Tuesday Morning Corp’s (TMC) bankruptcy judge today sanctioned a group of investment funds that purchased trade claims in the retailer’s Chapter 11 case, ordering them to correct a website that contained “false and misleading statements” regarding the off-price retailer’s plan of reorganization.
Delivering a decision from the bench during a hearing this morning, Judge Harlin Hale of the US Bankruptcy Court for the Northern District of Texas granted TMC’s motion for sanctions against the investment funds—a group that, according to court documents, includes Invictus Global Management, Bradford Capital Management, Contrarian Funds, Hain Capital Group, 507 Capital, Cherokee Debt Acquisition, and CRG Financial.
TMC filed the motion for sanctions on Monday (7 December), alleging that the claims purchasers’ actions “deliberately undermined” the process for soliciting votes on the retailer’s Chapter 11 plan. The company had secured approval of the disclosure statement for the plan on 16 November, allowing TMC to commence the solicitation process ahead of a 16 December voting deadline.
In his ruling on the sanctions motion, Judge Hale ordered the investment funds to immediately take down a website they created, rejecttuesdaymorningplan.com, to communicate with other creditors. The judge said the claims purchaser group could make the website go live again only after it has removed what he considered false and misleading statements.
“Creditors can speak to each other and offer opinions, but they cannot disseminate false information,” Judge Hale said.
As today's hearing began, Judge Hale told the parties that he evaluated potential First Amendment and free speech concerns related to the claims purchasers' website and communications with other creditors. Based on that evaluation, the judge said he concluded that false statements don't qualify as protected commercial speech under the First Amendment, and so he focused his ruling specifically on statements that he believed were false and misleading, since those can be regulated without running afoul of free speech rights.
Among the specific statements at issue, the claims purchaser’s website and a related press release contained a misleading discussion of the interest rate that may apply to a distribution for unsecured creditors under TMC’s plan. The plan itself proposes to fully pay USD 125m in general unsecured claims (GUC), plus interest. However, the company and unsecured creditors, including the claims purchasers, have disagreements over the proper interest rate that should apply to the GUC distributions.
When he approved TMC’s disclosure statement, Judge Hale required the company to include information regarding the disputed interest rates. But the judge said the claims purchasers’ communications, both on the website and through the press release, went beyond the additional disclosures he ordered into the disclosure statement and misstated the interest rates that TMC has advocated for to make the company’s position seem disadvantageous to unsecured creditors.
“The interest rate misrepresentation was material because of the context in which it was used,” the judge said.
Judge Hale also ordered the claims purchasers—who described themselves on their website as a “trade claimants committee”—to adopt a different name in the future. In the judge’s view, going by “trade claimants committee” could lead other creditors to believe the group is an official committee of trade creditors involved in TMC’s Chapter 11 case. Since, in reality, it is a self-organized group of funds that purchased claims against TMC from trade vendors and suppliers, Judge Hale required the claims purchaser group to include the words “ad hoc” or ”informal” in whatever label it adopts for itself as TMC’s Chapter 11 case proceeds.
A separate piece of the judge’s ruling requires the claims purchasers to cover TMC’s legal fees related to the dust-up over the website that the claims purchasers published while trying to convince other creditors to vote against TMC’s Chapter 11 plan. Judge Hale also reserved the ability to order the claims purchaser group to pay additional monetary damages, saying he would decide in the future whether further damages were warranted.
TMC filed for Chapter 11 in May with plans to close at least 133 underperforming store locations in the wake of the coronavirus pandemic’s impact. TMC does not sell products online, leaving it especially vulnerable to stay-at-home orders that forced the temporary closure of stores during the pandemic.
In addition to the proposal to pay GUC claims in full, Tuesday Morning’s Chapter 11 plan calls for a USD 40m backstopped equity rights offering and a new USD 110m asset-based loan facility that would support the retailer when it emerges from bankruptcy. A confirmation hearing on the plan is scheduled for 22 December.
by Scott Flaherty