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$3.5 Million Lawsuit Tangled Up in John Varvatos Bankruptcy

The music’s over for John Varvatos—or at least the rock ‘n’ roll men’s wear label will be singing a different tune under bankruptcy court protection.

John Varvatos Enterprises Inc.—the owner the global premium men’s fashion brand John Varvatos Collection and its more casual, lower-priced sibling John Varvatos Star USA—filed a voluntary Chapter 11 petition on Wednesday in a Delaware bankruptcy court.

The firm’s filing marks a grim chapter in fashion as insolvencies pile up under pandemic pressure.

The company reached an agreement with an affiliate of Lion Capital, its majority owner and investor, to sell the business to Lion to reorganize for a new beginning. In the meantime, Lion is providing debtor-in-possession financing to the company during its tour of bankruptcy proceedings. Sources said it will provide exit financing as well, as the investor plans to become the stalking horse bidder and ultimate owner upon the fashion firm’s exit from bankruptcy.

The sale requires the approval of the bankruptcy court. Because the Chapter 11 filing is not a pre-packaged bankruptcy, there’s a chance other bidders could come forward if the case proceeds to a court-approved auction. The recent onslaught of fashion bankruptcies is likely to attract brand management firms hungry for opportunities to acquire intellectual property assets at significantly reduced prices and then reap the financial rewards of reviving brands through licensing.

The John Varvatos brand has filed for Chapter 11 bankruptcy court protection, the latest fashion firm to do so from the impact of COVID-19.
Singer Nick Jonas, left, and John Varvatos, right. The designer’s firm filed Wednesday for bankruptcy court protection. Stephen Lovekin/Shutterstock

Authentic Brands Group, which claimed Barneys’ remains last year, attempted to purchase John Varvatos back in 2017 but stumbled onto a snag in negotiations. Lion is also an investor in the brand management firm, holding about a 20 percent stake. While the Varvatos brand would probably prefer not to go the licensing route, it may have less say under the bankruptcy process if an auction could potentially attract in higher offers.

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The Chapter 11 petition listed estimated assets at between $10 million to $50 million, which pale in comparison to estimated liabilities of between $100 million to $500 million. Two other affiliates, Lion/Hendrix Corp. and John Varvatos Apparel Corp., also filed at the same time. All three filings will be jointly administered.

The top 30 unsecured creditors can be divided into three groups: some finished goods vendors, mostly landlords for its stores, and a group of service providers, such as freight providers and lawyers.

Among its top unsecured creditors, trade vendors who were in the top 12 include: World Textile Sourcing, New York, N.Y. $1.3 million; Verde Garment Manufacturing Ltd., Tsuen Wan in the New Territories section of Hong Kong, $769,372; Jodan Corp., Seoul, South Korea, $737,943; Errepi, Perugla, Italy, $591,927, and Bhartiya Int’l Ltd., New Delhi, India, $497,495.

The John Varvatos brand has filed for Chapter 11 bankruptcy court protection, the latest fashion firm to do so from the coronavirus impact.
Kiss frontman Gene Simmons at the John Varvatos 13th Annual Stuart House Benefit at the John Varvatos Store on April 17, 2016 in West Hollywood, Calif. John Varvatos built its brand on rock ‘n’ roll. Kathy Hutchins/Shutterstock

Among the landlords listed in the top 30 list of unsecured creditors for its stores were: Vornado Realty Trust, New York, N.Y., $1.1 million; Bal Harbour Shops, Miami Beach, Fla., $323,692; South Coast Plaza, Costa Mesa, Calif., $193,818; 1145 Forum Shops LLC, Indianapolis, Ind., $190,035, and Century City Mall, Century City, Calif., $186,367.

However, the largest unsecured creditor is a group of class action claimants, who secured a contingent and currently disputed judgment of $3.5 million. No other details about the lawsuit were provided in the petition, but it is believed to be connected to a March judgment following a jury trial in a Manhattan federal court in which the fashion firm was ordered to pay $3.5 million to the company’s female sales associates. They contested a company discount policy that provided male-only discounts for Varvatos merchandise, while women instead received a 50 percent discount to AllSaints, also owned by Lion Capital. That was alleged to amount to a difference of $7,000 in clothing allowances, benefiting male workers who receive an annual store credit of $12,000, while the women saw their maximum discount at AllSaints set at $5,000.

Detroit-born John Varvatos, whose design background includes stints as Ralph Lauren and Calvin Klein, founded his eponymous company in 1999, and the line was launched in 2000 by Nautica Enterprises Inc. The brand at one point was under the umbrella of VF Corp., which scooped up Varvatos as part of its Nautica 2003 acquisition. VF sold a majority stake in Varvatos to Lion nine years later in 2012.

Despite the financial turmoil, the designer is still an active participant in the brand as its chief creative officer. Although Lion essentially owns 100 percent of the company, sources familiar with the capital structure said Wednesday that Varvatos still retains a very small minority stake that is expected to be canceled when the company leaves Chapter 11. With Varvatos at the creative helm, the brand has been able to maintain its rock ‘n’ roll aesthetic, even as it has moved toward a lifestyle positioning with product extensions. Music is still the key theme and the freestanding stores it operates have been likened to man caves where customers can hang out and relax.

The John Varvatos brand has filed for Chapter 11 bankruptcy court protection, the latest fashion firm to do so from the coronavirus impact.
A model on the runway at the John Varvatos F/W 2018 show. Rudy K/Sipa/Shutterstock

After 20 years in operation, the core collection is still the primary revenue generator and is sold online and at the company’s freestanding stores, while the younger Star line relies on sales at department store retailers that include Neiman Marcus and Nordstrom. While sales had been on a downward trend, some sources noted that the declines weren’t the sole cause of liquidity issues. Store closures in mid-March amplified the company’s financial distress.

The company hired MMG Advisors as its financial advisor. Morris, Nichols, Arsht & Tunnel is its legal advisor, while Clear Thinking Group is the restructuring advisor. Lion Capital’s legal counsel is Sullivan & Cromwell.

The Varvatos filing follows that of men’s online custom clothier J. Hilburn and preppy stalwart J. Crew earlier this week and premium denim brand True Religion last month. That’s in addition to the insolvency filings by Laura Ashley and Debenhams across the pond. All are victims of the coronavirus pandemic, and more fashion firms and retailers are expected to get ensnared by the virus’ tentacles.