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IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

Chapter 11 In re: Case No. 20-11043 (MFW) John Varvatos Enterprises, Inc., et al.,1 (Jointly Administered) Debtors. Re: Docket No. 21

OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO DEBTORS’ MOTION FOR AN ORDER (A) APPROVING THE SALE OF THE DEBTORS’ ASSETS FREE AND CLEAR OF CLAIMS, LIENS, AND ENCUMBRANCES; AND (B) APPROVING THE ASSUMPTION AND ASSIGNMENT OF DESIGNATED EXECUTORY CONTRACTS AND UNEXPIRED LEASES

The Official Committee of Unsecured Creditors (the “Committee”) of

John Varvatos Enterprises, Inc., et al., the above-captioned debtors and debtors-in-possession

(collectively, the “Debtors”), by and through its undersigned counsel, hereby files this objection

(the “Objection”) to the Debtors’ Motion for an Order (A) Approving the Sale of the Debtors’

Assets Free and Clear of Claims, Liens, and Encumbrances; and (B) Approving the Assumption and Assignment of Designated Executory Contracts and Unexpired Leases (the “Motion”).2 In support of this Objection, the Committee respectfully states as follows:

PRELIMINARY STATEMENT

1. The proposed sale of the Debtors business to Lion/Hendrix Cayman

Limited (“LHCL”), the Debtors’ equity holder, should not be permitted. Sufficient cause exists for this Court to immediately limit LHCL’s credit bid rights to ensure viable third-party bidders

1 The Debtors in these cases are as follows: John Varvatos Enterprises, Inc.; Lion/Hendrix Corporation; and John Varvatos Apparel Corp. 2 Docket No. 21. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Motion.

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can participate in the sale process. The LHCL bid proposal is premised on a $76 million credit bid that cannot withstand scrutiny. Contemporaneously with the filing of this Objection, the

Committee has requested standing to pursue recharacterization of the entirety of LHCL’s purported prepetition secured debt. The Committee has attached to that motion and to this

Objection a detailed complaint (the “Committee Complaint”)3 setting forth the undisputable facts that support recharacterization.

2. As detailed in the Committee Complaint, each cash advance comprising

LHCL’s alleged secured claim bears all the hallmarks of an equity infusion. Although nominally called “promissory notes,” they were never considered true debt instruments by LHCL or Lion

Capital. Contemporaneous unequivocally acknowledge the nature of these contributions as equity and demonstrate that LHCL and Lion Capital never considered these advances as debt.

3. Importantly,

as the Debtors finances continued to deteriorate.

The Debtors were always thinly capitalized and LHCL, as the direct and indirect owner of the

Debtors, and by extension Lion Capital, as the ultimate owner of the Debtors, had a vested interest in infusing equity into the Debtors to avoid a value-destroying liquidation. LHCL was even willing to subordinate its advances to the secured claims of third parties to protect its investment. LHCL never had any expectation of repayment other than through a sale. LHCL’s continued capital contributions as the company’s prospects floundered were solely intended to safeguard their investment and came with numerous conditions regarding the management of the

Debtors.

3 The Committee Complaint is annexed hereto as Exhibit A.

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4. Ultimately, Lion Capital’s insistence on documenting these capital contributions as debt through its complete control of the Debtors decision making process was intended to do exactly what equity dictates against – providing an inappropriate priority in the event of the inevitable bankruptcy of the Debtors. The inappropriate credit bid also serves to chill the bidding process. The evidence supporting recharacterization is clear and provides sufficient cause for this Court to limit LHCL’s credit bid rights in advance of the bid deadline to ensure third parties have a real opportunity to submit bids and participate at an auction.

5. Recharacterization aside, LHCL improperly seeks to credit bid for unencumbered assets against which it does not have liens or liens that were not properly perfected. These assets include approximately $350,000 in unencumbered bank accounts, potentially valuable leasehold interests, commercial tort claims, foreign intellectual property, and avoidance actions.

6. Lastly, the Lion APA threatens to leave the estates administratively insolvent. While the bid provides for a $2 million wind down fund, LHCL is not assuming any pre-closing administrative or priority claims, aside from cure claims. Yet the Debtors’ Schedules reflect $1.9 million in unsecured priority claims and it is unlikely that the $100,000 cushion will be sufficient to cover stub rent, priority tax claims, and the priority claims of employees that are not transferred to LHCL. Unsecured creditors, however, are slated to receive a mere $250,000 on a claims pool that exceeds $26 million.

7. In short, the sale process was designed for and dictated by LHCL and Lion

Capital for their benefit. If these parties want to receive the benefit of their investment, they must pay the freight and ensure that all administrative and priority claims are satisfied.

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BACKGROUND

I. Procedural Background

8. On May 6, 2020 (the “Petition Date”), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code with this Court. Since the

Petition Date, the Debtors have remained in possession of their assets and have continued to operate and manage their businesses as debtors-in-possession pursuant to sections 1107(a) and

1108 of the Bankruptcy Code.

9. On May 18, 2020, the Office of the United States Trustee for Region 3 appointed a five-member Committee consisting of: (i) Tessa Knox, as the class representative of the class action claimants; (ii) Vornado Realty Trust; (iii) Verde Garment Manufacturing

Limited; (iv) Meenakshi India Limited; and (v) L Industries Limited.4 The Committee selected

Kelley Drye & Warren LLP as its lead counsel and Potter Anderson & Corroon LLP as local counsel.

II. The Debtors’ Capital Structure

10. As of the Petition Date, Debtors John Varvatos Enterprises, Inc. (“JVE”) and John Varvatos Apparel Corp. (“JVA”) were parties to a senior secured credit agreement dated April 22, 2019, with Wells Fargo Bank, National Association (“Wells Fargo”) as agent, and the lenders party thereto (the “Wells Fargo Facility”). Debtor Lion/Hendrix Corporation

(“LHC”) guaranteed the Debtors’ obligations under the Wells Fargo Credit Facility. As of the

Petition Date, the Debtors owed Wells Fargo $19.5 million under the Wells Fargo Facility.

11. The Debtors are also party to five subordinated secured promissory notes issued in favor of LHCL. LHCL directly and indirectly owns each of the Debtors. London-

4 Docket No. 94.

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based private equity fund, Lion Capital LLP (“Lion Capital”), is the indirect majority owner of

LHCL and ultimately owns 100% of the Debtors’ equity.

12. The five promissory notes are as follows:

(i) a Second Amended and Restated Tranche A Joint and Several Secured Non- Negotiable Promissory Note, dated as of February 5, 2020 (the “Tranche A Note”) by JVE and JVA in favor of LHCL, and guaranteed by LHC;

(ii) a Second Amended and Restated Tranche B Joint and Several Secured Non- Negotiable Promissory Note, dated as of February 5, 2020 (the “Tranche B Note”) by JVE and JVA in favor of LHCL, and guaranteed by LHC;

(iii) a Second Amended and Restated Tranche C Joint and Several Secured Non- Negotiable Promissory Note, dated as of February 5, 2020 (the “Tranche C Note”) by JVE and JVA in favor of LHCL, and guaranteed by LHC;

(iv) a Third Amended and Restated Tranche C-1 Joint and Several Secured Non- Negotiable Promissory Note, dated as of February 5, 2020 (the “Tranche C-1 Note”) by JVE and JVA in favor of LHCL, and guaranteed by LHC; and

(v) a Tranche D Joint and Several Secured Non-Negotiable Promissory Note, dated as of February 5, 2020 (the “Tranche D Note” and together with the Tranche A Note, the Tranche B Note, the Tranche C Note and the Tranche C- 1 Note, the “Prepetition Notes”) by JVE and JVA in favor of LHCL, and guaranteed by LHC.

13. Pursuant to the DIP Order (as defined herein), the Debtors have stipulated to the validity of secured obligations totaling $94,779,483.00 under the Prepetition Notes.5

IV. Prepetition History

A. The Initial Investments

14. In 2012, Lion Capital acquired the Debtors. Lion Capital’s total original capital investment in the Debtors was $ . Following the acquisition, the Debtors’

5 Pursuant the DIP Order, the Debtors stipulate that as of the Petition Date: (i) the outstanding balance of the Tranche A Note is $14,249,161.38; (ii) the outstanding balance of the Tranche B Note is $32,526,639.94; (iii) the outstanding balance of the Tranche C Note is $15,840,297.53; (iv) the outstanding balance of the Tranche C-1 Note is $11,164,941.84; and (v) the outstanding balance of the Tranche D Note is $20,998,442.62. See DIP Order, ¶ J.

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performance was monitored by Lion Capital and

15. Contemporaneously with the acquisition, the Debtors entered into a

16.

17.

18.

19.

6 are annexed hereto as Exhibit B.

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20.

21.

22.

23.

B. The and the Prepetition Notes

24.

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25. On December 18, 2015, JVE and JVE issued the original Tranche A Note in the face amount of $ million (the “Original Tranche A Note”). The Original Tranche A

Note provided for PIK interest to accrue at percent per annum. No payment of principal or interest on the Original Tranche A Note was due .

26. Also, on December 18, 2015,

and (iii) the Debtors issued to LHCL the original version of Tranche B Notes in the original principal amount of $ million (the “Original Tranche B Note”). The Original

Tranche B Note provided for PIK interest to accrue at percent per annum.

27. Notwithstanding the documentation of the Original Tranche A Note and the Original Tranche B Note, i

28.

Accordingly, on March 30, 2016, the Debtors issued what was publicly characterized as a Tranche C “promissory note” with LHCL for up to $ (the “Original

Tranche C Note”). The Original Tranche C Note provided for PIK interest to accrue at

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percent per annum.

29.

30.

31.

32. On March 3, 2017, the Debtors issued what publicly was characterized as a Tranche C-1 “promissory note” to LHCL for up to $ (the “Original Tranche C-1

Note”). The Original Tranche C-1 Note provided for PIK interest to accrue at

percent per annum.

33. The Debtors struggled throughout 2017 and 2018,

on April 22, 2019, the Debtors entered into s and Wells Fargo.

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34. The Wells Fargo Facility was a new ABL facility

. In connection with the Debtors’ entry into these facilities, each of the Original Tranche A, B, C and C-1 Notes were amended and restated (collectively, the “First Amended Prepetition Notes”).

35.

36. On February 5, 2020, LHCL provided the Debtors

37.

38. At the same time, the Debtors amended and restated each of the First

Amended Prepetition Notes to their current versions.

39.

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40. As of the Petition Date, the amounts due LHCL under the Prepetition Notes totaled approximately

$94.8 million (the “LHCL Claim”), with constituting capitalized interest.

III. The Chapter 11 Cases

41. On the Petition Date, the Debtors and LHCL executed an asset purchase agreement (the “Lion APA”) providing for the proposed acquisition of substantially all of the

Debtors’ assets to LHCL for consideration consisting of: (i) up to $19,450,000 of cash to satisfy the Wells Fargo Facility; (ii) a $76 million credit bid; and (iii) the assumption of certain liabilities set forth in the Lion APA, including cure costs.

