A group of JC Penney bondholders are seeking to re-litigate its Chapter 11 case, claiming that a scandal that has since ensnared one of the country’s top bankruptcy judges tainted the US retailer’s 2020 reorganisation.
Eric Moore, a bondholder, described the deal clinched in bankruptcy court as a “multibillion-dollar heist” that improperly handed control of JC Penney to a select group of deep-pocketed parties including H2 Capital Partners, Simon Property Group and Brookfield, according to court filings.
Moore’s challenge has been joined by an asset manager, Barnett Capital. Together, they hold JC Penney bonds with a face value exceeding $300mn, which they purchased since 2023 for pennies on the dollar. The purchases came well after the bankruptcy had closed. The investor group is representing itself without outside legal counsel.
The 2020 case was overseen by David Jones, then-chief judge of the Southern District of Texas bankruptcy court where JCPenney filed its petition, represented by law firms Jackson Walker and Kirkland & Ellis.
With Jones at its helm the federal bankruptcy court in Houston had become a top destination for large, high-profile cases, and JC Penney, which was headquartered in Texas, was among them.
But he left the bench in October 2023 after confirming reports that he was secretly living with Elizabeth Freeman, a top partner at Jackson Walker, a firm which frequently appeared in his court.
Moore told the Financial Times that even before the scandal emerged, he began to voice concerns about the financial terms of the bankruptcy plan. A Kirkland & Ellis [junior] lawyer told him not to “make any noise”, Moore alleged.
In the process of investigating the deal, Moore said, lawyers from Akin Gump, who represented dissident bondholders, told him that they did not bargain harder in 2020 because they did not want to risk angering Jones and Freeman.
“Lawyers from Akin Gump implied the reason they didn’t raise hell over the split of the debtors assets was because of the [Jones/ Freeman] relationship,” Moore said.
Kirkland and Akin declined to comment.
Moore has alleged that Jones approved a deal that improperly sent a windfall of assets of JC Penney assets to the H2 group of parties and in effect wiped out creditors and shareholders who were not part of it.
The allegations are the latest ripple-effect from a scandal that has shaken the elite world of high-profile corporate restructurings. The US Department of Justice is seeking to claw back more than $30mn in fees paid to Jackson Walker in dozens of cases where Freeman appeared before Jones.
Lawyers for the JC Penney estate have supported the DoJ’s investigation and shared in filings text messages from 2021 between Jackson Walker lawyers that indicated they were long aware of Jones’s relationship with Freeman. At the same time, the estate has rejected Moore’s claim of unfair restructuring.
Moore’s efforts to challenge the JC Penney deal have accelerated since the revelation of the Jones’s relationship with Freeman. When JC Penney filed for bankruptcy in 2020 it had nearly $5bn of debt and was suffering from store closures amid the pandemic lockdowns across the US. Its formal petition to the Houston court came with a so-called restructuring support agreement.
The RSA described an eventual deal with a group of senior creditors led by H2 to provide $450mn of financing during the bankruptcy, in what is known as a debtor-in-possession loan. The DIP loan would rank as the most senior debt tranche, and its providers separately rolled up $450mn of existing debt into that top tier.
The group ultimately used that $900mn as a “credit bid” for 90 per cent of the JCPenney estate. They said they intended to revive the company as two halves, one that would manage the retail operations led by Brookfield and Simon and a separate “PropCo” controlled by H2 to own the underlying real estate.
However, the use of DIP loans to take over a business in Chapter 11 is a controversial practice among some judges and law professors as it can shut down rival bids and sell control too cheaply.
The terms became a significant sticking point in JC Penney’s case. The lenders and bondholders left out of the acquisition deal told Jones in court that the proposed structure from the DIP lenders “reek[ed] of not only greed but abhorrent bad faith”.
They argued that there was plenty of value in JC Penney to make the creditors whole and even leave something for shareholders. But JCPenney rejected this, claiming there were no other credible bids and that further restructuring was too risky to pursue. Jones agreed and approved the deal from Brookfield, Simon Property and H2.
In 2023, Kenneth Ayotte, an economist at UC Berkeley Law, calculated that the DIP lending group earned at least 545 per cent on its financing. “No court, to our knowledge, has ever approved a loan with such an exorbitant interest rate,” he wrote in a widely-circulated journal article.
Long-shot claims of mistreatment by out-of-the-money claimants are hardly new in bankruptcy cases. But the Jones scandal has opened up the JC Penney matter to second-guessing.
The current JCPenney entity has described Moore’s claims in court papers as “wholly inaccurate and illogical”, criticising his understanding of the credit bid. The bankruptcy court has also rejected previous claims Moore has made about the integrity of the restructuring, ruling that the implementation of the bankruptcy plan was consistent with the 2020 deal.
One person affiliated with a losing creditor said that while the 2020 outcome was not ideal, Jones had still listened to dissident creditors and established a mediation that resulted in somewhat-improved terms for their group.
According to a Bloomberg News report from October, emails discovered in the clawback action showed Freeman telling her colleagues in texts, sent just prior to the 2020 filing, that the case once filed would get to Jones: “Talked to Jones. He’s got us . . . They know Jones will cut through the bullshit.”
JC Penney has also pointed to a separate set of messages from Jackson Walker attorneys, saying it “seems clear” that two of Freeman’s colleagues “had sufficient knowledge of the relationship” — so much so that one of the Jackson Walker lawyers had to “go back and review all his declarations”, and another was “concerned it could cost Jones the bench”, according to court filings.
