Destination Maternity to Liquidate in Deal U.S. Called ‘Tainted’

(Bloomberg) -- Destination Maternity Corp. won court approval to liquidate its remaining stores after a judge rejected claims by a federal bankruptcy watchdog that a sale process, which might have saved part of the chain was “tainted” by conflicts.

U.S. Bankruptcy Judge Brendan Linehan Shannon acknowledged that the structure of the deal he approved was unusual, but said he disagreed that there was an actual conflict of interest. Two retail liquidation specialists worked for Destination Maternity before teaming up on the winning bid to conduct going-out-of business sales for the chain. One of the liquidators also has ties to a key Destination Maternity lender.

“There is at least an optical concern about a party wearing a number of hats,” Shannon said. “But I don’t believe there is a meaningful conflict.”

Under the deal, licensing company Marquee Brands LLC will get Destination’s name, website and other operating assets for about $50 million, while Hilco Merchant Resources and Gordon Brothers Retail Partners will run store-closing sales at its remaining 235 locations, with thousands of jobs likely to disappear, court papers show.

The structure made it difficult for a rival to make a competing offer to buy the entire company as a going concern or to outbid Marquee for the intellectual property without first getting permission from Hilco and Gordon Brothers, according to Destination’s main financial adviser, Neil A. Augustine, with Greenhill & Co.

Before putting the deal together, Greenhill talked to more than 100 potential bidders, but was unable to persuade anyone to make a going concern offer, Augustine told Shannon during the hearing Thursday in federal court in Wilmington, Delaware.

The U.S. Trustee argued that Hilco and Gordon Brothers had an advantage in bidding on the right to wind down the chain because they had more access to information about Destination Maternity than other potential bidders.

“That access may have chilled bidding from going concern buyers as well as from other liquidators,” wrote Timothy J. Fox, Jr., an attorney for the U.S. Trustee’s office in a court filing.

During the hearing, advisers for Gordon Brothers and Hilco both testified that they did nothing to prevent Destination Maternity from selling its assets for as much as possible. Shannon said that he accepted their views and ruled that the deal was proposed and executed in good faith.

Augustine told Shannon that Greenhill was in charge of trying to bring in a so-called going concern buyer to keep the chain alive. The liquidators did nothing to block those efforts, he said.

Destination Maternity knew that there was a risk the deal might look to outsiders like it was influenced by conflicts, but decided to go forward, Augustine said.

“We came to a conclusion it was a risk but we felt like it was a risk that would result in a higher and better value for the debtors,” he told Shannon.

The case is Destination Maternity Corp., 19-12256, U.S. Bankruptcy Court, District of Delaware (Wilmington).

©2019 Bloomberg L.P.

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