42. LHCL, however, will not assume or satisfy any pre-closing administrative or priority liabilities, and the Lion APA provides a $2 million fund to wind-down the estates.

The Lion APA also provides for only $250,000 for the Debtors’ general unsecured creditors, who are owed in excess of $26.1 million.

43. Following the Committee’s objection and negotiation of various revisions, the Court entered an order approving bidding procedures for the sale of the Debtors’ assets (the

“Sale Procedures Order”). The Sale Procedures Order established a July 13 bid deadline, a

July 15 auction, and a July 17 hearing to consider approval of the proposed sale.

44. The Court also entered a final order approving DIP financing from LHCL to fund the sale process and admnistration of the cases (the “DIP Order”). Pursuant to the DIP

Order, the Debtors were authorized to incur up to $21 million of DIP financing from LHCL consisting of (i) up to $10.5 million of new money to fund the bankruptcy cases; and (ii) a

$10.5 million partial roll up of the Tranche B Note (the “Roll-Up”).

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45. Both the Sale Procedures Order and DIP Order confrim that LHCL’s credit bid rights are subject to the Committee’s challenge rights.

46. On July 1, 2020, the Debtors filed their Statements of Financial Affairs

(the “SOFAs”) and Schedules of Assets and Liabilities (the “Schedules”).7

47. Based upon its review of the SOFAs, the Schedules, and its investigation into the Prepetition Notes and LHCL’s liens and claims, the Committee has identified the following assets that are not subject to encumbrance and/or were not properly perfected:

 the Debtors’ cash or cash equivalents, including cash in its depository accounts, in the amount of approximately $350,000, that are not in LHCL’s possession or subject to control agreements;

 the Debtors’ foreign intellectual property;

 the remaining leasehold interests, which are not subject to a leasehold mortgage or deed of trust, as required by applicable state law;

 commercial tort claims that were not identified with the specificity required by law; and

 chapter 5 avoidance actions, because such actions did not arise until the Debtors filed bankruptcy and should inure to the benefit of unsecured creditors.

48. Notwithstanding these deficiencies in LHCL’s collateral package, the Lion

APA does not include any cash consideration for these assets.

V. The Complaint and Standing Motion

49. Contemporaneously with the filing of this Objection, the Committee is seeking standing to pursue the Committee Complaint. Among other things, the Committee

Complaint seeks to recharacterize the LHCL Claim as equity and seeks an order confirming that

LHCL does not have liens on or has not properly perfected its liens on various assets.

7 Docket Nos. 260-264, 266.

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OBJECTION

50. In determining whether to authorize the use, sale, or lease of property of the estate under section 363(b), the Debtors have the burden of establishing a sound business purpose.8 The determination of whether a sale represents a sound business decision requires the debtor to prove the following four factors: (1) a sound business purpose for the sale; (2) the proposed sale price is fair; (3) the debtor has provided adequate and reasonable notice; and

(4) the buyer has acted in good faith.9 In determining whether a sale is supported by a sound business purpose, courts should consider “all salient factors pertaining to the proceeding and, accordingly, act to further the interests of the debtor, creditors, and equity holders alike.”10

51. Where a debtor seeks to sell substantially all assets through an expedited sale process under section 363, the sale requires closer scrutiny because such a sale deprives creditors of the safeguards afforded by the confirmation process.11 In such expedited sales, the debtor bears a heightened burden beyond mere sound business judgment.12 Moreover, insider transactions are subject to a heightened level of scrutiny.13

8 See Dai-Ichi Kangyo Bank, Ltd. v. Montgomery Ward Holdings, Corp. (In re Montgomery Ward), 242 B.R. 147, 153 (D. Del. 1999). 9 In re Summit Global Logistics, Inc., 2008 WL 819934, *9 (Bankr. D. N.J. Mar. 26, 2008); Titusville Country Club v. Pennbank (In re Titusville), 128 B.R. 396, 399 (Bankr. W.D. Pa. 1991). 10 In re Montgomery Ward, 242 B.R. at 153-54 (quoting and adopting Committee of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983). 11 In re Summit Global Logistics, Inc., 2008 Bankr. LEXIS 896, at *27-28 (Bankr. D.N.J. Mar. 26, 2008), quoting In re Medical Software Solutions, 286 B.R. 431, 445 (Bankr. D. Utah 2002) (internal quotations omitted) (“[W]hen a pre-confirmation [Section] 363(b) sale is of all, or substantially all, of the Debtor's property, and is proposed during the beginning stages of the case, the sale transaction should be closely scrutinized, and the proponent bears a heightened burden of proving the elements necessary for authorization.”). 12 See In re CGE Shattuck, LLC, 254 B.R. 5, 12 (Bankr. D. N.H. 2000) (internal citations omitted) (holding that “a debtor may not use the provisions of § 363 to deny creditors the protections they would receive under Chapter 11 if the transaction were part of a plan of reorganization” and that “[t]he closer a proposed transaction gets to the heart of the reorganization process, the greater scrutiny the Court must give to that matter.”); In re Channel one Communications, Inc., 117 B.R. 493, 496 (Bankr. E.D. Mo. 1990) (“[I]n the absence of the protection and finality offered by a disclosure statement and plan, such a transaction pursuant to Section 363(b) requires specific

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I. LHCL’s Credit Bid Rights Pursuant to Section 363(k) Must Be Limited

52. The right to credit bid is not absolute.14 Specifically, section 363(k) of the

Bankruptcy Code provides that a party may credit bid unless the court “for cause” orders otherwise.15 The term “cause” is not defined by the Bankruptcy Code, and it is left to the court to determine whether cause exists on a case-by-case basis.16

53. The decision of whether to deny credit bidding based on cause is within the discretion of the court.17 When evaluating whether “cause” exists, courts attempt to balance the interests of the debtor, its creditors, and the other parties in interest in order to achieve the maximization of the estate and an equitable distribution to all creditors.18

authorization by the Court. The sale must be closely scrutinized, and the proponent bears a heightened burden of proving the elements necessary for authorization.”). 13 See Crown Vill. Farm, LLC v. Arl. L.L.C. (In re Crown Vill. Farm, LLC), 415 B.R. 86, 93 (Bankr. D. Del. 2009) (holding that “[t]he sale process will be under the close scrutiny of the Court as required where the stalking horse is an insider”); Citicorp Venture Capital, Ltd. v. Comm. of Creditors Holding Unsecured Claims (In re Papercraft Corp.), 211 B.R. 813, 823 (W.D. Pa. 1997), aff’d, 160 F.3d 982 (3d Cir. 1998) (“[I]nsider transactions are subjected to rigorous scrutiny and when challenged, the burden is on the insider not only to prove the good faith of a transaction but also to show the inherent fairness from the viewpoint of the corporation and those with interests therein.”); see also In re Summit Global Logistics, Inc., 2008 Bankr. LEXIS 896, *27-28 (Bankr. D. N.J. Mar. 26, 2008) (quoting In re Medical Software Solutions, 286 B.R. 431, 445 (Bankr. D. Utah 2002) (“[W]hen a pre- confirmation [section] 363(b) sale is of all, or substantially all, of the Debtor's property, and is proposed during the beginning stages of the case, the sale transaction should be closely scrutinized, and the proponent bears a heightened burden of proving the elements necessary for authorization”). 14 See In re Fisker Auto. Holdings, Inc., 510 B.R. 55, 59 (Bankr. D. Del. 2014) (citing In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010). 15 11 U.S.C. § 363(k). 16 See In re Olde Prairie Block Owner, LLC, 464 B.R. 337, 348 (Bankr. N.D. Ill. 2011) (citing In re N.J. Affordable Homes Corp., 2006 WL 2128624, at *16 (Bankr. D. N.J. June 29, 2006) (stating that cause is “intended to be a flexible concept enabling a court to fashion an appropriate remedy on a case-by-case basis”); In re River Road Hotel Partners, LLC, 2010 WL 6634603, at *1 (Bankr. N.D. III. Oct. 5, 2010) (“Section 363 gives courts the discretion to decide what constitutes ‘cause’ and the flexibility to fashion an appropriate remedy by conditioning credit bidding on a case-by-case basis.”) 17 See In re Olde Prairie, 464 B.R. at 348. 18 In re RML, 528 B.R. at 155 (citations omitted).

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54. Courts have limited or denied the right to credit bid when the validity of a creditor’s lien is in dispute.19 These courts reason that “cause” existed to deny or limit the credit bid because the secured claim is not “allowed” as required by the statute when it is the subject of an adversary proceeding or objection. Courts have also limited credit bid rights when the credit bid would effectively chill bidding by third parties.20 While misconduct may also be a basis to limit credit bidding, the “cause” standard does not require that the secured creditor engage in inequitable conduct.21

55. Here, “cause” exists to limit LHCL’s credit bid rights pursuant to section

363(k) because: (i) the validity of the LHCL Claim is in dispute as evidenced by the Committee

Complaint seeking to recharacterize the LHCL Claim as equity; (ii) LHCL cannot credit bid for unencumbered property; and (iii) the credit bid will chill bidding.

A. The LHCL Claim is Disputed and Should Be Recharacterized as Equity

56. Cause exists to deny or limit LHCL’s credit bid rights because the validity of its secured claims is in dispute. Contemporaneous with filing this Objection, the Committee filed the Committee Complaint seeking to, among other things, recharacterize the LHCL Claim as equity. As a result, the LHCL Claim is not an “allowed claim” as required by the statute and

LHCL should not be authorized to submit a credit bid.

19 See In re CS Mining, LLC, 574 B.R. 259, 284-85 (Bankr. D. Utah 2017) (denying credit bid for cause where alleged secured claim was subject of adversary proceeding and objection, and thus not “allowed” as required by statute); In re Fisker Auto. Holdings, Inc., 510 B.R. at 61 (limiting credit bid where the allowed amount of the claim was uncertain because “the law leaves no doubt that the holder of a lien the validity of which has not been determined, as here, may not bid its lien”); In re Daufuskie Island Props., LLC, 441 B.R. 60, 64 (Bankr. D.S.C .2010) (denying right to credit bid where purportedly secured claim was the subject of adversary proceedings seeking to invalidate or subordinate the claim); Nat’l Bank of Commerce v. McMullan (In re McMullan), 196 B.R. 818, 835 (Bankr. W.D. Ark. 1996) (denying mortgagee right to credit bid because the validity of its liens and security interests were unresolved). 20 In re Fisker Auto. Holdings, Inc., 510 B.R. at 60. 21 Id. (citing In re Philadelphia Newspapers, LLC, 599 F.3d at 315 n.14).

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57. While the recharacterization count has not been adjudicated, the

Committee submits that there is ample support for recharacterizing the LHCL Claim as equity.

