June 11, 2009 4:53 PM

When Bankruptcy Gets Ugly: Lawyers Fighting Over Filene's, Delphi

Posted by Zach Lowe

We would have loved to have been in Cooley Godward Kronish's Manhattan office last Friday, when lawyers from six firms involved in the Filene's Basement auction were sniping at each other over the rules for the proceeding.

Men's Wearhouse, who emerged as the winning bidder, has dropped its $67 million offer after the previous stalking horse bidder, a consortium led by Crown Acquisitions, filed a blistering motion Tuesday accusing Men's Wearhouse (and its lawyers at K&L Gates) of violating the rules a bankruptcy judge had set for the auction, according to court papers and the Boston Globe.

Calling the auction "a travesty," Crown's lawyers at King & Spalding argued in the filing that Filene's and its lawyers (Pachulski Stang Ziehl & Jones) and the creditors committee counsel (Cooley) looked the other way when Crown brought up the violations because they believed Men's Wearhouse had presented the best bid.

Charles "Chad" Dale, the lead K&L Gates partner on the deal, and Laura Davis Jones, the lead Pachulski partner repping Filene's, did not immediately return a message seeking comment.

In the suit, filed by King & Spalding partner Arthur Steinberg, Crown accuses Men's Wearhouse of missing the bid application deadline, failing to fulfill certain conditions required of any bid--including a quick closing date--and conspiring with Filene's and the creditors committee to change its bid in the middle of the auction.

Crown also claims that when they raised their objections during the auction, Filene's attorneys did not respond and that a lawyer from the creditors committee (presumably either someone from Cooley, which hosted the auction, or Morris Nichols Arsht & Tunnell, the committee's local counsel in Delaware), said: "Don't be silly."

Now that Men's Wearhouse is out, the bidding is reopened for Crown and its chief rival, Syms, who is being advised by Pepper Hamilton and Lowenstein Sandler. (Fried, Frank, Harris, Shriver & Jacobson and Blank Rome are advising Vornado Realty Trust, Syms's partner on the deal). 

The nastiness is not limited to retail, as evident by the animosity that has overtaken the epic four-year bankruptcy of Delphi, the auto parts supplier and former General Motors subsidiary whose survival is dependent on GM's.

As we reported last week, Delphi (repped by Jack Butler of Skadden, Arps, Slate, Meagher & Flom) struck a deal to sell some assets (a handful of plants and its steering parts business) to General Motors and the rest to the private equity fund Platinum Equity (repped by Schulte, Roth & Zabel). 

That plan is less clear cut after a federal bankruptcy judge agreed with recalcitrant lenders on Wednesday and ordered a competitive auction for Delphi, according to The Wall Street Journal. (Court papers show--and Delphi lawyers have argued in court--that Delphi has always had a fiduciary duty to consider other offers). 

The proposed GM-Platinum transaction is incredibly complex (the motion outlining the terms is 952-pages long), but it appears that Platinum is putting up $250 million in equity and $250 million in financing, and that GM is putting up an unknown amount of financing (perhaps around $4 billion total, according to the WSJ) to back Platinum's deal.

Add it all up, and the secured lenders believe, much like they did in the Chrysler bankruptcy, they are getting a raw deal--20 cents on the dollar for billions in loans they hold.

Now Marc Abrams, chair of the business reorganization and restructuring department at Willkie Farr & Gallagher, is playing the role White & Case's Thomas Lauria played so well in the Chrysler case: lead lawyer for a handful of hedge fund holdouts. The funds claim the deal is a sham pushed by the Obama administration to save GM by propping up its former subsidiary, and that no other bidders were allowed to compete in an auction.

Abrams says he was retained six months ago by four funds, but beyond that wouldn't comment. Unlike in the Chrysler case, Abrams' clients have found common ground with Delphi's agent bank lender, JPMorgan Chase. The bank, advised by Donald Bernstein of Davis Polk & Wardwell, filed a separate objection echoing the funds' concerns. 

It appears the dissident lenders have a much stronger case than they did in the Chrysler case since, according to court papers, secured lenders must approve any asset sale in the Delphi case. That approval does not appear to be forthcoming. 

On the other hand, the judge granted GM permission Wednesday to lend Delphi the first $250 million in financing it wants to provide.

One interesting nugget: The Willkie team complains in court papers they were not allowed to negotiate directly with the Obama administration's auto task force, and had to discuss bids through Skadden instead. One reason appears to be that Matthew Feldman, a key member of the auto task force, was formerly a Willkie partner, which raised possible conflicts issues, according to the WSJ and court papers. 

Stay tuned. We'll be following this one closely.

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