Avenue Stores, LLC – Creditors’ Committee Climbs onto Chapter 7 Conversion Bandwagon as Pressure Mounts on Debtors and Sponsor Versa Capital Management

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November 18, 2019 – The Debtors' Official Committee of Unsecured Creditors (the “Committee”) filed an emergency motion seeking conversion of the Debtors’ Chapter 11 cases to cases under Chapter 7 [Docket No. 458]. This motion follows a similar November 14th filing by the U.S. Trustee assigned to the Debtors' cases [Docket No. 441]. In both cases, the motions highlight the ability of a Chapter 7 Trustee to pursue causes of action against the Debtors' equity sponsor Versa Capital Management ("Versa") relating to "avoidance of actual and constructively fraudulent transfers, claims for avoidance of preferential transfers, breach of fiduciary duty, aiding and abetting, corporate waste, equitable subordination and recharacterization." These are potential causes of action raised by the Committee weeks ago [Docket Nos. 384 and 391]; the issue for the Committee is that since then it has become clear that the Committee may not have standing to pursue Versa themselves. A Chapter 7 Trustee would have that standing. Both motions also consider a more straightforward argument, should the Court not warm to the accusations leveled at Versa as a grounds for conversion, the Debtors' estates are past the point of no return and properly belong in Chapter 7.

The Committee's motion states, “Pursuant to §1112(b), the Committee seeks immediate conversion of these cases to chapter 7 in order to avoid continuing losses to and diminution of estate assets, especially as there is no reasonable likelihood of rehabilitation of the Debtors’ business, and because the Debtors are unlikely to effectuate the confirmation of a chapter 11 plan. Conversion of these cases and appointment of a chapter 7 trustee are urgent matters in light of the impending expiration of the Initial Challenge Period and the impact such expiration will have on a chapter 7 trustee’s ability to prosecute certain claims and causes of action against Versa Capital Management, LLC and several of its affiliates and other parties, including the Pre-Petition Subordinated Lender (collectively, the “Versa Parties”).

Based on information and documents received to date, the Committee believes that a chapter 7 trustee would be empowered to assert good faith allegations supporting several claims and causes of action against the Versa Parties. Such claims and causes of action may include, but are not limited to, avoidance of actual and constructively fraudulent transfers, claims for avoidance of preferential transfers, breach of fiduciary duty, aiding and abetting, corporate waste, equitable subordination and recharacterization, as well as other challenges to the extent and priority of the Pre-Petition Subordinated Lender’s liens (collectively, the “Versa Actions”). In light of certain hurdles the Committee may face in seeking standing to prosecute some or all of these claims, which hurdles may not apply to a chapter 7 trustee, it is imperative that a chapter 7 trustee be appointed to continue the work the Committee has begun in seeking to maximize the value of these claims for the benefit of the creditors of these estates.

Given that the sale of the Debtors’ E-Commerce Business Assets is complete and the store closing sales have ceased, remaining in chapter 11 is simply not in the best interests of the estates or their unsecured creditors. The Debtors filed these cases approximately three months ago with the intent to sell substantially all of their assets. The sales are largely complete and the estates’ only remaining tasks are to wind-down their remaining business, distribute the proceeds of their asset sales, and monetize and distribute contingent assets. A chapter 7 trustee is well positioned to conduct those activities in these cases, and to determine how and whether to prosecute the claims and causes of action that the Committee has identified as among the remaining assets of the estates. Chapter 7 is therefore the most logical and prudent path forward to conclusion of these matters in a way that maximizes value and serves the best interests of unsecured creditors.”