The focus of a recharacterization analysis is whether the parties called an instrument one thing when in fact they intended it as something else.22 The overarching question is whether the transaction created a debt or equity relationship from the outset.23 The intent may be inferred from (1) what the parties say in their contracts, (2) what they do through their actions, and (3) the economic reality of the surrounding circumstances.24 Accordingly, in characterizing an instrument as debt or equity, a court must start its inquiry at the inception of the parties’ relationship.25

58. To determine whether the transaction was intended as debt or equity, a court will not rely on a mechanistic scorecard but will assess the facts that confer context on a case-by-case basis.26 Courts have considered the following factors to determine whether recharacterization is proper:

(1) the names given to the instruments, if any, evidencing the indebtedness; (2) the presence or absence of a fixed maturity date and schedule of payments; (3) the presence or absence of a fixed rate of interest and interest payments; (4) the source of repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of interest between the creditor and the stockholder; (7) the security, if any, for the advances;

22 In re Friedman’s Inc., 452 B.R. 512, 518 (Bankr. D. Del. 2011) (citing In re SubMicron Sys. Corp., 432 F.3d 448, 456 (3d Cir. 2006)). 23 Id. n. 7 (citing In re Cold Harbor Assocs., L.P., 204 B.R. 904, 915 (Bankr. E.D. Va. 1997). 24 Id. 25 United States v. State St. Bank & Trust Co., 520 B.R. 29, 74 (Bankr. D. Del. 2014) (citing Bayer Corp. v. MascoTech, Inc. (In re Autostyle Plastics, Inc.), 269 F.3d 726, 748-49 (6th Cir. 2001). 26 In re SubMicron, 432 F.3d at 454.

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(8) the corporation’s ability to obtain financing from outside lending institutions; (9) the extent to which the advances were subordinated to the claims of outside creditors; (10) the extent to which the advances were used to acquire capital assets; and (11) the presence or absence of a sinking fund to provide repayments.27

59. In the Third Circuit, the recharacterization analysis is a totality-of-the- circumstances test where no one factor is dispositive.28

60. Recharacterization of the LHCL Claim as equity is warranted. The history referenced herein, and more fully described in the Complaint, reveals that Lion Capital and

LHCL intended the cash advances in the form of the Prepetition Notes to be equity infusions.

This presents the axiomatic example where the parties called the advances

“promissory notes” when in fact, they intended the advances to be further investments.

61. An analysis of the multi-factor test yields the same conclusion:

 Names Given to the Instruments, Fixed Maturity Date, Schedule of Payments, Interest Rate, and Interest Payments:

 Source of Repayments: If the expectation of repayment depends solely on the success of the borrower’s business, the transaction has the appearance of a capital

27 Moll Indus., 454 B.R. at 581-82 (citing Official Comm. of Unsecured Creditors v. Credit Suisse First Bos. (In re Exide Techs., Inc, 299 B.R. 732, 740 (Bankr. D. Del. 2003) (Walrath, J). 28 Lipscomb v. Clairvest Equity Partners Ltd. P'ship (In re LMI Legacy Holdings, Inc.), 2017 WL 1508606, at *14 (Bankr. D. Del. Apr. 27, 2017) (citing Autobacs Strauss, Inc. v. Autobacs Seven Co. (In re Autobacs Strauss, Inc.), 473 B.R. 525, 572 (Bankr. D. Del. 2012) (citation omitted)).

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contribution.29

 The Adequacy or Inadequacy of Capitalization: “[W]hen a corporation is undercapitalized, a court is more skeptical of purported loans made to it because they may in reality be infusions of capital.”30

 The Identity of Interest Between the Creditor and the Stockholder: “If stockholders make advances in proportion to their respective stock ownership, an equity contribution is indicated.”31 LHCL is the exclusive holder of the Prepetition Notes as well as the 100% direct and indirect owner of the Debtors. While LHCL is not the only lender to the Debtors, LHCL’s advances represent the overwhelming majority of the claims pool.

 Extent to Which the Advances Were Subordinated to the Claims of Outside Creditors: Subordination of advances to claims of all other creditors indicates that the advances were capital contributions and not loans.32 The advances under the Prepetition Notes were at all times subordinated to the claims of the Debtors’ third party lenders.

62. The totality of the circumstances, in conjunction with the multi-factor analysis, reveal that the funds advanced under the guise of the Prepetition Notes were truly equity infusions. As a result, LHCL does not have a valid secured claim and cause exists to limit or deny its credit bid.

B. LHCL Cannot Credit Bid for Assets that are Not Subject to its Liens

63. Cause also exists to limit LHCL’s credit bid rights because it seeks to credit bid for unencumbered property. Section 363(k) of the Bankruptcy Code provides that a

29 Exide, 299 B.R. at 741 (citing Autostyle, 269 F.3d at 751). 30 State St. Bank & Trust, 520 B.R. at 78 (citing SubMicron, 432 F.3d at 457). 31 Exide, 299 B.R. at 741 (citing Autostyle, 269 F.3d at 751).

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secured creditor may credit bid the allowed amount of its claim against the property securing such claim in a sale of such property outside of the ordinary course of business.33 It is axiomatic, therefore, that to the extent a “creditor’s lien attaches to only some of the property to be sold, the creditor cannot credit bid the secured claim for the unencumbered property but must pay cash.”34

Where the extent of a lender’s liens are in dispute, courts have prevented or conditioned a lender’s credit bid by putting certain protections in place.35

64. As described more fully in the Committee Complaint, even if the Court does not recharacterize the LHCL Claim, LHCL does not have the right to credit bid for all of the Debtors’ assets. At least the following categories of assets are not subject to LHCL’s prepetition liens: (i) bank accounts; (ii) foreign intellectual property; (iii) leasehold interests;

(iv) commercial tort claims; and (v) avoidance actions.

65. The Debtors had numerous Bank Accounts for which account control agreements were not executed and which were not in LHCL’s possession, which had a value of

$350,000 in cash on the Petition Date.

66. Under the Lion APA, LHCL may acquire the Debtors’ remaining go- forward locations, including the assumption and assignment of the underlying leases for such

32 Id. at 742 (citing Autostyle, 269 F.3d at 752). 33 See 11 U.S.C. § 363(k). 34 3 COLLIER ON BANKRUPTCY ¶ 363.09[3] (16th ed. 2019); see also In re Free Lance-Star Publishing Co. of Fredericksburg, VA, 512 B.R. 798, 806 (Bankr. E.D. Va. 2014) (“DSP does not have a right to assert a credit bid on assets that do not secure DSP’s allowed claim.”) 35 See In re Akard St. Fuels, L.P., 2001 WL 1568332 (N.D. Tex. December 4, 2001) (denying right to credit bid where lender’s liens were subject to a challenge and lender was capable of bidding cash at the auction); In re Octagon Roofing, 125 B.R. 583, 592 (Bankr. N.D. Ill. 1991) (permitting lender’s credit bid so long as lender posted irrevocable letter of credit if the lien was later avoided); In re Hickey Properties, Ltd., 181 B.R. 171 (Bankr. D. Vt. 1995) (denying right to credit bid for debtor’s equity interest where lender’s lien did not extend to such equity).

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locations. LHCL, however, does not have a lien in these leasehold interests. LHCL has not produced any mortgages or deeds of trust with respect to such leases.36

67. LHCL’s prepetition collateral also included foreign intellectual property.

LHCL, however, did not properly perfect its liens in such intellectual property in accordance with applicable local law.

68. LHCL also does not have a prepetition lien in the Debtors’ chapter 5 avoidance actions. Such actions also were not part of the prepetition collateral package because they do not arise until a debtor files for bankruptcy.37 The prepetition lien similarly does not apply to previously unidentified commercial tort claims.38

69. Taken together, LHCL’s liens do not extend to valuable assets that it seeks to acquire through the credit bid. Section 363(k) prohibits a credit bid for assets that are not subject to a creditor’s liens. Therefore, cause exists to limit LHCL’s credit bit rights and LHCL must provide cash value if it seeks to acquire these assets.

C. The Credit Bid Will Chill Bidding

70. Cause exists to deny or significantly limit LHCL’s credit bid because the credit bid stands to chill bidding by other third party bidders. LHCL has submitted a $76 million credit bid, which it may increase up to the full $94.8 million under the Prepetition Notes.

71. The Committee’s concerns are not hypothetical or speculative.

36 See In re DBSI, Inc., 432 B.R. 126, 132 (Bankr. D. Del. 2010) (“It is widely held that security interests in leases must be recorded in the real property records of the county where the real property is located”). 37 See PAH Litig. Trust v. Water St. Healthcare Partners L.P. (In re Physiotherapy Holdings, Inc.), Case No. 13-12965, 2016 Bankr. LEXIS 2810, *53-54 (Bankr. D. Del. June 20, 2016) (“Post-petition avoidance actions can only be brought by the trustee after the petition is filed”).

Case 20-11043-MFW Doc 338 Filed 07/16/20 Page 21 of 23

Thus, the LHCL credit bid has had a real chilling effect on the Debtors’ proposed sale. Limiting or denying LHCL’s credit bid will likely attract renewed interest in the bidding process and foster a competitive bidding environment that provides additional value for the Debtors’ creditors.39

II. The Sale Cannot Leave the Estates Administratively Insolvent

72. The Debtors should not be allowed to move forward with a sale process that may leave these estates administratively insolvent.40 Section 363 was not designed to allow a debtor to circumvent the Bankruptcy Code’s protections for creditors. “A principal goal of the reorganization provisions of the Bankruptcy Code is to benefit the creditors of the Chapter 11 debtor by preserving going-concern value and thereby enhancing the amounts recovered by all creditors.”41 A sale that benefits only secured lenders to the exclusion of unsecured creditors runs contrary to the good-faith requirements inherent in the chapter 11 process.

73. The Lion APA leaves the estates with $2,000,000 to fund the wind down of the Debtors’ estates in the event of dismissal, including the payment of any administrative and

38 To perfect a security interest in a commercial tort claim, the security agreement and the UCC-1 must identify the claim specifically; a general identification of “commercial tort claims” is insufficient. See U.C.C. § 9- 108(e) (a description only by type of collateral is insufficient for a commercial tort claim). 39 Philadelphia Newspapers, 599 F.3d at 316 n.14 (“A court may deny a lender the right to credit bid . . . to foster a competitive bidding environment.”). 40 See Allied Systems Holding, Inc., Case No. 12-11564 (CSS), Hr’g Tr. (Docket No. 492) at 86-90 (Bankr. D. Del. Sept. 28, 2012) (“I’m not going to lay out the terms of what a credit bid or a sale order or anything else is going to be, but I can tell you that I'm not going to approve a sale in this case that’s going to leave an administratively insolvent estate”). Excerpts from the transcript are attached hereto as Exhibit C. 41 In re Timbers of Inwood Forest Assoc., Ltd., 808 F.2d 363, 373 (5th Cir. 1987), aff’d 484 U.S. 365 (1988).

Case 20-11043-MFW Doc 338 Filed 07/16/20 Page 22 of 23

priority claims that are not assumed by LHCL. The Schedules reflect $1.9 million in priority claims as of the Petition Date.

74. In addition, potentially significant administrative and priority claims may remain unpaid, including: (i) stub rent; (ii) “Excluded Taxes,” which may include priority tax claims; and (iii) priority claims of current or former employees who are not Transferred

Employees. The Debtors should not be allowed to move forward with a sale process that is likely to leave these estates administratively insolvent.

