Bankruptcy court filings in connection with the Chapter 11 proceedings of Neiman Marcus Group Ltd. LLC suggest that despite the company's contention that its proposed restructuring is supported by a "significant majority" of its creditors, the company will face headwinds as it seeks to confirm a reorganization plan.

Indeed, first-day bankruptcy court filings show that holders of 77% of the company's extended-term loans (with about $2.24 billion outstanding, according to filings), 99% of its second-lien notes (with about $561.7 million outstanding), and 69% of its third-lien notes (with about $1.23 billion outstanding) support the company’s restructuring support agreement.

But Marble Ridge Capital LP, the company's largest unsecured creditor, said in a May 8 court filing, that "certain pre-petition transactions … may well form the basis for substantial estate recoveries." It added that "[b]eginning in early 2017, the debtors, at the behest of the LBO sponsors, worked diligently to devise and implement a scheme to fraudulently transfer away from creditors the MyTheresa assets worth nearly a billion dollars by some estimates."

"There is no question that these fraudulent conveyance and related claims may be the most valuable assets available to satisfy unsecured creditors," Marble Ridge said.

Marble Ridge said once the company "has safely landed in Chapter 11," it intends to seek the appointment of an examiner to investigate potential fraudulent conveyance claims against the company and its leveraged buyout sponsors, namely, Ares Management Corp. and Canada Pension Plan Investment Board.

The company's mytheresa.com GmbH unit is not a part of the Chapter 11 filing.

These claims are nothing new. Over the past two years, Marble Ridge has aggressively challenged the company's actions with respect to MyTheresa, including lawsuits in state courts in Texas and New York.

Marble Ridge said it holds nearly one-half of the company's stub senior unsecured notes: specifically, $25 million of the company's 8% senior cash pay notes due 2021, which still have about $56.58 million outstanding, and $40.1 million of the company's 8.75%/9.5% senior PIK toggle notes, which are outstanding in the amount of approximately $80.68 million.

According to the Marble Ridge court filing, shortly after Ares and CPPIB acquired the company in 2013, the company's debt load became "unsustainable," with MyTheresa, a European unit focused on online luxury sales, "the only bright spot."

As a result, Marble Ridge asserts, "the LBO sponsors undertook an elaborate scheme designed to secure for themselves the value of MyTheresa," engineering a series of transactions in September 2018 "to strip the debtors' crown jewel — the valuable MyTheresa business — away from creditors for the benefit of the LBO sponsors and their collaborators in exchange for no consideration."

Specifically, Marble Ridge alleges that in March 2017, the company, while insolvent, redesignated the intermediate subsidiaries controlling MyTheresa — and the subsidiaries that had issued and guaranteed the unsecured senior notes — from "restricted subsidiaries" to "unrestricted subsidiaries," freeing them from restrictive covenants under senior note indentures.

It was unclear at the time whether these redesignations were permitted. According to Marble Ridge, the company asserted at the time that it met the required financial tests for doing so, while Marble Ridge said it concluded "that the re-designation was not permitted."

According to the court filing, "Just days after Marble Ridge raised its concerns [about the re-designation] with Lazard [the company's financial advisor], on September 18, 2018, the company announced that it conveyed the MyTheresa assets through a series of dividends made between corporate affiliates ultimately to Neiman Marcus Group, Inc. for no consideration … which moved the MyTheresa subsidiaries out of the reach of unsecured noteholders."

Marble Ridge further alleged that the company "misleadingly" described this in regulatory filings as an "organizational change."

But according to Marble Ridge, in reality "the LBO sponsors attempted to insulate themselves [through the dividend transactions] from liability and obtain operational control over the debtors by creating a web of corporate shells."

When the smoke cleared, MyTheresa was owned directly by parent company Neiman Marcus Group Inc. — a new intermediate holding company would later be placed between Neiman Marcus Group and the unit — which was 100% owned by Ares and CPPIB, while the intermediate subsidiaries that have issued and guaranteed the senior unsecured notes, and which previously were the owners of MyTheresa, were stripped of any interest in the unit.

Marble Ridge filed a lawsuit challenging the MyTheresa transfer as a fraudulent conveyance in Texas state court in December 2018, but that suit was dismissed on the technical grounds that Marble Ridge lacked standing under Texas law.

Meanwhile, in April 2019, the company launched an exchange offer, ultimately subscribed to by holders of more than 91% of the company's unsecured notes, under which unsecured noteholders exchanged their debt for a $250 million preferred equity stake in MyTheresa’s parent company — according to Marble Ridge, only "a fraction" of MyTheresa's value — and either new 8% third-lien notes due 2024 (for holders of the 8% cash-pay notes due 2021) or 8.75% third-lien notes due 2024 (for holders of the 8.75%/9.50% PIK toggle notes due 2021), secured by, among other collateral, a first-priority pledge of 50% of the common equity interests of the MyTheresa parent.

In addition, under the exchange offer, unsecured noteholders were required to waive any past breaches of the unsecured note indentures. However, Marble Ridge objected to an attempt by the company to have the indenture trustee for the unsecured notes to waive any claims arising out of the MyTheresa transfer on behalf of holders of all the unsecured debt. As a result, Marble Ridge and other unsecured noteholders that did not exchange their debt also have not released the company from potential fraudulent conveyance liability.

Meanwhile, the indenture trustee for the unsecured notes filed a lawsuit in August 2019 in state court in New York challenging the MyTheresa transactions as a fraudulent conveyance. A hearing on the company's motion to dismiss that lawsuit was scheduled to be held in late April but was delayed due to the COVID-19 pandemic.

Marble Ridge said it is unclear whether that lawsuit will be able to proceed in light of the Chapter 11 filing.

This article was written by Alan Zimmerman, who covers corporate bankruptcies for LCD.