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September 9, 2021 – Further to the Court's July 29th order refusing to approve the Debtors' Disclosure Statement because the underlying Plan "fails to satisfy section 1129(a)(9) [ie pay holders of adminsitartive claims] of the Bankruptcy Code and is therefore patently unconfirmable,” the Debtors have now filed a motion to dismiss their Chapter 11 cases [Docket No. 2082]. The Debtors' current motion to dismiss notes that conversion to Chapter 7 in respect of the Debtors' "fully administered" cases would "merely add another layer of unnecessary additional administrative expenses" to cases where there is little left to be done in winding down the Debtors' affairs.
As detailed below, the Debtors' $81.1mn sale of substantially all of their to a consortium comprised of Simon Property Group, Brookfield Property Partners and Authentic Brands Group closed more than 18 months ago.
The Debtors' filed for Chapter 11 in September 2019, noting that "Forever 21 is a story about family and the 'American Dream'," and insisting that they would continue that dream and "prosper for years to come" with the "support from our key landlord and vendor constituents." Those vendors, unsecured trade creditors, were owed over $350.0mn, with unpaid for inventory serving as collateral for aggressive borrowing used to finance aggressive growth. Rarely has a house of cards collapsed so emphatically, with these Debtors not even able to make good on administrative claims much less the staggering $350.0mn of trade debt generously spread from Africa to China.
The Court's succinct 2-page, July 29th order followed (and agreed with) a July 13th objection from the U.S. Trustee assigned to the Debtors' cases who took issue with Plan provisions that would see administrative claims holders left without a full recovery in violation of § 1129(a)(9) of the Bankruptcy Code. As discussed further below, the failure to make whole shortcoming was exacerbated by the Debtors' late-in-the-day attempts to bind already solicited holders of administrative claims to a Plan that they had not affirmatively agreed to support, ie a Plan where silence was to be treated as consent in respect of a less than 100% recoveries on their administrative claims.
A hearing on the motion is scheduled for October 4, 2021, with objections due by September 23, 2021.
The motion notes, “After considering all potential alternatives to bring these chapter 11 cases to a value maximizing conclusion, the Debtors have determined that a dismissal of these chapter 11 cases is the most expeditious and cost-effective mechanism to wind down the Debtors’ affairs and maximize recoveries for holders of allowed Administrative Claims and Secured Claims.
A dismissal will result in greater recoveries for holders of Administrative Claims and Secured Claims and ensure a faster and less costly completion of these chapter 11 cases as compared to a conversion to chapter 7. The fees and commissions incurred by a chapter 7 trustee and its professionals alone justify dismissal of these cases. The Debtors estimate that the proceeds available for distribution through the structured dismissal contemplated by the Order could amount to approximately $34.5 to $35.3 million. In the event these chapter 11 cases are converted to cases under chapter 7 of the Bankruptcy Code, the Debtors estimate that the distributable proceeds could be equal to approximately $25.2 to $26.9 million after taking into account additional chapter 7 expenses. Conversion to chapter 7 would also likely further delay distributions to holders of allowed Administrative Claims and Secured Claims, as a chapter 7 trustee would need to spend time familiarizing itself with these cases through the engagement of new professionals.
Because the Debtors’ cases have been fully administered, conversion to chapter 7 and a corresponding liquidation is unnecessary and unlikely to generate additional value. The few corporate actions that remain outstanding—filing final tax returns and dissolving the Debtors’ corporate existence (or analogous limited liability company actions)—do not require a chapter 7 trustee’s oversight. Therefore, conversion to chapter 7 cases will merely add another layer of unnecessary additional administrative expenses, which would need to be paid in full before any holders of Administrative Claims and Secured Claims could receive any recovery on account of their claims.