75. The Lion APA also provides that if LHCL rejects a contract during the 30 day post-closing designation rights period, and such rejection results in increased administrative liabilities, other than de minimis liabilities, LHCL will negotiate in good faith to adjust the wind down budget.42 This provision leaves the payment of increased administrative claims subject to dispute and potentially protracted negotiation or litigation.

76. The sale to LHCL should be denied unless LHCL agrees to assume these liabilities or provide cash consideration to: (i) satisfy all administrative and priority claims, including those arising from the rejection of leases during the designation rights period; (ii) fund an adequate wind down budget; and (iii) provide sufficient funds to effectuate a meaningful distribution to general unsecured creditors.

42 See Lion APA § 1.5(d).

Case 20-11043-MFW Doc 338 Filed 07/16/20 Page 23 of 23

CONCLUSION

WHEREFORE, the Committee respectfully requests that the Court (i) deny the Motion unless modified as set forth herein; and (ii) grant such other and further relief as the Court deems just and proper.

Dated: July 9, 2020 Wilmington, Delaware

POTTER ANDERSON & CORROON LLP

/s/ Jeremy W. Ryan Jeremy W. Ryan (DE Bar No. 4057) R. Stephen McNeill (DE Bar No. 5210) 1313 North Market Street, 6th Floor Wilmington, Delaware 19801 Telephone: (302) 984-6000 Facsimile: (302) 658-1192 Email: [email protected] [email protected]

and

KELLEY DRYE & WARREN LLP Eric R. Wilson (admitted pro hac vice) Jason R. Adams (admitted pro hac vice) Maeghan J. McLoughlin (admitted pro hac vice) 101 Park Avenue New York, New York 10178 Telephone: (212) 808-7800 Facsimile: (212) 808-7897 Email: [email protected] [email protected] [email protected]

Counsel to the Official Committee of Unsecured Creditors of John Varvatos Enterprises, Inc., et al

Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 1 of 59

EXHIBIT A Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 2 of 59

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE x : In re : Chapter 11 : John Varvatos Enterprises, Inc. et al., : Case No. 20-11043 (MFW) : Debtors. : (Joint Administration) : ------: : Official Committee of Unsecured Creditors of : John Varvatos Enterprises, Inc. et al., : : Plaintiff, : : Adv. Pro. No. 20-______(MFW) v. : : Lion/Hendrix Cayman Limited, : : Defendant. : : ------x

COMPLAINT

The Official Committee of Unsecured Creditors (the “Committee”) of John

Varvatos Enterprises, Inc. et al., the debtors and debtors-in-possession in the above-captioned bankruptcy proceedings (collectively, the “Debtors”), by and through its undersigned counsel, as and for its Complaint against defendant Lion/Hendrix Cayman Limited (“LHCL”), hereby alleges as follows:

NATURE OF THE ACTION

1. The Committee brings this action to recharacterize as equity nearly

$95 million of improperly documented “debt” allegedly outstanding on certain “promissory notes” John Varvatos Enterprises, Inc. (“JVE”) and John Varvatos Apparel Corp. (“JVA”) executed in favor of LHCL, the entity that directly or indirectly owns and controls them.

IMPAC 6790425v.1 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 3 of 59

2. Notwithstanding LHCL’s disingenuous documentation of debt, LHCL and

its affiliates consistently demonstrated through their conduct and words that they viewed their

capital contributions as equity and not loans. As set forth below, while the face amount of these

contributions are alleged at $95 million, LHCL in reality only provided at most $ of

actual capital to the Debtors, and imposed an unreasonable, non-market rate of return of up to

% which was document as , and resulted in the accumulation of $ of

purported interest.

Name Given Original Note Amount Interest Maturity Principal Interest to Instrument Date Funded Paid Paid Tranche A December 18, $ $ $ $ 2015 Tranche B December 18, $ $ $ $ 2015 Tranche C March 30, 2016 $ $ $ $

Tranche C-1 March 3, 2017 $ $ $ $

Tranche D February 5, 2020 $ $ $ $

Total: $ $ $ $

IMPAC 6790425v.1 2 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 4 of 59

4. The LHCL equity investments were necessitated by continued losses at the

Debtors .

Given the Debtors’ financial condition, no non-insider third-party lender would have provided the Debtors financing, even on a subordinated basis.

Given declining sales and negative cash flow,

6. The above allegations are not mere conjecture but come directly from

LHCL and Lion Capital themselves.

7. In short, LHCL and Lion Capital’s own internal documents and the economic realities surrounding the advances yield only one pragmatic conclusion: LHCL infused

IMPAC 6790425v.1 3 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 5 of 59

the

8. Fundamental principles of equity compel the conclusion that, under the facts and circumstances alleged below, the Court should recharacterize as equity the $95 million of alleged “debt” outstanding on the “promissory notes” at issue here. As a result, the

$10.5 million prepetition notes that were refinanced as part of the DIP financing in these cases must be unwound and recharacterized.

9. To the extent the Court determines that some or all of the prepetition notes should not be recharacterized, the Debtors’ stipulation in the final DIP order regarding the extent and perfection of LHCL’s liens are overbroad and must be limited to account for certain excluded collateral or other categories of assets that were not properly perfected by LHCL.

JURISDICTION AND VENUE

10. This Adversary Proceeding is brought in accordance with Rule 7001 of the

Federal Rules of Bankruptcy Procedure.

11. This Adversary Proceeding relates to the chapter 11 cases jointly administered as John Varvatos Enterprises, Inc., et al., Case No. 20-11043 (MFW) (the “Main

Case”).

12. This Court has subject matter jurisdiction over this Adversary Proceeding pursuant to 28 U.S.C. §§157 and 1334.

13. Venue in this Court is proper pursuant to 28 U.S.C. §§1408 and 1409 because this is a proceeding relating to and arising under the Bankruptcy Code and the Debtors’ chapter 11 cases.

IMPAC 6790425v.1 4 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 6 of 59

14. This Court may grant the requested declaratory relief pursuant to

28 U.S.C. § 2201(a), and such relief is properly sought by adversary proceeding pursuant to

Federal Rules of Bankruptcy Procedure 7001(2) and (9).

15. This is a core proceeding within the meaning of 28 U.S.C. §157(b). The

Committee confirms its consent, pursuant to Rule 7008-1 of the Local Rules of Bankruptcy

Practice and Procedure, to the entry of a final order by this Court if it is determined that the Court, absent the parties’ consent, cannot enter final orders or judgments herein consistent with Article

III of the United States Constitution.

FACTUAL ALLEGATIONS

A. The Parties

1. The Committee

16. On May 18, 2020, the Office of the United States Trustee for Region 3 appointed the Committee to represent the interests of the unsecured creditors of debtors JVE, JVA and Lion/Hendrix Corporation (“LH Corp.”).

17. The Committee is comprised of five members: Tessa Knox, as the class representative of the class action claimants, Vornado Realty Trust, Verde Garment Manufacturing

Limited, Meenakshi India Limited, and L Industries Limited.

2. The Lion Capital Entities

18. Defendant LHCL is an exempted limited company organized under the laws of the Cayman Islands. Centrally managed and operated in the United Kingdom, LHCL directly or indirectly owns the Debtors.

19. LHCL is wholly owned by Lion/Hendrix Cayman LP, a Cayman exempted limited partnership.

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20. Lion/Hendrix Cayman LP, in turn, is majority owned by Lion Capital

(Guernsey) III Limited and one or more other private equity funds ultimately managed by Lion

Capital LLP (“Lion Capital”).

21. Lion Capital is a London-based private equity firm specializing in the consumer sector. Since its formation, the firm and its principals have invested approximately $9 billion in branded consumer goods and retail businesses in North America and Europe.

B. Procedural Background

22. On May 6, 2020 (the “Petition Date”), each of the Debtors filed with this

Court a voluntary petition for relief under chapter 11 of the Bankruptcy Code.

23. On March 25, 2020, little more than a month prior to the Petition Date, the

Debtors retained MMG Advisors, Inc. (“MMG”) to provide investment banking services to the

Debtors. The sale process commenced by MMG represented the restart of a sale process the

Debtors have been pursuing since at least 2015.

24. Prior the Petition Date, MMG received bids from multiple parties to acquire substantially all of the Debtors assets through a sale conducted pursuant to section 363 of the Bankruptcy Code. These bids included, but were not limited to (i) a substantial cash bid from an unrelated third party consisting of, upon information and belief, a $75 million cash component and a proposal to provide approximately $10 million of DIP financing to fund a bankruptcy process; and (ii) a credit bid from the Debtors’ parent and insider, LHCL.

25. The Debtors created a restructuring committee of one purported independent director to consider bids. The restructuring committee selected the credit bid from

LHCL to serve as a stalking horse bid.

26. On the Petition Date, the Debtors and LHCL executed an asset purchase agreement (the “Lion APA”) providing for the proposed acquisition of substantially all of the

IMPAC 6790425v.1 6 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 8 of 59

Debtors’ assets for consideration consisting of (i) up to $19,450,000 of cash to satisfy the Wells

Fargo Facility (defined below); (ii) a $76 million credit bid; and (iii) the assumption of certain liabilities set forth in the Lion APA.

27. The Lion APA provides for a guaranty of only $250,000 to be left behind for the Debtors’ general unsecured creditors, who are owed in excess of $26.1 million.

28. Following the Committee’s objection and negotiation of various revisions, the Court entered an order approving bidding procedures for the sale of the Debtors’ assets on

June 9, 2020 (the “Sale Procedures Order”).1 The Sale Procedures Order established a July 13 bid deadline, a July 15 auction, and a July 17 hearing to consider approval of the proposed sale.

29. Pursuant to Paragraph H of the Sale Procedures Order, the LHCL’s credit bid rights are subject to the Committee’s challenge rights set forth in the DIP Order (defined below).

30. Also on June 9, 2020, the Court entered a final order approving DIP financing from LHCL (the “DIP Order”).2 Pursuant to the DIP Order, the Debtors were authorized to incur up to $21 million of DIP financing from LHCL consisting of (i) up to

$10.5 million of new money to fund the Debtors’ bankruptcy cases; and (ii) $10.5 million of refinanced prepetition debt purportedly owing from the Debtors to LHCL pursuant to a Tranche

B Note (the “Roll-Up”).

31. Pursuant to Paragraph I of the DIP Order, the Debtors have stipulated to, among other things, the validity of $19,449,655.54 of first lien secured debt owing pursuant to a credit agreement dated April 22, 2019, among JVE and JVA as borrowers, LHC as guarantor,

1 Main Case Docket No. 177. 2 Main Case Docket No. 176.

IMPAC 6790425v.1 7 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 9 of 59

Wells Fargo Bank, National Association (“Wells Fargo”) as agent, and the lenders party thereto

(the “Wells Credit Facility”).

