.B.4, ECF No. 154 at 21. General unsecured creditors would receive their pro rata share of $500,000. Id., art. III.B.5, ECF No. 154 at 22. Then-existing holders of equity interests in Ascena would receive nothing.⁵ Id., art. III.B.8, ECF No. 154 at 22.

As the Bankruptcy Cases progressed, the Debtors pivoted from the debt-to-equity conversion set forth in the Original Plan to three consummated sale transactions. First, the Debtors obtained a stalking horse bid for their Catherines assets of $16 million. Order (I) Approving Stalking Horse Protections, (II) Approving Bidding Procedures for Sale of Catherines Assets, & (III) Approving Contract Assumption & Assignment Procedures, ECF No. 455. The Debtors ultimately sold the Catherines enterprise as a going concern for a purchase price of $40.8 million. Am. Order (I) Approving Definitive Purchase Agreement,

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(II) Authorizing Sale of Catherines Assets Free & Clear of Liens, Claims, Encumbrances, & Interests, & (III) Granting Related Relief, ECF No. 690. Second, the Debtors obtained an initial stalking horse bid for their Justice assets of $44 million. Order (I) Approving Stalking Horse Protections, (II) Approving Bidding Procedures for Sale of Justice Assets, & (III) Approving Contract Assumption & Assignment Procedures, ECF No. 986. The Debtors ultimately sold the Justice enterprise as a going concern for $71 million. Order (I) Approving Sale of Justice Assets Free & Clear of All Liens, Claims & Encumbrances, (II) Authorizing Assumption & Assignment of Certain Executory Contracts & Unexpired Leases, & (III) Granting Related Relief, ECF No. 1118. Third and finally, the Debtors sold their remaining brands⁶ (the "Premium Sale") as a going concern for a purchase price of $540 million, exclusive of the assumption of certain liabilities. Order (I) Approving Assumption & Assignment of Certain Non-Real Property Contracts & Real Property Leases, (II) Approving Sale of Premium & Lane Bryant & Certain Other Assets Free & Clear of All Liens, Claims, Encumbrances, & Interests, (III) Authorizing Assumption & Assignment of Certain Executory Contracts & Unexpired Leases, (IV) Establishing Rejection Procedures, & (V) Granting Related Relief, ECF No. 1295. When the Premium Sale closed on December 23, 2020, the Debtors had effectively completed the sale of substantially all of their assets. Teffner Decl. ¶ 5, ECF No. 1760 at 3. The Ascena brands live

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on, however, with almost all of the Debtors' stores continuing business operations and most employees retaining their jobs.⁷

The RSA was amended in light of the foregoing. The RSA, as amended and revised, was supported by 97% of the Term Lenders. Teffner Decl. ¶¶ 4-5, ECF No. 1760 at 3-4. Similarly, the Plan was subsequently amended to provide for a distribution of remaining estate cash following the effective date (the "Effective Date")⁸ of the Plan and incorporated a global resolution with the official committee of unsecured creditors.⁹ Id. ¶ 5, ECF No. 1760 at 3-4. The Plan now provided for payment in full in Cash on the Effective Date of priority and administrative claims and the Debtors' pre-Petition Date ABL loan in the amount of $333 million. The fulcrum class was the Term Lenders, who will receive their pro rata share of the remaining cash subject to a carveout for general unsecured creditors. In turn, the general unsecured creditors will receive a pro rata distribution from a trust (the "GUC Trust") established for their benefit and, as more fully explained herein, a possible waiver of any avoidance action that may be brought against a holder of a general unsecured claim. Plan, art. III.B.5 & IV.C, ECF No. 1811 at 104-105, 107. The GUC Trust will be funded by $7.25 million in cash and a portion of proceeds from certain non-bankruptcy litigation. Id., art. I.A.84, ECF No. 1811 at 92.

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Holders of equity interests in Ascena are not projected to receive any distribution and, as such, were deemed to reject the Plan. Id., art. III.B.8, ECF No. 1811 at 105.

To effectuate the sale transactions, the Debtors used certain of the sales proceeds to repay the Debtors' Court-approved debtor-in-possession financing facilities. Kosturos Decl. ¶ 6, ECF No. 1761 at 3. The Debtors reserved appropriately $255 million for payment of certain unresolved claims to be paid in full pursuant to the terms of the Plan: (a) approximately $61 million for projected administrative and priority claims related to the Justice and Catherines businesses; (b) approximately $27 million to fund administrative costs related to the post-Effective Date wind-down of the Debtors' estates; (c) $7.25 million to fund the GUC Trust in accordance with the terms of the Plan; (d) approximately $5.3 million to cash collateralize certain outstanding surety bonds; and (e) approximately $154 million for allowed administrative, priority, and other claims or amounts required to be paid under the Plan. Id. ¶ 8, ECF No. 1761 at 4. Based on the claims filed to date and the Debtor's books and records, the Debtors will have cash reserved on the Effective Date well in excess of what will be necessary to pay all allowed administrative, priority, and other claims or amounts required to be paid under the Plan. Id. ¶ 11, ECF No. 1761 at 5. After payment of the allowed amount of these claims, the Plan provides that any remaining excess cash will be disbursed to the Term Lenders. Id.

As part of the holistic structure of the Plan, the major constituents negotiated and included certain releases and exculpation provisions contained in Article VIII of the Plan. In particular, the Plan provides, inter alia:

[E]ach Released Party is conclusively, absolutely, unconditionally, irrevocably, and forever released and discharged by each and all of the Debtors, the Reorganized Debtors, and their Estates . . . from any and all Causes of Action,¹⁰ including any derivative claims,

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asserted or assertable on behalf of any of the Debtors . . . based on or relating to, or in any manner arising from, in whole or in part, the Debtors (including the management, ownership, or operation thereof), the purchase, sale, or rescission of any Security of the Debtors or the Reorganized Debtors, the subject matter of, or the transactions or events giving rise to, any Claim or Interest that is treated in the Plan, . . . or any other related agreement, or upon any other act, omission, transaction, agreement, event, or other occurrence (in each case, related to any of the foregoing) taking place on or before the Effective Date.

(the foregoing the "Debtor Releases"). Plan, art. VIII.E, ECF No. 1811 at 129-30. The Plan further provides:

[E]ach Releasing Party . . . is deemed to have released and discharged each Debtor, Reorganized Debtor, and each other Released Party from any and all Causes of Action, whether known or unknown, including any derivative claims, asserted or assertable on behalf of any of the Debtors . . . based on or relating to, or in any manner arising from, in whole or

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