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The Problem With US Bankruptcy Laws

Not so long ago, in malls and malls across Illinois, shoppers could count on Dress Barns, Lane Bryants, Ann Taylors, Justices and other clothing stores operated by Ascena Retail Group.

Five years ago, the retailer operated nearly 5,000 physical locations catering to women, teens and tweens. By 2020, that number had been halved and the bankrupt chain agreed to sell its surviving stores.

Fashion apparel is a tough business for any retailer, given the stiff competition from e-commerce and the effects of the pandemic on all retail sectors. In Ascena’s case, some of its wounds were self-inflicted, and its executives’ efforts to avoid a lawsuit made its bankruptcy record a landmark. We hope that the United States Supreme Court will take this into account.

Ascena’s troubles began in 2015, when it paid more than $2 billion for Ann Inc., parent company of Ann Taylor, Loft and other clothing retail chains. Over the next two years, executives of the then-listed company told investors on at least several occasions that business was doing well. In May 2017, Ascena warned of trouble ahead and its stock plunged. A few weeks later, it took a $1.3 billion restructuring charge, and the deal just went downhill from there.

During its bankruptcy reorganization, Ascena received extensive legal protections for former senior executives and other company insiders. These so-called third-party waivers protect people who have never filed for bankruptcy cost themselves from lawsuits arising from their conduct, ending potential claims that would normally be resolved by judges or juries in other courts. These legal releases have become commonplace in corporate bankruptcy cases and, to put it bluntly, they stink.

Readers may recall that the Sackler family of notorious opioid seller Purdue Pharma received these same releases. Although neither of the Sacklers filed for personal bankruptcy, the judge in their company’s case approved a settlement allowing family members to walk away with the billions they had earned selling addictive drugs and without fear of being sued in other courts.

The result was so outrageous that it provoked a backlash and a New York District judge struck down the Purdue settlement. His ruling underscored how such releases have become common in bankruptcy reorganizations. Debtors file their cases at places known to distribute them regularly or threaten to drag out proceedings at the expense of creditors unless they get the free legal passes they want.

Neither the Sacklers nor any other bankrupt corporate steward should have so much leverage to twist justice. Finally, it looks like a reconsideration is at hand, as district judges consider the use of these releases in bankruptcies other than Purdue, which was particularly antagonistic because so many people died from its drugs. .

Nothing about the Ascena case is as serious as the murderous facts behind the Purdue case. Whenever publicly traded companies suffer huge write-downs, as Ascena did, securities fraud claims usually follow. Often these claims go nowhere or settle for relatively small amounts.

Yet the claims deserve to be heard, and it is fundamentally wrong that a bankruptcy judge can, as usual practice, waive them. If misconduct occurs, those involved should be held accountable.

Last month, U.S. District Judge David Novak overturned Ascena’s bankruptcy settlement and sent it back to bankruptcy court, ostensibly referring it to a new judge. Novak described the broad legal releases in Ascena’s reorganization plan as “shocking,” saying they would have freed virtually everyone involved from virtually every possible claim, including a pair of former executives targeted in the investor fraud case.

While legislation is pending in Congress to address the issue, the ultimate authority is the United States Supreme Court. We urge the nine judges to take up the first available case to end this disturbing practice once and for all.

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