32. Pursuant to Paragraph J of the DIP Order, the Debtors have stipulated to, among other things, the validity of purportedly fully subordinated secured debt of approximately

$94,779,483.00 pursuant to:

33. Pursuant to Paragraph J of the Final Order, the Debtors further stipulated that as of the Petition Date: (i) the outstanding balance of the Tranche A Note is $14,249,161.38;

(ii) the outstanding balance of the Tranche B Note is $32,526,639.94; (iii) the outstanding balance of the Tranche C Note is $15,840,297.53; (iv) the outstanding balance of the

Tranche C-1 Note is $11,164,941.84; and (v) the outstanding balance of the Tranche D Note is

$20,998,442.62.

34. Notwithstanding the outstanding balances stipulated to by the Debtors, the actual amounts of capital provided by LHCL to the Debtors was significantly less. As discussed

IMPAC 6790425v.1 8 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 10 of 59

in further detail below, in reality LHCL provided capital of only

35. Pursuant to Paragraph J of the Final Order, the Debtors further stipulate that (i) the obligations under the Prepetition Notes are not subject to contest, including recharacterization; (ii) the liens and security interests granted to LHCL are valid, binding and properly perfected in the Collateral as defined in an Amended and Restated Security Agreement dated February 5, 2020 (the “Security Agreement”).

36. The purported amounts owing by the Debtors to LHCL under the

Prepetition Notes, and the liens purportedly granted to LHCL pursuant to the Security

Agreement are expressly subordinated in all respects to the liens and claims in connection with the Wells Fargo Facility.

37. The Prepetition Notes and the Security Agreement are each governed by

state law.

38. LH Corp. guaranteed the obligations of JVE and JVA under the Security

Agreement.

39. Under the Security Agreement, JVE and JVA purported to grant LHCL a security interest in

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40.

41.

42.

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43. On September 28, 2015, LH Corp. filed UCC-1 financing statements with the Delaware Secretary of State against JVE and JVA (collectively, the “Financing Statements”).

44. On December 18, 2015, LH Corp. filed a full assignment of its interest in the Financing Statements in favor of LHCL.

45. The Financing Statements state that they cover “[a]ll assets” or “[a]ll assets of the debtor, wherever located, whether now owned or hereafter acquired or arising.”

46. The Debtors stipulations in Paragraph J of the Final Order are without prejudice to the Committee’s right to assert a challenge as provided in paragraphs 20 and 21 of the Final Order.

47. Pursuant to paragraph 20 of the Final Order, the Committee has until July

13, 2020 to commence a challenge to the Debtors’ stipulations contained in the Final Order.

Paragraph 20 further provides that the challenge period shall be tolled if the Committee files a motion for standing to prosecute a challenge, which motion attached a draft complaint, by July

13, 2020. Paragraph 20 further provides that the Committee’s challenge right includes the right to challenge the Roll-Up of $10.5 million of Tranche B Note into the DIP financing.

C. The John Varvatos Brand History

48. The John Varvatos fashion brand is globally recognized for its fusion of contemporary style with what it touts as a “rebel spirit” and “rock ‘n roll” culture.

49. The brand is the brain child of John Varvatos, a designer who held senior executive positions with Ralph Lauren and Calvin Klein.

50. In or about 1998, Varvatos left Ralph Lauren to join Nautica Enterprises,

Inc. (“Nautica”). As part of that move, Nautica agreed to support Varvatos’s plan to develop his own fashion brand.

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51. Varvatos launched his namesake brand in 2000 as a Nautica subsidiary.

Varvatos’s edgy designs soon attracted a following among the likes of Bruce Springsteen, Iggy

Pop, Alice Cooper and Dave Matthews.

52. In 2003, VF Corp. (“VF”) acquired Varvatos’s company as part of its larger acquisition of Nautica.

D. Lion Capital Acquires a Majority Stake in the Company With an Initial Investment of $ Million

53. In 2012, Lion Capital acquired JVE and JVA from a VF subsidiary.

54. To effectuate the acquisition, Lion Capital caused LH Corp. to be incorporated under Delaware law on or about January 13, 2012.

55. On April 29, 2012, LH Corp. acquired 100 percent of the outstanding capital stock of JVE and JVA for $ .

56. The $ percent of the outstanding capital stock of JVE and the payment of existing indebtedness owed to VF. The purchase price also included Varvatos’s contribution of his interest in the outstanding capital stock of JVE, plus a receivable from VF.

57. Varvatos’s contributions to the total $ purchase price were exchanged for an ownership interest in Lion/Hendrix Cayman L.P.

58. As part of the transaction, JVE and JVA became subsidiaries of LH Corp.

(LH Corp., JVE and JVA are referred to collectively herein as the “Company”).

59. Lion Capital’s total original capital investment in the Company was

$ . After accounting for the purchase price for the outstanding capital stock of JVE and transaction costs, little equity capital remained of Lion Capital’s original capital investment to fund operations.

IMPAC 6790425v.1 12 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 14 of 59

E. The CIT Facility

60. On the same date that Lion Capital acquired its majority interest in JVE,

the Company and CIT Finance LLC (“CIT”), as agent, entered into a $ revolving credit

facility (the “CIT ABL Facility”).

61.

62.

63.

64. Pursuant to a security agreement dated as of April 30, 2012, amounts

outstanding under the CIT ABL Facility were secured by first-priority liens on substantially all of

the Company’s assets.

F. Lion Experiences Initial Success Following Acquisition

65. Lion Capital immediately assumed control of the management of the

Company.

Varvatos

retained the title of Chief Creative Officer within the new corporate structure.

66. Lion Capital also assumed control of the Board of Directors of JVE, JVA

and LH Corp. Those board members included, at various times relevant to this action, Lyndon

Lea, co-founder and managing partner of Lion Capital; Capps, a Lion Capital partner; William

IMPAC 6790425v.1 13 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 15 of 59

Kim, the Chief Executive Officer of AllSaints, a Lion Capital portfolio company; Chang, a partner with Lion Capital; and Matt Nordby, a partner with Lion Capital.

67. Varvatos was bullish on the Company’s future under Lion Capital’s control. In announcing the Lion Capital acquisition, Varvatos stated, “With Lion Capital we will be aggressively growing our company-owned retail stores, both domestically and on a global basis.”

68. Lea of Lion Capital stated, “We look forward to unlocking the substantial potential that we see within the brand over the next several years.”

69. LH Corp., through its subsidiaries, continued to operate as a leading designer, distributor, marketer and seller of men’s apparel, footwear and accessories.

70. The majority of the Company’s wholesale customers consisted of retailers operating throughout the United States. At the time of Lion Capital’s investment, the Company also operated nine retail stores and one retail outlet. In addition, the Company also sold directly to customers through an ecommerce channel.

71. The Company also had begun to expand its business by entering into agreements to license its trademark on various products, including fragrances, sneakers, eyewear, leather accessories, dress shirts and neckwear.

72. Under Lion Capital’s control, the Company experienced some initial success. In 2013, .

73.

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74. The Company’s profile also was ascending in 2013, given Varvatos’s appearance on the Fashion Star television show and the release of his book, “Rock in Fashion.”

Varvatos had acquired celebrity status at this point.

75. On or about May 1, 2013, Cristiano Quieti -- the top executive at Diesel

USA, a premium denim and accessory brand -- joined the Company as its new President and

Chief Executive Officer. Quieti reported to Varvatos in his capacity as the Company’s Chief

Creative Officer.

76.

77.

G. After a Strong Start, the Company Encounters Headwinds

78. Notwithstanding a promising start under Lion Capital’s control, by 2014 the Company began to encounter substantial internal and external challenges that would undermine its performance in the years ahead.

79.

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80.

81.

82.

83.

84.

85.

86.

87. Upon information, the Company did not solicit offers for third party financing in connection with the

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H. Lion Capital Continues to Invest Substantial Funds to Salvage The Company and Protect Its Investment

88. The Company’s performance was continually monitored by executives at the highest levels of Lion Capital. The Investment Committee of Lion Capital -- the final arbiter of whether to invest, in what amounts and on what terms --

89.

90.

91.

92.

93. However, as early March 2015, it was clear the Company could not achieve their lofty projections. As of March 2015, sales were down an alarming

IMPAC 6790425v.1 17 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 19 of 59

percent from the prior year and down percent against budget.

94. The stark reversal of fortunes were the result of consistent declines in retail and ecommerce revenue, stemming primarily from certain cost cutting measures designed to alter the brand’s products to cater to a mass market. The shift toward a mass market did not register with Varvatos’s traditionally high-end niche market.

95. By 2015, many of the Debtors’ wholesale partners had either severed ties to the Company or dramatically reduced the volume of their purchases. The erosion of these crucial wholesale relationships severely undermined the Company’s financial performance.

96. The Company also struggled with the substantial costs associated with the expansion of its store footprint and the opening of new stores under adverse economic and market conditions. These costs contributed to what would become significant and sustained losses at the

Company.

97. In addition to raising concerns at Lion Capital, the Company’s sagging performance and aging payables was straining its critical lending relationship with CIT.

98.

99.

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100.

101.

102.

103.

104.

105.

106.

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107.

108.

109. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about March 2015 given the Company’s financial condition.

110.

111.

112.

113.

114.

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115.

116.

117.

118.

119.

120.

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121.

122.

123.

124.

125.

126.

IMPAC 6790425v.1 22 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 24 of 59

127.

128. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about July 2015 given the Company’s financial condition.

129.

130.

131.

132.

133.

IMPAC 6790425v.1 23 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 25 of 59

134.

135.

136.

137. The Company continued to flounder in the second half of 2015.

138.

139.

* * * *

140.

IMPAC 6790425v.1 24 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 26 of 59

141.

142.

”

143.

144.

145.

146.

IMPAC 6790425v.1 25 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 27 of 59

147.

148.

149.

150. T

151.

152. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about September 2015 given the Company’s financial condition.

153. Notwithstanding Lion Capital’s additional investments through LHCL, the

Company continued to perform below expectations into late 2015.

154.

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155.

156.

157.

158.

159.

IMPAC 6790425v.1 27 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 29 of 59

160.

161.

162.

163.

164.

165.

166.

IMPAC 6790425v.1 28 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 30 of 59

167.

168.

169. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about October 2015 given the Company’s financial condition.

I. The and The Beginning Accumulations of the Prepetition Notes

170. As of December 2015,

171.

172. The Company’s financial condition had continued to deteriorate.

173.

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174. Upon information and belief, at this time Lion Capital representatives were in discussions to sell all or part of the Company’s assets to Authentic Brands Group (“ABG”).

175. On December 18, 2015, JVE and JVA issued the original Tranche A Note in the face amount of $ million which, upon information and belief, corresponded with an additional equity investment from Lion Capital of $ million (the “Original Tranche A Note”).

176. The Original Tranche A Note provided for interest to accrue at

percent per annum. No payment of principal or interest on the Original Tranche A Note was due for – i.e., sufficient lead time for the consummation of Lion

Capital’s contemplated exit strategy with respect to its investment in the Company through

LHCL.

177.

178.

179.

180.

181.

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182. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about December 2015 given the Company’s financial condition.

183. In order to partially address the Company’s unmanageable balance sheet, on December 18, 2015, the Company -- at the direction of its Lion Capital-controlled Board of

Directors – also entered into an

184.

185.

186.

