J.C. Penney Shareholders Lose Bid to Delay Sale

Sindhu Sundar
·4 min read

J.C. Penney crossed another hurdle to closing its going concern sale this month.

At a hearing Friday, U.S. District Judge Nelva Gonzales Ramos in Texas denied a motion by the ad hoc committee of equity interest holders to stay, or delay, the sale of the retailer’s business while the shareholders appeal a Texas bankruptcy court’s approval of the deal.

J.C. Penney’s going concern deal, which involves the sale of its retail business to landlords Simon Property Group and Brookfield Property and of its property business to a group of majority first-lien lenders, is now expected to close by Monday.

The Texas bankruptcy court overseeing the bankruptcy case had approved the sale earlier this month over objections by the ad hoc equity committee, which had argued that the deal was being needlessly fast-tracked by secured lenders that they claimed were directing the process at the expense of shareholders and potentially other unsecured creditors.

J.C. Penney and its lenders have fought back, arguing that the deal is time-critical, and that closing the sale is the only way for the retailer to avoid a liquidation that would close its more than 600 stores and leave its roughly 60,000 employees out of a job. The retailer’s $900 million debtor-in-possession loan now matures on Monday, and the retailer’s advisers have argued in court that delaying the sale past that point would collapse the deal and put the retailer in default on its loans.

On Friday, Gonzales Ramos, who considered the stay motion, agreed that there was enough indication that delaying the sale would hurt the retailer.

“I understand this is a difficult situation…the situation created here is obviously far from ideal,” she said. “It’s difficult, emotional, for many present and not present, and I’m so sorry about that. It’s a situation we are found in.”

A representative for J.C. Penney declined to comment, and the chairman of the ad hoc equity committee did not comment.

At Friday’s hearing, the shareholder group’s attorney Johnie Patterson of Walker and Patterson PC cast J.C. Penney’s bankruptcy’s process as being directed by its secured lenders toward their desired outcome. The terms of the company’s $900 million DIP loan, of which half was a “roll-up” meant to go toward paying secured loans owed to first-lien lenders, cemented the dynamic in their favor, Patterson argued to the court. The large sum would be a secured administrative claim accrued during the course of the bankruptcy and, unlike pre-bankruptcy unsecured claims, entitled to full repayment under the bankruptcy code, he argued.

“That’s important because no matter what happens in a bankruptcy case, an administrative claim is entitled to be paid in full at confirmation, or sooner sometimes,” Patterson told the court. “So this really put them in the driver’s seat.”

But J.C. Penney’s attorney, Michael Slade of Kirkland & Ellis LLP, told the court that the timing of the sale was non-negotiable at this point, and that delaying the closing of the sale any further would jeopardize the retailer’s survival, and cause a cascade effect to other stakeholders, he argued.

“To say that a stay here would cause harm to others would be a massive understatement,” Slade told the court.

“Six hundred stores plus would be closed, 60,000 people terminated, all the trade creditors would lose a partner, all of the second lien and other unsecured creditors would lose their chance at an earn out, hundreds of malls would lose their anchor tenant, every other store in the mall would suffer,” he said. “The carnage would be massive.”

Shareholders are at the bottom of the repayment priority list in bankruptcies, in which unsecured creditors generally stand to receive diminished recoveries, if at all. J.C. Penney sought the consensus of other stakeholders before it presented the sale for final approval before the bankruptcy court this month, reaching deals with a minority first lien lender group as well as the official committee of unsecured creditors, which has comprised vendors and landlords.

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