The Order sets forth the process for dismissing the Debtors’ chapter 11 cases through a structured, Court-supervised process that balances the interests of holders of Administrative Claims in receiving prompt distributions, with the Court’s interest in ensuring the Debtors’ limited assets are distributed in a fair manner that comports with the requirements of the Bankruptcy Code. A central component of the Order is an expedited claims resolution process for determining the allowed amount of Administrative Claims and Secured Claims. This process provides parties in interest with notice and an opportunity to object to their proposed treatment and is structured in a manner substantially similar to this Court’s order…
Here, the Debtors do not have the core for a workable chapter 11 plan in light of the Court’s ruling at the hearing on approval of the Disclosure Statement on July 22, 2021 (the 'Hearing'). At the Hearing, the Court denied the Debtors’ motion for approval of the Disclosure Statement, expressing its concerns that the Debtors may never be able to confirm a chapter 11 plan under the circumstances of these cases. Consistent with such ruling, the Court thereafter entered the Disclosure Statement Denial Order, denying approval of the Disclosure Statement and finding that the Debtors’ chapter 11 plan as written was patently unconfirmable.
Thus, it is unlikely that the Debtors would be able to formulate a chapter 11 plan that would be confirmed by this Court. Therefore, cause exists for dismissal of these chapter 11 cases. ”
U.S Trustee Objection
On July 13, 2021, the U.S. Trustee objected to the Debtors’ Disclosure Statement, arguing, “the Debtors should not be permitted to deem agreement from administrative creditors to accept a reduced distribution when such creditors have already communicated to the Debtors that they do not agree to such treatment by not returning the opt-in form” [Docket No. 1995].
The U.S. Trustee’s objection reads: “The Debtors in these cases sold their business by way of a section 363 sale in February of 2020. They have been admittedly administratively solvent by at least $100 million dollars since that time. In the fall of last year, the Debtors commenced a process, with the Court’s approval, whereby they sent forms to all of their administrative creditors asking them to opt-in to the proposed treatment of their claims under the Plan, whereby they would receive a distribution of at least 11% of their allowed administrative claims.
The Debtors indicate in their amended Disclosure Statement, that they have received opt-in forms from approximately 90% of their administrative creditors, but not from the remaining 10%, even though representatives of the Debtors reached out more than five times on average to each such creditor. Counsel to the Debtors indicate that the 10% accounts for approximately $11 million in administrative claims, although that figure would be closer to $20 million if based on the amount of the administrative claims listed in the Debtors’ Liquidation Analysis and May 2021 Monthly Operating Report. Even assuming the $11 million figure is correct, there does not appear to be anything near sufficient funds in the Debtors’ estates to pay such claims in full, as required under section 1129(a)(9) of the Code, unless the funds that have been set aside to pay professional fees are made available to pay non-professional administrative creditors.
The Debtors now seek Court approval for procedures whereby they would send to those administrative creditors who did not return an opt-in form regarding their treatment under the Plan an opt-out form regarding their treatment under the Plan. The Debtor also seek approval to send opt-out forms to all priority tax and other priority creditors. Such procedures are in furtherance of a Plan that provides that if an administrative, priority tax or other priority creditors does not return an opt-out form, or file an objection to confirmation, such creditor shall be deemed to consent to receive under the Plan a small fraction of what they are mandated to be paid under § 1129(a)(9) of the Bankruptcy Code.
There are only a small number of written opinions addressing whether the agreement of a creditor to receive less under a plan than that provided under section 1129(a)(9) can be implied by silence, or whether such agreement must be affirmative. The majority of such opinions require affirmative agreement. The one written opinion that allowed an opt-out process for administrative creditors involved facts vastly different from those of the present case….
On February 13, 2020, the Court hearing the Debtors’ cases issued an order [Docket No. 927] approving the $81.1mn sale of substantially all of the Debtors’ assets to F21 OpCo, LLC (the “Buyer,” a consortium comprised of Simon Property Group, Brookfield Property Partners and Authentic Brands Group). The sale closed on February 19, 2020.