187. Pursuant to the , the Company also issued to LHCL the original version of Tranche B Notes in the original principal amount of $ million (the

“Original Tranche B Note”). The Original Tranche B Note provided for interest to accrue at

percent per annum. No payment of principal or interest on the Original Tranche B Note was due for -- i.e., sufficient time for LHCL and its affiliates to execute upon their exit strategy with respect to the equity investment in the Company.

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188. Notwithstanding the documentation of the Original Tranche A Note and the Original Tranche B Note, internally, LHCL and other Lion Capital affiliates continued to refer to the $

189.

190.

191.

192.

193. In light of the facts and circumstances in place in and around December

2015, as well as at the time of LHCL’s acquisition of the Company as set forth above, LHCL plainly was advancing the aggregate $ million reflected in the Original Tranche A Note as an investor and not as a lender. The $ million advance represented an equity investment, not a loan by LHCL or a bona fide debt of the Company.

194.

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195. No reasonable lender would have loaned $ million to Company on the terms reflected in the Original Tranche A Note and Original Tranche B Note under the prevailing circumstances.

196. The Original Tranche A Note and Original Tranche B Note were subordinated to the CIT ABL Facility.

197. At the relevant time, the Company was so thinly capitalized that it had no means of repaying the $ million consistent with the terms of the Original Tranche A Note and

Original Tranche B Note.

198. LHCL and the Company understood that the only means by which LHCL could possibly recoup the $ million plus interest would be to stabilize and then substantially improve the Company’s business performance so it could be sold at a premium consistent with

Lion Capital’s exit strategy.

199. Upon information and belief, the Company had not established a sinking fund to provide for the repayment of the $ million advance.

200. The maturity dates of the Original Tranche A Note and Original Tranche B

Note were illusory. The Company and LHCL understood that LHCL would be repaid not by some date certain reflected in the Original Tranche A Note and Original Tranche B Note but rather upon the ultimate sale of the Company at a multiple of the firm’s investment.

201. Similarly, the rates of interest reflected in the Original Tranche A Note and

Original Tranche B Note were not market and were illusory, premised on Lion Capital’s own

IMPAC 6790425v.1 33 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 35 of 59

assessment of its desired internal rate of return on equity capital. The Company and LHCL understood that the upside of LHCL’s capital contribution into the Company was not tied to any interest rate stipulated in the Original Tranche A Note or Original Tranche B Note but rather to the multiple at which the Company could be sold if its business performance could be stabilized and then substantially improved upon.

202. That the $ million advance was an investment rather than a loan is further reflected in the fact that LHCL was at once the 100 percent owner of the Company and the holder of 100 percent of the alleged debt reflected in the Tranche A and Tranche B “promissory notes.”

J. The Original Tranche C Note

203. Brashear joined the Company in November 2015 as President and Chief

Executive Officer. He managed to stabilize the Company’s performance through the first quarter of 2016. The need for ongoing investment from Lion Capital through LHCL to sustain the

Company, however, remained constant.

204.

205.

206.

IMPAC 6790425v.1 34 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 36 of 59

207.

208.

209.

210.

* * * *

211.

On March 30, 2016, the Company issued what was publicly characterized as a Tranche C “promissory note” with LHCL for up to

$ million (the “Original Tranche C Note”).

IMPAC 6790425v.1 35 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 37 of 59

212. The Original Tranche C Note provided for interest to accrue at

percent per annum. No payment of principal or interest on the Tranche C “promissory note” was due -- sufficient time for Lion Capital’s contemplated exit strategy regarding its investment in the Company to run its course.

213.

214.

215.

216.

217. In light of the facts and circumstances in place in and around March 2016, as well as at the time of LHCL’s acquisition of the Company as set forth above, LHCL plainly was advancing the $ million reflected in the Original Tranche C Note as an investor and not as a lender. The $ million advance represented an equity investment, not a loan by LHCL or a bona fide debt of the Company.

218. The $ million advance represented a continuation of LHCL’s investment in the John Varvatos brand, the upside of which LHCL and its affiliates expected to reap at the

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culmination of the exit strategy through which the Company would be sold in the near term at some multiple of LHCL’s aggregate investment.

219. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about March 2016 given the Company’s financial condition.

220. The Original Tranche C Note was subordinated to the CIT ABL Facility.

221. At the relevant time, the Company was so thinly capitalized that it had no means of repaying the $ million consistent with the terms of the Original Tranche C Note

Indeed the $ million was injected at a time when an immediate capital infusion was needed to avoid

222. The Company and LHCL understood that the only means by which LHCL could possibly recoup the $ million plus interest would be to stabilize and then substantially improve the Company’s business performance so it could be sold at a premium consistent with

Lion Capital’s exit strategy.

223. Upon information and belief, the Company had not established a sinking fund to provide for the repayment of the $ million.

224. The maturity date reflected in the Original Tranche C Note was illusory.

The Company and LHCL understood that LHCL would be repaid not by some date certain set forth in the Original Tranche C Note but rather upon the ultimate sale of the Company at a multiple of the firm’s investment.

IMPAC 6790425v.1 37 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 39 of 59

225. Similarly, the rate of interest reflected in the Original Tranche C Note was not market and was illusory, premised on Lion Capital’s own assessment of its desired internal rate of return on equity capital. The Company and LHCL understood that the upside of its injection of $ million into the Company was not tied to any interest rate stipulated in the Original

Tranche C Note but rather to the multiple at which the Company could be sold if its business performance could be stabilized and then substantially improved upon.

226. That the $ million advance was an investment rather than a loan is further reflected in the fact that LHCL was at once the 100 percent owner of the Company and the holder of 100 percent of the alleged debt reflected in the Original Tranche C Note.

K. The Original Tranche C-1 Note

227. The optimism generated by Brashear’s addition to the Company’s management team was short-lived. 2016 proved to be another trying year for the Company.

228. The Company closed 2016 with sales of just $

229.

230.

231.

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232.

233.

234.

235.

236.

237.

IMPAC 6790425v.1 39 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 41 of 59

238.

239.

On March 3, 2017, the Company issued what publicly was characterized as a Tranche C-1 “promissory note” to LHCL for up to

$ million (the “Original Tranche C-1 Note”).

240. While the committed amount of the Original Tranche C-1 Note was

$ million, upon information and belief, only $ million of capital was ever contributed to the

Company in connection with what was documented in the Original Tranche C-1 Note.

241. The Original Tranche C-1 Note provided for interest to accrue at

percent per annum. No payment of principal or interest on the Tranche C-1 Note was due for

-- i.e., ample time for Lion Capital’s anticipated exit from its investment in the

John Varvatos brand through LHCL.

242.

243.

244.

245.

IMPAC 6790425v.1 40 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 42 of 59

246.

247.

248.

249. In light of the facts and circumstances in place in and around March 2017, as well as at the time LHCL’s acquisition of the Company as set forth above, LHCL plainly was advancing the capital reflected in the Original Tranche C-1 Note as an investor and not as a

IMPAC 6790425v.1 41 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 43 of 59

lender. The $ million of capital actually provided represented an equity investment, not a loan by LHCL or a bona fide debt of the Company.

250. The $ million of capital represented a continuation of LHCL’s equity investment in the John Varvatos brand, the upside of which LHCL and its affiliates expected to reap at the culmination of an exit strategy through which the Company would be sold in the near term as some multiple of LHCL’s aggregate investment. As Lion Capital’s Investment

Committee was advised, the $

251. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about March 2017 given the Company’s financial condition.

252. The Original Tranche C-1 Note was subordinated to the CIT ABL Facility.

253. At the relevant time, the Company was so thinly capitalized that it had no means of repaying the $ million consistent with the terms of the Original Tranche C-1 Note.

Indeed, as the Lion Capital Investment Committee was advised,

254. The Company and LHCL understood that the only means by which it could possibly recoup the $ million plus interest would be to stabilize and then substantially improve the Company’s business performance so it could be sold at a premium consistent with Lion

Capital’s exit strategy.

255. Upon information and belief, the Company had not established a sinking fund to provide for the repayment of the $ million.

IMPAC 6790425v.1 42 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 44 of 59

256. The maturity date reflected in the Original Tranche C-1 Note was illusory.

The Company and LHCL understood that LHCL would be repaid not by some date certain memorialized in the Original Tranche C-1 Note but rather upon the ultimate sale of the Company at a multiple of the firm’s investment.

257. Similarly, the rate of interest reflected in the Original Tranche C-1 Note was not market and was illusory, premised on Lion Capital’s own assessment of its desired internal rate or return on equity capital. The Company and LHCL understood that the upside of

LHCL’s injection of $ million into the Company was not tied to any interest rate stipulated in the Tranche C-1 “promissory note” but rather to the multiple at which the Company could be sold if its business performance could be stabilized and then substantially improved upon.

258. That the $ million advance was an equity investment rather than a loan is further reflected in the fact that LHCL was at once the 100 percent owner of the Company and the holder of 100 percent of the alleged debt reflected in the Tranche C-1 “promissory note.”

L. CIT Exits the Picture

259. The Company struggled throughout 2017 and 2018, recording negative cash flows and negative equity despite Lion Capital’s deepening investment.

260. Wholesale partners continued to sever or drastically reduce ties to the

Company. In 2018, for example, Nordstrom partially removed the John Varvatos brand from its stores, resulting in a devastating loss of $4.6 million in sales and $2.6 million in gross profit from

2018 to 2019.

261. CIT took notice.

262. Throughout much of 2019, Lion Capital continued its efforts to orchestrate the sale of the lower-end John Varvatos Star USA brand and the Company’s licensing business in

IMPAC 6790425v.1 43 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 45 of 59

order to recapitalize the business and refocus the Company on its higher-priced brand, the John

Varvatos Collection. The sale did not materialize, further aggravating the Company’s precarious financial condition.

263.

264.

265. On April 22, 2019, the Company entered into separate credit agreements with Crystal Financial LLC (the “Crystal Facility”) and Wells Fargo (the “Wells Fargo Facility”).

266. The Wells Fargo Facility was a new ABL facility while the Crystal Facility was a $17.5 million term loan facility used to repay the CIT ABL Facility. The facilities were subject to an April 22, 2019 intercreditor agreement pursuant to which the parties agreed to various lien priorities. Of note, the Crystal Facility was secured by first liens on certain Term

Priority Collateral, including equipment, fixtures and intellectual property.

267. In connection with the Company’s entry into these facilities, each of the

Original Tranche A, B, C and C-1 Notes were amended and restated (collectively, the “First

Amended Prepetition Notes”). The First Amended Prepetition Notes were fully subordinated to the Crystal and Wells Fargo Facilities.

M. Crystal Financial Exits the Picture

268.

IMPAC 6790425v.1 44 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 46 of 59

269. Adding to the tumult, Brashear and the Company parted ways in on around

May 2019.

270.

271.

272.

273.

274. At LHCL and other Lion Capital affiliates, the $ million injected into the Company through the second amended Tranche C-1 Note was not considered a loan; instead, it was deemed a continuation of Lion Capital’s expanding equity investment in the Company through LHCL.

275. Lion Capital’s further investment could not salvage the Crystal Financial lending relationship.

276.

