Aéropostale Inc. et al.

The court denied Aéropostale’s motion for equitable subordination, and Sycamore and its affiliate were the prevailing parties in the litigation.

Retained by Kirkland & Ellis

In litigation arising from the bankruptcy of the apparel retailer Aéropostale, Cornerstone Research was retained by counsel for Sycamore Partners, pre-petition term lender and former equity investor in Aéropostale. Cornerstone Research worked with two testifying experts who addressed certain aspects of claims by Aéropostale against Sycamore and its affiliate, MGF Sourcing, a global sourcing company.

The debtor, Aéropostale, filed a motion for equitable subordination of the claims of Sycamore Partners and MGF Sourcing. Aéropostale also moved to disqualify Sycamore Partners from submitting a bid in a sale of Aéropostale’s assets. In addition, the clothing retailer sought to recharacterize a portion of Sycamore’s pre-petition term loan to Aéropostale as equity. Aéropostale alleged that Sycamore Partners engaged in inequitable conduct by pushing the retailer into bankruptcy in order to buy the company’s assets at a discount and by selling the company’s stock while in possession of Aéropostale’s material, nonpublic information.

The court credited the testimony of Mr. Bell and Professor Pritchard in denying the motion for equitable subordination.

Cornerstone Research worked with Alan Bell, a former Ernst & Young LLP audit partner. Mr. Bell testified that, as of the end of fiscal year 2015, Aéropostale faced significant financial risk and that an audit opinion on Aéropostale’s financial statements would have expressed substantial doubt about the company’s ability to continue as a going concern for the next fiscal year. A going-concern opinion from Aéropostale’s auditor would have triggered an event of default in its debt agreements resulting in bankruptcy regardless of any alleged inequitable conduct by Sycamore Partners. The judge stated in his opinion that “the Court finds credible the testimony of the Term Lenders’ expert, Mr. Bell, who opined that as of February 24, 2016, Aéropostale’s 2015 audit would have indicated substantial doubt that the company could continue as a going concern for the period from January 31, 2016, to January 28, 2017.”

Cornerstone Research also supported Professor Adam Pritchard of the University of Michigan Law School to address a claim that Sycamore improperly traded Aéropostale’s stock while in possession of material, nonpublic information. Professor Pritchard demonstrated that Aéropostale’s stock price did not react to the news about the stock sale by Sycamore. He further demonstrated that Aéropostale’s stock price remained at or above the level at which Sycamore sold the shares for more than two months after the sale, even after Aéropostale publicly released adverse information. Professor Pritchard testified that it was substantially unlikely that a reasonable shareholder would consider the information that Sycamore possessed to be important in deciding whether to buy or sell Aéropostale stock. In reaching its decision, the court credited the testimony of Professor Pritchard regarding Aéropostale’s stock price trajectory.

The court denied Aéropostale’s motion on all counts, and Sycamore and its affiliate were the prevailing parties in the litigation.