The U.S. Trustees’ Motion

The U.S. Trustee assigned to the Debtors' cases requested conversion of the Debtors’ Chapter 11 cases to cases under Chapter 7, arguing that failure to convert might effectively prevent the Debtors' estates from pursuing "valuable causes of action" involving potential "fraudulent transfers, claims for avoidance of preferential transfers, breach of fiduciary duty, aiding and abetting, corporate waste, conspiracy…" against Versa [Docket No. 441]. The U.S. Trustee's concern is that these causes of action, raised by the Debtors' Official Committee of Unsecured Creditors (the "Committee"), may not actually be something that the Committee has standing to pursue itself; meaning that it would have to step in to the process if these causes of action are to maintained and/or pursued. In a more traditional vein, the US. Trustee also argues that the time is ripe for a Chapter 7 conversion based on its view that "there is a substantial or continuing loss to or diminution of the estates and there is no reasonable likelihood of rehabilitation."

The U.S. Trustee's motion [Docket No. 441] stated, “Cause exists to convert the Debtors’ jointly-administered chapter 11 cases to cases under chapter 7 of the Bankruptcy Code. The Official Committee of Unsecured Creditors (the ‘Committee’) has informed the Court that it has determined that there are potential valuable causes of action against Ornatus URG Funding, LLC (‘Ornatus’). Under applicable law, these causes of action may have to be pursued by a Chapter 7 Trustee, as the Committee may not have standing. If the cases are not converted and a Chapter 7 Trustee is not appointed prior to the expiration of the Initial Challenge Period, the estate may lose the ability to pursue these valuable assets. In addition, there is a substantial or continuing loss to or diminution of the estates and there is no reasonable likelihood of rehabilitation. The Court should convert this case pursuant to 11 U.S.C. § 1112(b) (4) (A).”

Committee Investigation

In a pair of motions [Docket Nos. 384 and 391], the Committee laid out its concerns over the potentially valuable causes of action relating to Ornatus, whose parent, Versa, is the Debtors’ sponsor. The Committee stated: "The Committee looks to this Court to facilitate the Committee’s efforts to fulfil its fiduciary duties by conducting an investigation that includes, inter alia, a review of (i) the amount, validity, enforceability, priority or extent and priority of the claims (the ‘Versa Claims’) asserted by Ornatus; (ii) the prepetition relationship between the Debtors and Versa, including the pre-petition cash infusions giving rise to the Versa Claims; (iii) Versa’s involvement in the day-to-day management of the Debtors’ operations; and (iv) all potential claims and causes of action that may be asserted against the Versa Parties (the “Investigation”).

From the information and documents received to date, the Committee believes it can make good faith allegations for several claims against the Versa Parties and others, including claims for avoidance of actual and constructively fraudulent transfers, claims for avoidance of preferential transfers, breach of fiduciary duty, aiding and abetting, corporate waste, conspiracy, and wilful and/or negligent payment of unlawful dividend under applicable law, as well as challenges to the extent and priority of the Versa Parties’ liens. 

Additionally and because of the Debtors’ and Versa Parties’ apparent refusal to produce the documents that are key to the Committee’s Investigation, the Committee respectfully requests that the Court extend the time to commence the Challenges with respect to the Pre-Petition Subordinated Lender.”

Further Background

On October 7, 2019, the Court approved the $16.5mn sale of the Debtors' E-Commerce Business assets to City Chic Collective USA Incorporated (“City Chic”) [Docket No. 339]. The revised asset purchase agreement amongst the Debtors and City Chic is attached to the sale order as Exhibit A.

About the Debtors

Avenue is a national specialty fashion retailer of women’s plus-sized apparel, intimates, footwear, and accessories that is dedicated to providing real-sized women with modern and fashionable clothes at affordable prices. Avenue’s product line almost exclusively features a marketplace sourced and procured assortment of branded merchandise. Headquartered in Rochelle Park, New Jersey, the Debtors have two primary units: the retail store business and an e-commerce business. Through their retail business, the Debtors operate 255 leased stores in 35 states, which are primarily located in suburban areas and in malls or shopping centers. In addition to their retail operations, the Debtors sell and distribute merchandise through the Avenue.com and Loralette.com websites (the ‘E-Commerce Business’).

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