Not too long ago, in malls and malls around the world, shoppers could count on Dress Barns, Lane Bryants, Ann Taylors, Justices and other clothing stores operated by Ascena Retail Group. Five years ago, the retailer operated nearly 5,000 brick-and-mortar locations catering to women, teens and tweens. By 2020, that number had been halved and the bankrupt chain agreed to sell its surviving stores.
Fashion apparel is a tough business for any retailer, given the stiff competition from e-commerce and the effects of the pandemic on all retail sectors. In Ascena’s case, some of its wounds were self-inflicted, and its executives’ efforts to avoid a lawsuit made its bankruptcy record a landmark. We hope that the United States Supreme Court will take this into account.
Ascena’s troubles began in 2015, when it paid more than $2 billion for Ann Inc., parent company of Ann Taylor, Loft and other clothing retail chains. Over the next two years, executives of the then-listed company told investors at least several times that business was doing well. In May 2017, Ascena warned of trouble ahead and its stock plunged. A few weeks later, it took a $1.3 billion restructuring charge, and the deal just went downhill from there.
During its bankruptcy reorganization, Ascena received extensive legal protections for former senior executives and other company insiders. These so-called third-party waivers protect people who have never filed for bankruptcy themselves from lawsuits arising from their conduct, ending potential claims that would normally be resolved by judges or juries in other courts.
These statutory releases have become commonplace in corporate bankruptcy cases and, to put it bluntly, they stink.
Whenever publicly traded companies suffer huge write-downs, as Ascena did, securities fraud claims usually follow. Often these claims go nowhere or settle for relatively small amounts.
Yet the claims deserve to be heard, and it is fundamentally wrong that a bankruptcy judge can, as usual practice, waive them. If misconduct occurs, those involved should be held accountable.
Last month, U.S. District Judge David Novak overturned Ascena’s bankruptcy settlement and sent it back to bankruptcy court, ostensibly referring it to a new judge. Novak described the broad legal releases in Ascena’s reorganization plan as “shocking”, saying they would have freed virtually everyone involved from virtually every possible claim, including two former executives targeted in the fraud case. to investors.
Novak criticized a lack of due diligence by the bankruptcy court before the sweeping releases were granted. In theory, the releases could have been necessary to shield the reorganized company from ongoing litigation costs, such as defending lawsuits against former company executives. Novak found that no in-depth analysis was done before the releases were approved despite objections from the U.S. Department of Justice, the U.S. Securities and Exchange Commission and attorneys representing investors.
Already enough. There may be rare cases where these versions are needed, but their senseless proliferation must stop.
While legislation is pending in Congress to address the issue, the ultimate authority is the United States Supreme Court. We urge the nine judges to take up the first available case to end this disturbing practice once and for all.