IMPAC 6790425v.1 45 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 47 of 59

277.

278.

279.

N. The Tranche D Note

280. Less than one year after entering into the Crystal Facility, unable to remedy its defaults thereunder, and desperate to prevent a corresponding default under the Wells Fargo

Facility that would have had catastrophic consequences under the circumstances, the Company once again turned to Lion Capital. LHCL moved promptly to provide the Company with the wherewithal to pay off the Crystal Facility.

281.

282. On February 5, 2020, LHCL provided the Company additional capital of

$ million. Of the $ million LHCL injected into the Company,

IMPAC 6790425v.1 46 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 48 of 59

283. LHCL documented the capital contribution through the Tranche D Note.

284.

285.

286.

287.

288. Upon information and belief, the Company did not seek alternative financing from any third-party sources at this time. No financial institution would have advanced subordinated secured financing to the Company in or about February 2020 given the Company’s financial condition.

289. At the same time, the Company amended and restated each of the First

Amended Prepetition Notes to their current versions. The face amounts of the Tranche A,

Tranche B, Tranche C and Tranche C-1 Notes were revised to add

290.

Instead, the liens and claims under the Tranche D Note were fully subordinated to the liens and claims under the

Wells Fargo Facility.

IMPAC 6790425v.1 47 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 49 of 59

291. In light of the facts and circumstances in place in and around February

2020, as well as at the time of LHCL’s acquisition of the Company as set forth above, LHCL plainly was advancing the $ million reflected in the Tranche D Note as an investor and not as a lender. The $ million advance represented an equity investment, not a loan by LHCL or a bona fide debt of the Company.

292. The $ million advance represented a continuation of LHCL’s investment in the John Varvatos brand, the upside of which LHCL and its affiliates expected to reap at the culmination of an exit strategy through which the Company would be sold in the near term as some multiple of LHCL’s aggregate equity investment.

293. No reasonable lender would have loaned the $ million to Company at the terms reflected in the Tranche D Note under the precarious circumstances in place as of

February 2020.

294. At the relevant time, the Company was so thinly capitalized that it had no conceivable means of repaying the $ million consistent with the terms of the Tranche D Note.

295. The Company and LHCL understood that the only means by which LHCL could would possibly recover the $ million plus interest would be to stabilize and then substantially improve the Company’s business performance.

296. Upon information and belief, the Company had not established a sinking fund to provide for the repayment of the $ million.

297. The maturity date on the Tranche D Note was illusory. The Company and

LHCL understood that LHCL would be repaid not by any date certain set forth in the Tranche D

Note but rather upon the ultimate sale of the Company at a multiple of the firm’s investment consistent with Lion Capital’s exit strategy.

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298. Similarly, the rate of interest reflected on the Tranche D Note was illusory.

The Company and LHCL understood that the upside of LHCL’s injection of $ million into the Company was not tied to the interest rate stipulated in the Tranche D Note but rather to the multiple at which the Company could be sold if its business performance could be stabilized and then substantially improved upon.

299. That the $ million advance was an equity investment rather than a loan is further reflected in the fact that LHCL was at once the 100 percent owner of the Company and the holder of 100 percent of the alleged debt reflected in the Tranche D “promissory note.”

300. The Prepetition Notes were issued prior to the onset of the COVID-19 pandemic Debtors blame for ultimately pushing them into bankruptcy.

301.

302.

303. As of the Petition Date, the amounts due under the Prepetition Notes totaled approximately $94.5 million, constituting capitalized interest.

O. The Unencumbered Assets and Unperfected Collateral

304. On June 30, 2020 and July 1, 2020, the Debtors filed their schedules of assets (the “Schedules”) and statements of financial affairs (the “SOFAs”) for each of the

Debtors.

305. The Debtors’ Schedules list that the Debtors were party to 27 real property leases (the “Leasehold Interests”).

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306.

307. Upon information and belief, the real property leases governing the

Debtors’ Leasehold Interests prohibit the Debtors from granting a lien in such Leasehold

Interests, and none of the Debtors’ landlords provided their consent to the granting of a lien in such Leasehold Interests.

308. The Debtors’ Schedules include potential preference actions pursuant to section 547 of the Bankruptcy Code. The SOFA for JVE lists nearly $1.4 million in payments made by JVE in the ninety days prior to the Petition Date and approximately $2.1 million of payments made to insiders in the one year prior to the Petition Date (collectively, the “Avoidance

Actions”). The transfers may be subject to preference claims.

309. The Debtors’ Avoidance Actions did not come into existence until the

Debtors filed for bankruptcy.

310. The Debtors’ Schedules collectively list approximately 75 accounts (the

“Bank Accounts”), including accounts held at Wells Fargo, Bank of America, N.A, Bank of

America N.A., Canada, Paypal, Bank of Montreal, and Bank of Scotland, which collectively held approximately $350,000 as of the Petition Date.6

311. Upon information and belief, LHCL did not enter into deposit account control agreements granting it control over the Bank Accounts.

312.

6 Of the Debtors’ approximately 75 Bank Accounts, the Debtors’ cash is held in only 14 Bank Accounts, with Wells Fargo accounts holding only $53.41.

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313.

314.

315. Upon information and belief, LHCL did not take the necessary steps to perfect any purported security interest in each individual jurisdiction.

COUNT I RECHARACTERIZATION OF DEBT TO EQUITY AND RETURN OF PAYMENTS PURSUANT TO 11 U.S.C. §105(a)

316. The Committee repeats and re-alleges each and every allegation contained in paragraphs 1 through 315 above as though fully set forth herein.

317. Against the backdrop of the facts and circumstances alleged above, the

Committee requests that the Court, in the exercise of its equitable powers, recharacterize as equity the $94.5 million in alleged debt reflected in the Prepetition Notes.

318. The focus of recharacterization is whether the parties called an instrument one thing when, in fact, it was intended as something else. The parties’ intent is determined from their words and actions, as well as the common sense evaluation of the economic reality of the circumstances surrounding the transactions in question.

319. In short, recharacterization turns on whether the alleged debt actually existed, or if the transactions at issue were disguised equity contributions.

320. The determinative inquiry in classifying advances as either debt or equity is the intent of the parties at the time of their transactions.

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321. The question is whether the party infusing the funds did so as a lender

(expecting to be repaid with interest regardless of the receiving party’s fortunes) or as an investor

(with its expectation of repayment tied directly to the receiving party’s fortunes).

322. The facts and circumstances alleged above demonstrate that LHCL advanced the subject $94.5 million to the Company not as a lender but as an investor, with the parties understanding and intending that LHCL would be repaid pursuant to Lion Capital’s exit strategy in which the Company would be sold at same premium if and when its business performance was stabilized and improved under LHCL’s control.

323.

324. The Company and LHCL’s words and conduct, as well as the economic realities of the circumstances surrounding the $94.5 million in advances from Lion Capital through LHCL to the Company, compel the conclusion that those advances were equity contributions disguised as debt.

325. Equity compels the recharacterization of those advances as equity under the circumstances alleged above.

COUNT II

DECLARATORY JUDGMENT THAT THE $10.5 MILLION OF REFINANCED PREPETITION DEBT IS NO LONGER SUBJECT TO ROLL UP

326. The Committee repeats and re-alleges each and every allegation contained in paragraphs 1 through 325 above as though fully set forth herein.

IMPAC 6790425v.1 52 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 54 of 59

327. The Roll-Up, consisting of $10.5 million of Tranche B Note obligations, remained subject to the Committee’s right to challenge the prior obligations under the Tranche B

Note.

328. As set forth above, the Tranche B Note obligations should be recharacterized as equity.

329. As a result of the recharacterization of the Tranche B Note obligations as equity, the Roll-Up must be unwound.

330. The Committee, therefore, is entitled to a declaration the Roll-Up provided for under the DIP Order is ineffective and the DIP obligations shall only consist of the new money advanced to the Debtors following the Petition Date.

COUNT III

AVOIDANCE OF UNPERFECTED LIEN ON BANK ACCOUNTS

331. The Committee repeats and realleges the allegations contained in paragraphs 1 through 330 as if fully restated herein.

332. Any prepetition lien held by LCHL on the Bank Accounts was unperfected as of the Petition Date because LCHL did not enter an agreement providing it with control over the Bank Accounts, as required under applicable state law.

333. As a result, pursuant to section 544(b) of the Bankruptcy Code, any security interest claimed by LCHL in the Bank Accounts and the value of such Bank Accounts was unperfected as of the Petition Date.

334. As of the Petition Date, the Bank Accounts had a value of approximately

$350,000.

IMPAC 6790425v.1 53 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 55 of 59

335. LCHL bears the burden to present evidence that the cash in the Bank

Accounts can be traced to its prepetition collateral, which LCHL failed to do and which, upon information and belief, LCHL will be unable to do.

336. The Committee is entitled pursuant to section 544(b) of the Bankruptcy

Code to a judgment avoiding any prepetition lien held by LCHL as unperfected against the Bank

Accounts and the cash in such accounts.

COUNT IV

DECLARATORY JUDGMENT THAT THE PREPETITION LIEN DOES NOT ATTACH TO THE DEBTORS’ LEASEHOLD INTERESTS

337. The Committee repeats and realleges the allegations contained in paragraphs 1 through 336 as if fully restated herein.

338. The Leasehold Interests are Excluded Property under the Security

Agreement because, upon information and belief, the applicable leases governing the Leasehold

Interests prohibit the granting of a lien in such Leasehold Interests absent the consent of the applicable landlord, which consent was not obtained.

339. Upon information and belief, Agent did not file, nor did it have authority to file, leasehold mortgages or deeds of trust against the Leaseholds Interests in the county where such Leasehold Interests are located, as is required to perfect an interest in a debtor’s leasehold interest.

340. As any prepetition lien did not extend to the Debtors’ Leasehold Interests, it similarly does not extend to the proceeds of such Leasehold Interests.7

7 See Timothy Dean Restaurant & Bar v. White (In re Timothy Dean Restaurant & Bar), 341 B.R. 1, 30 (Bankr. D.C. 2006) (holding that because the bank did not have an effective lien on the lease, the settlement proceeds attributable to the lease could not be subject to the bank’s lien).

IMPAC 6790425v.1 54 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 56 of 59

341. A present, justiciable controversy exists regarding whether the any prepetition lien held by LHCL attaches to the Leasehold Interests, and the value thereof.

342. This Court is authorized to resolve this dispute pursuant to

11 U.S.C. § 506 and Fed. R. Bankr. P. 7001(2).

343. The Committee is entitled to a declaration that any prepetition lien held by

LHCL does not attach to the Debtors’ Leasehold Interests and the value thereof.

COUNT V

AVOIDANCE OF UNPERFECTED LIEN ON COMMERCIAL TORT CLAIMS

344. The Committee repeats and realleges the allegations contained in paragraphs 1 through 343 as if fully restated herein.

345. The Security Agreement did not list any potential commercial tort claims held by the Debtors.

346. Upon information and belief, the Security Agreement was not amended to add any commercial tort claims held by the Debtors.

