By Rick Archer
A New York federal judge decided Monday that bankrupt women's apparel company BCBG Max Azria Group Inc. can escape a $7 million golden parachute payment to founder Max Azria's wife Lubov, ruling her employment contract and the company’s 2015 restructuring agreement are not integrated.
In a bench ruling, U.S. Bankruptcy Judge Shelley C. Chapman said the two agreements are distinct in a number of important ways — including having different parties and different governing laws — and that when Lubov Azria chose which parts of the restructuring agreement to sign, the integration clause that has been central to her case was not one of them.
“As demonstrated by the very substantial nature of the dispute brought to the court, the integration clause is a substantial agreement and not mere boilerplate,” Judge Chapman said.
The fashion house, founded by Max Azria in 1989, and its subsidiaries filed for Chapter 11 protection in New York late last month with the hope of restructuring more than $500 million worth of debt. As part of its efforts to cut costs while continuing to operate, BCBG fired Lubov Azria on March 8, and two weeks ago it moved to reject her employment agreement, saying it is in the best interest of the debtors' estates. The agreement provides for a $7 million golden parachute payment that the debtors aim to have rejected.
In an effort to block the move, the Azrias filed an objection and an adversary complaint on March 24, saying Lubov Azria's contract is integrated with a 2015 out-of-court restructuring agreement that ensured the couple's long-term employment and a measure of continued control as part of giving up sole equity ownership to an outside investor. They claim that the employment agreement cannot be rejected unless the entire restructuring agreement is as well.
The fashion house, which believes that the contract in question contains an integration provision reflecting that the employment agreement stands alone, said it is seeking to resolve the dispute before a May 19 deadline for potential purchasers to bid on its assets. It argued that the restructuring agreement explicitly states Lubov Azria is not a party to its integration clause, and that the employment agreement expressly states it is the entire agreement between Azria and BCBG.
In their latest argument the Azrias claimed they would not have agreed to the restructuring without the employment contract, but BCBG argued this was immaterial to the fact the agreements have inconsistent terms, including different parties, effective dates and dispute resolution forums.
At Monday’s hearing, BCBG counsel Stephen Hackney of Kirkland & Ellis LLP restated those arguments and contended that Lubov specifically agreed to only a select number of the provisions in the restructuring agreement, not including the integration clause, and that agreeing to the integration clause would go against their intent — stated in a pair of declarations submitted to the court — to avoid unnecessary liability.
“What’s going to be enemy number one? It’s the integration clause,” he said.
Robert Pfister Klee Tuchin Bogdanoff & Stern LLP, counsel for the Azrias, argued the Azrias also failed to sign off on a number of clauses necessary to the contract, including clauses that defined terms used in the clauses they did sign off on, and therefore must have agreed to the integration clause as well.
He also argued Lubov Azria was deeply involved in the restructuring agreement, as it involved her and her husband surrendering 80 percent of their interest in BCBG.
“She’s not dipping her toe in, she’s neck-deep,” he said.
While questioning Pfister, Judge Chapman said she disagreed with the use of Azrias’ declarations to make an after-the-fact interpretation of the contracts.
“If we’re going to go down that route, there’s not guiding principle,” she said. “Contracts will never mean what they say if the parties disagree.”
Judge Chapman also listed a number of significant differences between the agreements, including the fact that a number of third parties are involved in the restructuring agreement and not in the employment agreement, that the agreements have different effective dates and that the restructuring agreement is expressly governed by New York law and says disputes should be taken to court and the employment agreement calls for arbitration under California law.
“We’re grateful for the outcome,” Hackney said after the hearing.
Counsel for the Azrias declined to comment.
BCBG is represented by Stephen Charles Hackney, Joshua A. Sussberg, Christopher J. Marcus, James H.M. Sprayregen and Benjamin M. Rhode of Kirkland & Ellis LLP.
The Azrias are represented by Thomas E. Patterson, Robert J. Pfister and Sasha M. Gurvitz of Klee Tuchin Bogdanoff & Stern LLP and Martin D. Singer and Todd S. Eagan of Lavely & Singer PC.
The case is In re: BCBG Max Azria Global Holdings LLC et al., case number 1:17-bk-10466, in the U.S. Bankruptcy Court for the Southern District of New York.
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