Image: MyTheresa

In late September 2018, the Board of Directors of the Neiman Marcus Group Ltd. received a letter. In the correspondence, Marble Ridge Capital – the New York-headquartered investment firm and significant Neiman Marcus creditor – accused the 113-year old department store chain of engaging in a fraudulent scheme intended to harm its creditors and its employees. According to Marble Ridge, Neiman Marcus’ transfer of its European e-commerce division, namely, buzzy e-commerce company Mytheresa, to private equity owners, Ares Management and Canada Pension Plan Investment Board (“CPPIB”) was at the center of the alleged fraud. The purpose of the transaction, the fund alleged? To shield those assets from existing creditors in case of bankruptcy. 

The letter came on the heels of Neiman Marcus Group Ltd. (“Neiman Marcus”) transferring approximately $1 billion in assets to a corporation held by Neiman Marcus owners Ares and CPPIB – a corporation that is quite notably separate from the retailer’s corporate entity Neiman Marcus Group LTD – in a September 2018 transaction. Given that Neiman Marcus allegedly transferred the valuable European arm of the company without receiving anything in exchange, Marble Ridge and its bankruptcy attorney-turned-distressed debt fund founder Daniel Kamensky called foul: “CPPIB and Ares are looking to line their own pockets at the expense of [Neiman Marcus’] other stakeholders and employees,” Marble Ridge asserted in its September 18, 2018 letter.

The since-liquidated Marble Ridge argued that such actions “threaten the viability of a storied franchise that includes marquee brands such as Neiman Marcus and Bergdorf Goodman,” and went on to slam the company’s board for not engaging in “a strategic review to maximize value for the benefit of all of the Company’s stakeholders.” Despite having well-established fiduciary obligations, the fund alleged that the Neiman Marcus board simply “allowed the theft of assets by CPPIB and Ares.” 

The Court Battle Begins

What started as a strongly-worded letter to Neiman Marcus’ board turned into a public-facing legal battle a few months later when Marble Ridge filed a lawsuit against the Dallas, Texas-based retailer’s various domestic and international corporate identities centering on the $1 billion transfer and seeking upwards of $1 million in damages. In a 25-page petition, which was filed in a state court in Dallas on December 10, 2018, Marble Ridge set forth various claims of fraud in connection of Neiman Marcus’ transfer of the Mytheresa assets in a scheme it orchestrated to benefit Ares and CPPIB, and “hinder, delay and defraud [Neiman Marcus’] creditors.” 

In addition to transferring the assets “for no consideration whatsoever,” the transfer was problematic, per Marble Ridge, because Neiman Marcus was allegedly insolvent at the time of the transfer or made insolvent as a result, the transfer ran afoul of U.S. federal bankruptcy law, which prohibits asset transfers by insolvent entities. 

Ultimately, the issue, in Marble Ridge’s eyes, was that the transfer took Mytheresa’s assets off of the table, and with it “any claims that creditors might have on Mytheresa as collateral – a problem if the company ever went bankrupt,” per Bloomberg, which it eventually did.

Within a week, Neiman Marcus has filed a lengthy answer to Marble Ridge’s complaint, complete with claims of its own, including defamation and business disparagement. According to Neiman Marcus, in a September 2018 press release detailing its letter to Neiman Marcus’ board, Marble Ridge cited “theft of assets by” Neiman Marcus’ private equity sponsors and a potential “default” by Neiman Marcus. Those statements – and others – “were false and defamatory, and with regard to the truth of the statement, Marble Ridge acted with actual malice or negligence,” the retailer argued. 

Beyond merely filing a countersuit, Neiman Marcus went on a PR campaign, telling the media that “for the last three months, Marble Ridge has made numerous false statements in the press, and has repeated them in [its] complaint,” and clarifying that “Neiman Marcus is not and has never been in default, and is in full compliance with the terms of its debt agreements.”

By March 2019, the court had tossed out Marble Ridge’s case in its entirety with prejudice (meaning that the fund cannot not refile a case against Neiman Marcus on the same grounds). In a brief order, Judge Tonya Parker of the 116th Civil District Court simply cited a lack of subject matter jurisdiction, leaving Neiman Marcus to gloat – “From the beginning, we have said Marble Ridge’s lawsuit lacked merit,” a rep for the group said in a statement on the heels of the ruling – and Marble Ridge to publicly reiterate its position that “the transfer of MyTheresa to the retailer’s shareholders, who led a $6 billion leveraged buyout of the company in 2013, impairs all other Neiman Marcus stakeholders.” 

In terms of its own claims, Neiman Marcus – which ultimately filed for Chapter 11 bankruptcy in a Texas court in May – was served a better hand. Just a month later, despite attempts by Marble Ridge to get the court to declare Neiman’s countersuit a Strategic Lawsuit Against Public Participation (“SLAPP”) and dismiss it as against public policy, the court refused to dismiss Neiman Marcus’ counterclaims. (A SLAPP is a lawsuit that is filed in retaliation for a party speaking out on a public issue or controversy). 

While the case is still underway in Texas, Neiman Marcus announced on Friday that it has completed its Chapter 11 bankruptcy protection process, emerging from what has been coined “one of the highest-profile retail collapses during the COVID-19 pandemic.”

As for the implosion of Mable Ridge Capital, whose founder was arrested and charged with fraud, extortion, and obstruction of justice in connection with Neiman Marcus bankruptcy on September 3, that is coming in a follow up next week.

*The case is Marble Ridge Capital LP v. Neiman Marcus Group Inc., et al, DC-18-18371, 116th Judicial District (Dallas).