The Nine West Decision: A New Twist on an Old Cause of Action

Trustees pursuing recoveries for unsecured creditors in Chapter 11 cases may have another arrow in their quiver under the right set of facts. Board of director members may have something new to worry about when considering their fiduciary duties in approving a merger or sale.

A Chapter 11 plan of reorganization under which trade claims are unimpaired and where secured debt and/or bondholder debt are the only restructured debt is quite common. The norm in plans of reorganization is to provide broad releases to as many parties as possible, including members of a debtor’s board of directors, senior management, professional advisors, plan sponsors and proponents, and secured lenders. Trade creditors whose claims are unimpaired do not have the right to vote on a plan of reorganization, and where trade creditors are being paid in full and a creditors committee is not appointed, such releases may go unchallenged. A leveraged buyout (“LBO”) where liability for trade debt is assumed also is common. But what happens when the reorganized company or highly-levered company after an LBO winds up in bankruptcy and unsecured creditors are left holding the proverbial bag?

A recent decision by the United States District Court for the Southern District of New York in In re Nine West LBO Securities Litigation¹ sent shock waves through the legal and financial communities. Although the case has drawn the most attention in the world of leveraged buyouts and private equity, it should also be on the radar screen of trade credit executives.