Neiman Marcus, Executive Bonuses, and Its Chapter 11 Journey
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Neiman Marcus Group’s recent steps in Texas bankruptcy court to execute its reorganization plan have drawn scrutiny.
The U.S. Trustee in the case flagged concerns this week with the retailer’s plan to award as much as nearly $10 million in bonuses to a group of company executives, including chief executive officer Geoffroy van Raemdonck; chief merchant officer Svetlana Todorovich, and chief operating officer Chris Sim. The proposed so-called “key employee incentive plan” seeks to award a maximum of up to $6 million to van Raemdonck alone.
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Such executive bonus plans in bankruptcies are a common feature of the proceedings. Companies’ goal in these cases, regardless of the act of seeking multimillion-dollar bonuses for executives as rank-and-file employees face losing their jobs, is to show the court that such bonuses are essential to helping the company meet its bankruptcy milestones or other performance metrics targets.
Neiman Marcus entered into bankruptcy in May with the goal of having a Chapter 11 plan approved within four months.
The U.S. Trustee in the case, whose job in part is to protect the interest of creditors, said in a court filing Tuesday the company has to show that the request is “justified by the facts and circumstances of these cases.” Earlier court documents filed in the case show that in the year leading up to the company’s bankruptcy filing, van Raemdonck had already earned more than $8 million in salary and bonuses.
As the COVID-19 pandemic began in the U.S. in March and April, Neiman Marcus furloughed roughly 11,282 full- and part-time employees. Those employees are being brought back “in phases” as the company reopens its stores, a company representative said on Thursday.
“To date nearly all of our stores have reopened in some capacity whether it be for customer traffic or private appointments,” the representative said.
A hearing on the issue of its executive bonus plan is scheduled to take place on Friday.
The attention to its planned payments to executives comes at a time when the retailer faces another key hearing next week on a disclosure statement for its Chapter 11 plan. The purpose of a disclosure statement is essentially to assure the court that when creditors are asked to vote on a plan of reorganization, they have adequate information to do so.
Creditors in the Neiman’s case have certainly voiced their concerns. In particular, the conflict over Neiman’s handling of the online retailer Mytheresa before the bankruptcy still looms over the plan. Even before the bankruptcy, the transaction involving the Mytheresa web site was the subject of litigation by some creditors characterizing it as the transfer of an asset worth $1 billion for “no consideration,” allegedly to keep it from creditors.
The issue has continued to vex creditors during the bankruptcy, which fundamentally deals with the question of how a company’s bankruptcy estate can meet its obligations to creditors.
Unsecured creditors, including vendors, typically stand to recover a mere fraction of what they are owed. One way that these creditors can maximize what they receive in the process is by pursuing lawsuits for recoveries.
A company in bankruptcy may assist such recovery efforts, as it has a fiduciary duty to maximize the value of the estate for the benefit of all of their creditors. To this end, a Chapter 11 plan approved by a court would involve creating some kind of liquidation trust or litigation trust that would be overseen by a trustee helping creditors to pursue recoveries.
In the Neiman Marcus bankruptcy, unsecured creditors have been eyeing possible lawsuits related to the Mytheresa transfer as one potential source of recoveries. Such suits could be targeted against Neiman’s leveraged buyout sponsor, the private equity fund Ares Management.
The dispute over Neiman’s Chapter 11 plan, which will be a subject of a hearing scheduled for Tuesday, has involved concerns raised by creditors about how a plan by the retailer would prevent them from pursuing suits related to the Mytheresa transfer, and essentially block off a path to recoveries.
Amid these concerns, the court allowed the unsecured creditors committee, which has been investigating the circumstances around the Mytheresa transfer, to file its own disclosure statement related to a Chapter 11 plan. The committee’s goal in general is to ensure that creditors are able to pursue recoveries for their claims.
In its objection filed this month, the unsecured creditors committee argued that the creditors shouldn’t support Neiman’s reorganization plan because of what it views as a valuable asset — ability to pursue litigation over Mytheresa — that it says Neiman’s plan doesn’t factor into the calculation of recoveries for creditors.
Tuesday’s hearing on the disclosure statement could go one of a few ways. The judge may approve or decline to approve the statement, or only agree to approve it if is modified with additional information for creditors.
