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U.S. Trustee Objects to Gymboree Ch. 11 Plan Disclosures

Bankrupt children's apparel company Gymboree should not be able to solicit its proposed Chapter 11 plan to creditors due to its inclusion of shoddy or incomplete details surrounding litigation releases, the U.S. trustee said Monday, joining a slew of mall and shopping center owners objecting to the company's restructuring disclosures.
Attorneys for the U.S. trustee’s office, the federal government’s bankruptcy watchdog, told a Virginia bankruptcy judge that Gymboree Corp. should be forced to alter the disclosures it seeks to send to creditors explaining how their claims against the company will be treated under a proposed restructuring plan.
According to the agency, the disclosure statement must be rejected in its current form because it fails to adequately explain provisions in the plan that would release third-party affiliates from litigation and incorrectly describes the provisions as consensual for each of the proposed creditor classes when only some creditors are given the option to opt out of the releases. For instance, creditors that fail to return a ballot or are deemed unimpaired under the retailer’s plan are bound to the release provisions, the trustee’s office said.
“None of these creditors has truly manifested an unambiguous consent to the third-party release and none of these creditors should be found to have manifested such consent by the legal fiction of a deemed acceptance or an ‘opt out’ requirement,” the objection reads.
The trustee’s office, which is prone to raise objections to third-party litigation releases, also noted that the language in Gymboree’s disclosure statement seemingly releases an impermissible scope of claims.
Aside from the government, several of Gymboree’s commercial landlords have also urged the court to force a rework of the company’s disclosures. As proposed, the plan would impermissibly allow the debtors to assume or reject store leases after its reorganization is confirmed and provide real estate owners with too little time to evaluate proposed amounts to cure their claims against the company, they said.
Their objections come just a week after Gymboree announced it would be closing nearly 350 store locations as part of its effort to restructure with a smaller brick-and-mortar presence that serves more highly trafficked areas.
Attorneys for the debtors did not immediately respond to a request for comment Tuesday.
The popular toddlers' apparel company filed for bankruptcy protection in June, intent on restructuring about $1.1 billion in total funded debt obligations it took on during a 2010 buyout by private equity firm Bain.
Like other retailers that have filed for bankruptcy in recent months, Gymboree attributes its current financial woes to its dependency on store traffic and "underdeveloped online presence and wholesale platform."
Under a prenegotiated plan, the company aims to recapitalize using a cash infusion of $35 million in debtor-in-possession financing from its term loan lenders, accessing up to $273.5 million from asset-backed loan facilities, rolling up prepetition borrowing debt into its DIP financing, and raising $80 million in new equity through a stock offering.
The retailer is looking to close up to 450 of its 1,300 stores and focus on selling large quantities of merchandise to retailers like T.J. Maxx and Costco, improving its online and mobile shopping platform, and shifting its product sourcing to lower-cost countries. The company aims to exit Chapter 11 by late September.
The debtors are represented by James H.M. Sprayregen, Anup Sathy, Steven N. Serajeddini, Joshua A. Sussberg and Matthew C. Fagen of Kirkland & Ellis LLP and by Michael A. Condyles, Peter J. Barrett and Jeremy S. Williams of Kutak Rock LLP.
The US Trustee is represented by Robert B. Van Arsdale and Shannon Pecoraro.
The case is In re: The Gymboree Corp., case number 3:17-bk-32986, in the U.S. Bankruptcy Court for the Eastern District of Virginia.