United Retail Creditors Challenge Stalking Horse Bid (Law360)

By Kaitlin Ugolik

Unsecured creditors of women's clothing retailer United Retail Group Inc. on Monday filed an adversary complaint within the company's New York bankruptcy case seeking to block would-be buyer Versa Capital Management LLC's purported $9.5 million secured claim.

The $9.5 million claim was transferred to Versa affiliate Ornatus URG Acquisition LLC from United Retail parent Redcats USA Inc. for credit bidding purposes, allowing Versa to bid on the company's assets using its secured debt.

But the committee of unsecured creditors argues that the $9.5 million is in fact an unsecured claim and subject to taxes and other restrictions that reduce the allowable recovery amount to zero.

"Now, standing in the shoes of Redcats, the defendant asserts the Redcats secured claim in a vastly overstated amount," the creditors' complaint said.

United Retail, which sells women's clothing under the Avenue brand, filed for bankruptcy protection Feb. 1, citing too-expensive rent at retail locations and saying Versa would serve as lead bidder for its assets. The business has been plagued with retail sales declines since the company's $200 million acquisition in 2007 by Redcats, according to court filings.

U.S. Bankruptcy Judge Stuart M. Bernstein approved the sale plan at a Feb. 22 hearing amid concerns from Versa that its stalking horse bid was not adequately protected because the creditors committee refused to acquiesce to certain terms. The committee, meanwhile, unsuccessfully fought a proposed $1.2 million breakup fee for the stalking horse bid.

Versa is poised to pay about $32 million in cash and put up to $17 million toward United Retail's bankruptcy loan and up to $11.1 million toward bankruptcy expenses, in addition taking on nearly $5 million in debt at a March 23 auction, according to court documents.

The $9.5 million debt Versa has proposed using for credit bidding is about 25 percent of the purported value of Versa's overall bid, a big number that would "discourage a robust auction process," allowing Versa to bid a "phantom" claim while other bidders have to put up the cash to match it, unsecured creditors' attorney Jay Indyke of Cooley LLP told Law360 on Wednesday.

But a lawyer representing Versa said Wednesday that the private equity firm planned to dispute these assertions, adding that, "if anything, it may have understated its claims, both secure and unsecured."

The committee of unsecured creditors asked the court to make a decision on its request preliminary and injunctive relief by Thursday so that other potential bidders, who have until March 20 to place their bids, will have adequate notice of the value of Versa's stalking horse bid.

The debtor is represented by Nicole Greenblatt, Paul Basta, Marc Kieselstein and Benjamin Steele of Kirkland & Ellis LLP.

The creditors committee is represented by Jay Indyke of Cooley LLP.

Versa Capital is represented by Alexandra D. Korry, Michael Torkin and William Monahan of Sullivan & Cromwell LLP.

The bankruptcy is In re: United Retail, case number 1:12-bk-10405, in the U.S. Bankruptcy Court for the Southern District of New York.

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Related Contacts
Jay Indyke Partner, New York
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Business Restructuring & Reorganization