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Image: MyTheresa

Neiman Marcus has been busy making headlines this week in connection with the announcement that it will permanently close a number of stores, including its 180,000-square foot outpost in New York City’s glitzy Hudson Yards complex, which cost a reported $80 million to build and which Neiman Marcus occupied for just a year and a half. At the same time, the upscale retailer is also at the center of an ugly battle in a Houston, Texas bankruptcy court over MyTheresa, the buzzy e-commerce business it acquired in September 2014. At issue in the high-stakes legal scuffle? Whether Neiman Marcus inflated its valuation by billions of dollars in connection with a transfer of MyTheresa, and thus, ran afoul of the law and removed the company from its impending bankruptcy proceedings in the process.

According to a group of Neiman Marcus bankruptcy creditors, the Dallas,Texas-based chain “inflated its own value by billions of dollars before its 2018 spinoff of fast-growing e-commerce businesses MyTheresa so it could carry out what they say was an improper transaction,” as first reported by the Wall Street Journal. That transaction saw Neiman Marcus – which filed for Chapter 11 bankruptcy in May – transfer its European e-commerce division, namely, MyTheresa, to an unrestricted subsidiary in 2017. The retailer then transferred ownership of Munich-based MyTheresa again in September 2018 – this time to Neiman Marcus Group Ltd.’s parent company, Neiman Marcus Group Inc. – allegedly in an attempt to shield the company’s assets from creditors. 

The crux of the issue actually took place before the second transfer, though, in early 2018 when Neiman Marcus put a $7 billion-plus valuation on its business. According to the group of bankruptcy creditors, that sum is quite a bit more than the $3.9 billion price tag that an independent valuation (summoned by the creditors) came up with for the 112-year old retailer. The $3.1 billion difference is significant because if the creditors’ valuation is correct, it would mean that Neiman Marcus was insolvent at the time of the MyTheresa transfer (i.e., the sum of its debts was greater than all of its assets), and thus, the company ran afoul of U.S. federal bankruptcy law, which prohibits asset transfers by insolvent entities. 

In other words, the creditors argue that Neiman Marcus’ board inflated the total assets of the company to enable the company to appear as though it was solvent and therefore, legally above-board in making the transfer of MyTheresa. 

In previously-redacted court documents, which were released on Friday, Neiman Marcus’ creditors argue that “there is ample indirect evidence of fraudulent intent and multiple badges of fraud” to be found in connection with the $7 billion valuation and subsequent MyTheresa transfer. “In approving and effectuating the distribution, [Neiman Marcus’] Board was presented with various alternatives, including the option of paying fair value for the MyTheresa asset, but chose to upstream the asset for no consideration,” they assert. 

As such, they are claiming legal rights in MyTheresa, which is not technically part of Neiman Marcus’ U.S. bankruptcy proceedings but which legally may be clawed back from its current ownership if the valuation and transfer are found to be fraudulent in nature. 

In addition to questioning the valuation methodology used in the creditors’ report, a representative for Ares Management LP – one of the two private equity firms that acquired Neiman Marcus in September 2013 for $6 billion leveraged buyout – said this week, as reported by the WSJ, that the recently “unsealed creditors’ report provides no new evidence,” and that “two national law firms advised Neiman Marcus that the MyTheresa spinoff was legal and permissible under the company’s debt documents.”

Hardly the first fight over MyTheresa, Neiman Marcus has been facing off against creditor Marble Ridge Capital, which filed suit against it in a Texas state court in 2018, accusing the retailer of fraud in connection with the MyTheresa transfer. In that suit, the Manhattan-based distressed debt investor characterized the transfer as an attempt by Neiman Marcus to prevent its domestic creditors from accessing an estimated $1 billion in assets, and a move that enables Neiman Marcus owners, Ares Management LP and Canada Pension Plan Investment Board, to “usurp this massive benefit” for no consideration to the company.

In response, Neiman Marcus sought to have Marble Ridge’s case tossed out, while also lodging claims of its own, namely for defamation, citing Marble’s practice of “recklessly [making] false statements regarding the company’s compliance with its debt documents with the intent of damaging the company.” On the heels of a Texas state court dismissing Marble Ridge’s case in March 2019 due to the investment firm’s lack of the requisite subject matter jurisdiction to bring such a suit, the court allowed Neiman Marcus’ defamation suit to move forward in a decision in April 2019.