Between them, Simon Property Group and Brookfield Property are the lessors in respect of more than 180 of the Debtors’ leases. Authentic Brands Group (“ABG,” 30% owned by BlackRock Inc.) owns more than 50 consumer brands.
Petition Date Perspective
On September 29, 2019, privately-held Forever 21, Inc. and seven affiliated Debtors (“Forever 21” or the “Debtors,” a "fast fashion" retailer) filed for Chapter 11 protection noting estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $1.0bn and $10.0bn.
In documents filed with the Court, the Debtors "estimate that they owe approximately $350 million to their vendors as of the Petition Date" which matches the amount being provided in the Debtors' debtor-in-possession ("DIP") financing. The Debtors are insistent that they will honor their trade debt (and the DIP financing tends to back up that commitment in the short-term) in their pursuit of "keeping the American dream alive," but that $350.0mn of jettisonable unsecured debt will certainly be scrutinized by secured pre-petition (now DIP) lenders who will have their own dreams, theirs being slightly higher up the dream waterfall. The right-sizing will not come at their expense, so it will have to come at the expense of the founding Chang family, the unsecured creditors (vendors and landlords) or a mixture of both. How much of the Chang's American dream will be left to them upon emergence of the restructured Debtors?
In a press release announcing the filing, the Debtors advised that “Forever 21 intends to use these proceedings to facilitate a global restructuring that will allow the Company to focus on a profitable core part of its operations. As part of its restructuring strategy, the Company plans to exit most of its international locations in Asia and Europe, but will continue operations in Mexico and Latin America….Forever 21 will use these proceedings to right size its store base and return to basics that allowed the Company to thrive and grow into the fast fashion leader.
Linda Chang, the Debtors' Executive Vice President and daughter of founders Do Won and Jin Sook Chang, added: “With support from our key landlord and vendor constituents, we are confident we will emerge as a stronger, more competitive enterprise that is better positioned to prosper for years to come, and we remain committed to delivering the fast fashion trends that our customers have come to expect from Forever 21.”
Objectives of the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Goulding Declaration”), Jonathan Goulding, the Debtors’ Chief Restructuring Officer, stated: "Forever 21 is a story about family and the 'American Dream.' In an age when retail, as most Americans know it, is under assault, Forever 21 intends to use these proceedings to remain viable and write a different ending from so many retail companies before it. The goal of these chapter 11 cases is clear: emerge with a viable and feasible standalone business and keep the dream alive.
Strong relationships with its vendors and landlords, that in many instances stretch close to 30 years, have served as a foundation for success. These relationships—carefully cultivated over the course of two plus decades—have been the backbone of Forever 21’s success since its inception. And it is these relationships that allowed Forever 21 to operate with very little funded debt, supported Forever 21 during its recent difficulties, resulting in virtually no cash-on-delivery demands or actions to “lock” Forever 21 out of its stores, and will be critical sources of support for Forever 21’s successful restructuring. Vendor relationships together with support from Forever 21’s longstanding landlord community will ensure the fresh start necessary to keep the dream alive—not only for the Changs and Forever 21, but for hundreds of vendors and thousands of employees who also have realized their dreams through Forever 21’s meteoric rise."
About the Debtors
Founded in 1984, Forever 21, Inc., headquartered in Los Angeles, California, is a fast fashion retailer of women’s, men’s and kids clothing and accessories and is known for offering the hottest, most current fashion trends at a great value to consumers. Forever 21 delivers a curated assortment of new merchandise brought in daily.
As of the Petition Date, the Debtors operate 549 stores across the United States, and 251 stores are operated internationally by non-Debtor affiliates. Of the 251 international stores, 181 are owned and operated exclusively by the non-Debtor affiliates, 54 are franchises, and 16 are operated as joint ventures. The Debtors also maintain a substantial online presence, with their e-commerce platform accounting for approximately 16 percent of all sales. In addition to the 534 stores operated under the Forever 21 brand, the Debtors formed a beauty and wellness brand, Riley Rose, in 2017, which operates 15 stores in the United States.
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