347. The Financing Statements do not list any potential commercial tort claims held by the Debtors.

348. Accordingly, any prepetition lien held by LHCL on the Debtors’ commercial tort claims was unperfected as of the Petition Date because the Financing Statements do not identify any commercial tort claims with the specificity required under applicable law.

349. As any prepetition lien held by LHCL did not extend to the Debtors’ commercial tort claims, it similarly does not extend to the proceeds of such claims.8

8 See Bayer CropScience, LLC v. Stearns Bank Nat’l Ass’n, 837 F.3d 911, 916 (8th Cir. 2016) (“We hold that the drafters of the UCC, in implementing the heightened identification requirements of commercial tort claims including the requirement that the commercial tort claim be in existence at the time it is encumbered, intended for the proceeds of a commercial tort claim to be excluded from an after-acquired general intangibles clause”).

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350. As a result, pursuant to section 544(b) of the Bankruptcy Code, any security interest claimed by LHCL in commercial tort claims and the proceeds of any such commercial tort claims was unperfected as of the Petition Date.

351. The Committee is entitled pursuant to section 544(b) of the Bankruptcy

Code to a judgment avoiding any prepetition lien as unperfected against the Debtors’ commercial tort claims.

COUNT VI

DECLARATORY JUDGMENT THAT THE PREPETITION LIEN DOES NOT ATTACH TO THE AVOIDANCE ACTIONS AND THEIR PROCEEDS

352. The Committee repeats and realleges the allegations contained in paragraphs 1 through 351 as if fully restated herein.

353. Avoidance Actions do not come into existence until a debtor files a petition for relief under the Bankruptcy Code.

354. Further, a trustee, on behalf of all creditors, has sole authority to recover preference payments.

355. Accordingly, the Avoidance Actions are not prepetition collateral under the Security Agreement.

356. As the Debtors’ Avoidance Actions are not subject to LHCL’s prepetition lien, upon information and belief, any prepetition lien similarly does not extend to the proceeds of any such Avoidance Actions.

357. A present, justiciable controversy exists regarding whether any prepetition lien attaches to the Avoidance Actions and their proceeds.

358. This Court is authorized to resolve this dispute pursuant to

11 U.S.C. § 506 and Fed. R. Bankr. P. 7001(2).

IMPAC 6790425v.1 56 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 58 of 59

359. The Committee is entitled to a declaration that any prepetition lien does not attach to the Avoidance Actions and their proceeds.

COUNT VII

DECLARATORY JUDGMENT THAT THE PREPETITION LIEN DOES NOT ATTACH TO THE INTELLECTUAL PROPERTY

360. Plaintiff repeats and realleges the allegations contained in paragraphs 1 through 359 as if fully restated herein.

361. Upon information and belief, LHCL did not file, nor did not have authority to file, a financing statement to perfect the any prepetition lien held by LHCL any intellectual property pending, registered, or published in any applicable foreign jurisdiction.

362. A present, justiciable controversy exists regarding whether the any prepetition lien attaches to any foreign intellectual property and its proceeds.

363. This Court is authorized to resolve this dispute pursuant to 11 U.S.C.

§ 506 and Fed. R. Bankr. P. 7001(2).

364. Plaintiff is entitled to a declaration that any prepetition lien held by LHCL does not attach to the Debtors’ foreign intellectual property and its proceeds.

WHEREFORE, the Committee respectfully requests that the Court enter judgment:

a) On Count I, declaring that the Prepetition Notes shall be recharacterized as equity;

b) On Count II, declaring that $10.5 million under the DIP facility is not subject to roll up;

c) On Count III, judgment, pursuant to section 544(b) of the Bankruptcy Code, avoiding as unperfected any prepetition lien against the Bank Accounts and the value thereof;

d) On Count IV, declaring that, pursuant to section 506 of the Bankruptcy Code and Fed. R. Bankr. P. 7001(2) and (9), any prepetition lien held by LHCL does not attach to the Leasehold Interests and the value thereof;

IMPAC 6790425v.1 57 Case 20-11043-MFW Doc 338-1 Filed 07/16/20 Page 59 of 59

e) On Count V, judgment, pursuant to section 544(b) of the Bankruptcy Code, avoiding as unperfected any prepetition lien against the Debtors’ commercial tort claims and their proceeds;

f) On Count VI, declaring that, pursuant to section 506 of the Bankruptcy Code and Fed. R. Bankr. P. 7001(2) and (9), any prepetition lien does not attach to the Avoidance Actions and their proceeds;

g) On Count VII, declaring that, pursuant to section 506 of the Bankruptcy Code and Fed. R. Bankr. P. 7001(2) and (9), any prepetition lien does not attach to the Financed Debtors’ Intellectual Property and its proceeds; and

h) granting such other and further relief as this Court may deem just and proper.

Dated: July__, 2020 Wilmington, Delaware

POTTER ANDERSON & CORROON LLP

/s/ Jeremy W. Ryan (DE Bar No. 4057) R. Stephen McNeill (DE Bar No. 5210) 1313 North Market Street, 6th Floor Wilmington, Delaware 19801 Telephone: (302) 984-6000 Facsimile: (302) 658-1192 Email: [email protected] [email protected]

and

Counsel to the Official Committee of Unsecured Creditors of John Varvatos Enterprises, Inc., et al

IMPAC 6790425v.1 58 Case 20-11043-MFW Doc 338-2 Filed 07/16/20 Page 1 of 1

EXHIBIT B

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EXHIBIT C Case 20-11043-MFW12-11564-CSS Doc Doc 492 338-3 Filed Filed 10/02/12 07/16/20 Page Page 86 2of of 95 6

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1 Thank you.

2 MR. CAVENDAR: Just a few follow-up points, Your

3 Honor.

4 Mr. Burke said that the list was based primarily

5 on what the department heads thought were key and they could

6 have picked their favorite employees. Well, the testimony

7 was they didn't just rely on what the department head's

8 said; that they analyzed that -- that information and

9 questioned each person on the list.

10 Beyond that, Your Honor, the testimony was that

11 they didn't just rely on the department heads; that they --

12 that the terminal managers and the shop managers were on the

13 list without regard to what the -- without regard to what

14 the department heads said because those people, those

15 positions are key to the company. So that list didn't come

16 from the department heads.

17 With respect to the Yucaipa credit bid issue, Your

18 Honor, from our perspective the Court ultimately has to

19 approve a credit bid in this case and to the extent there is

20 any issue with respect to -- to that, that's an issue for

21 another day. Yucaipa has consented to the relief we're

22 seeking here. We do not believe any arguments they've made

23 with respect to that should hold up approval of the KERP.

24 THE COURT: Okay. Thank you.

25 All right. What we're dealing with is a key

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1 employee retention plan. No insiders are implicated, so the

2 503(c)(1), 503(c)(2) issues are not implicated. We're under

3 503(c)(3), which is transaction outside the ordinary course

4 of business, which I think there's no dispute this is,

5 providing compensation or bonuses, if you will, for --

6 retention plans for officers -- not officers, excuse me,

7 managers, et cetera. So there's no dispute that -- what

8 section of the Bankruptcy Code we're operating under and the

9 legal cast is that the proposal be justified by the facts

10 and circumstances of the case.

11 Courts have struggled with figuring out what facts

12 and circumstances means. Usually, this type of transaction

13 would be approved under 363 as outside the ordinary course

14 of business and it would be a business judgment standard

15 that the Court would look at: Did the debtor make a

16 reasonable exercise of its business judgment and, if so,

17 what the debtor wants to do is what would be appropriate to

18 -- for the debtor to do.

19 The Dana factors have been set out as, you know,

20 one possible way to figure out whether the facts and

21 circumstances are met in the case. It's helpful. Whether

22 it's really appropriate or exactly the right mantra or not,

23 I don't really think I need to get into because the bottom

24 line is the debtor has made the case for this KERP to be

25 approved by the Court.

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1 The testimony was brought before the Court. The

2 exhibits were before the Court. There were extensive

3 discussion and testimony about all of the -- all of the Dana

4 factors as they might apply in this case. Some of it was

5 somewhat vague, but I disagree that all of it was vague. I

6 think some of it was quite detailed and explained the

7 process that was gone through in order to come -- come up

8 with a plan that makes some sense. The dollar amounts make

9 sense. You're -- you're motivating people to say.

10 On a point about this whole focusing on who are

11 key as opposed to who may leave. I don't really think

12 that's the right focus. The whole point of these plans, to

13 a certain extent, is to get people from not engaging in the

14 process of figuring out whether they're going to leave or

15 not. It's -- it's a little bit why the 503(c)(1) concept

16 that you can't give an insider a retention bonus unless he's

17 already got a job really defeats the entire purpose of

18 having the incentive bonus in the first place, which is

19 keeping them from going and getting another job.

20 It's -- it's like critical trade vendor motions.

21 Okay. The whole point of that is to not have to go -- is to

22 really serve as a proxy so you don't have to go through the

23 whole process of training new vendors, all the expenses

24 associated with that, et cetera. You're trying to nip it in

25 the bud. And I think -- I think -- to me, that's a big

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1 piece of why you have a retention plan. It's a big piece of

2 why you have incentive plans, although they are somewhat

3 different.

4 It's interesting, or as an aside, to see the pre-

5 2005 BABSIPA plan versus the 2012 BABSIPA plan, and I think

6 Senator Kennedy would be extremely pleased with the

7 difference, although interestingly enough the parties

8 getting the KERP in this situation are actually non-manage

9 -- non-senior officers or officers at all of the debtor.

10 Anyway, I'm going to approve it. I think the

11 evidentiary standard has to be met, and I'm going to

12 overrule the objections.

13 I understand the committee's point. Bottom line

14 is we're putting another $800,000 on the administrative

15 expenses of this company. Where is that money going to come

16 from? And no matter where it comes from, it's $800,000 that

17 are going to be ahead of the unsecured creditors in any

18 event.

19 So I -- I am cognizant of that issue and I think

20 that's an important issue. I'm not going to lay out the

21 terms of what a credit bid or a sale order or anything else

22 is going to be, but I can tell you that I'm not going to

23 approve a sale in this case that's going to leave an

24 administratively insolvent estate. It's just not going to

25 happen, certainly not one that's been, you know, popping

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1 along here for a little while with admin claims continuing

2 to rise as opposed to maybe, you know, one of these quick 30

3 day sale and convert cases. That's not what we have here.

4 That's all I can really offer at this point. The

5 (indiscernible) of the bargaining unit, I think you raised

6 some good points. You know, I was a little surprised that

7 cross wasn't more developed by -- by the objectors because I

8 think you really left the record untouched and the record

9 that was presented was sufficient.

10 But in any event, I'm going to overrule your

11 objections and I'll grant the motion. And do you have a

12 form of order I can sign?

13 And I appreciate the parties' patience in having

14 to take such a long recess.

15 (Pause)

16 THE COURT: Thank you.

17 All right. I've signed the order. Anything

18 further for today?

19 Very good. We're adjourned. Thank you.

20 (A chorus of thank you's)

21 (Whereupon these proceedings were concluded at 2:45

22 p.m.)

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