Stinson Leonard Street Bankruptcy Attorneys Force HMX Shareholders to Walk Away From $20 Million in Claims
Stinson Leonard Street LLP attorneys representing the liquidating trust in the HMX bankruptcy cases recently won a settlement that will prevent former shareholders of HMX from receiving any payment on over $20 million in claims. Bankruptcy Judge Allan L. Gropper of the U.S. Bankruptcy Court for the Southern District of New York entered an order approving the settlement on September 2, 2014.
In 2009, S. Kumars Nationwide Limited and affiliated entities (SKNL) purchased substantially all of the assets of the affiliated Hartmarx entities through a bankruptcy sale. Among other things, SKNL purchased rights to several iconic brands, including Hickey Freeman and Hart Schaffner & Marx. Over the following three years, ownership and management attempted to turn the HMX companies around. As part of this process, SKNL injected tens of millions of dollars into the entities.
These efforts were ultimately unsuccessful. In the fall of 2012, the HMX entities filed a second bankruptcy citing their inability to overcome changing trends, reductions in revenue and a deterioration of liquidity. Entities affiliated with SKNL asserted nearly $30 million in claims against the HMX bankruptcy estates. These claims amounted to more than half of the total unsecured claims filed in the cases.
On March 4, 2014, the HMX liquidating trust filed a complaint against various SKNL affiliates arguing that transfers from SKNL to the HMX entities were not loans at all, but should be considered equity contributions due to SKNL's status as a shareholder. The complaint thus sought to "recharacterize" as equity approximately $19.3 million in SKNL transfers. In the alternative, the complaint sought to "subordinate" claims arising from this $19.3 million in transfers such that creditors other than SKNL would be paid in full before SKNL could be paid anything from the HMX estates. The HMX liquidating trust also filed objections to millions of dollars in other claims asserted by SKNL entities.
After several months of negotiation, the HMX trust and SNKL reached an agreement. Most significantly, their settlement disallows almost $2 million in SKNL claims entirely and also ensures that SKNL will be paid nothing on another $19.3 in claims unless other allowed creditor claims are paid in full.
The result obtained by the HMX trust will roughly double the return of unsecured creditors other than SKNL. "The result is fantastic," said Herman Roup, the former chairman of the unsecured creditors and representative of Trisula Corporation, the largest unsecured creditor in the HMX cases. "It is the right result, but we could not have gotten here without the blood, sweat and tears of everyone involved, especially our legal team – it will benefit the true creditors significantly."
The result obtained by the HMX trust will roughly double the return of unsecured creditors other than SKNL. "The result is fantastic," said Herman Roup, a representative of Trisula Corporation, one of the largest unsecured creditors in the HMX cases. "It is the right result, but we could not have gotten here without the blood, sweat and tears of everyone involved – it will benefit true creditors significantly."
Professionals in the bankruptcy industry agree. "It is uncommon to see a settlement of this size in a recharacterization or equitable subordination lawsuit," said turnaround consultant Tobias Keller of Visitacion Group, LLC, who also serves on the HMX trust oversight committee. "HMX creditors obtained a very good result – and without the usual costs of litigation."