More than $1 billion doled out to shareholders in Sycamore Partners’ 2014 buyout of retailer Nine West and other apparel brands owned by Jones Group is legitimate and can’t be unwound, according to an appeals court ruling that gave priority to market stability over creditors seeking to recoup funds in bankruptcy, according to a WSJ Pro Bankruptcy analysis. In a long-awaited 56-page ruling, the U.S. Court of Appeals for the Second Circuit last week affirmed the Southern District of New York’s 2020 decision that extended safe harbor protections to payments distributed to shareholders in the deal. Nine West’s bankruptcy trustee has argued that directors, officers and shareholders of the retailer’s former parent company unlawfully profited from the buyout. Junior debtholders said the LBO saddled the company with debt, stripped it of its best assets and led it to bankruptcy. These creditors, who suffered big investment losses after the retailer filed for chapter 11 in 2018, asked the court to deem more than $1.18 billion of payments made to both the shareholders and to former directors and officers in the buyout illegal and that they should be paid back. The court of appeals held that in Nine West’s LBO most of the distributions in question — $1.105 billion paid to shareholders — are protected by the safe harbor and that Nine West was considered a financial institution because it hired a bank agent, Wells Fargo, as the conduit of the transactions. The court said in this case a customer to a financial institution is a financial institution itself. The Nine West trustee hasn’t said whether this ruling will be appealed.
