Court Opinion

ID: 6352981
Source: CourtListenerOpinion
Date Created: 2022-06-23 17:00:32.615428+00
Date Added: 2024-06-11T09:13:49.458195
License: Public Domain

NOT PRECEDENTIAL

              UNITED STATES COURT OF APPEALS
                   FOR THE THIRD CIRCUIT

                             No. 21-2766

         In re: JOHN VARVATOS ENTERPRISES INC, et al.,

                                                 Debtors

     TESSA KNOX, individually and as the Certified Representative
              of the Class of Judgment Creditors,

                                                Appellant

                                   v.

                LION HENDRIX CAYMAN LIMITED

              Appeal from the United States District Court
                       for the District of Delaware
                (D.C. Civil Action No. 1-20-cv-00937)
              District Judge: Honorable Colm F. Connolly

              Submitted Under Third Circuit LAR 34.1(a)
                            June 9, 2022

Before: CHAGARES, Chief Judge, AMBRO, and FUENTES, Circuit Judges

                     (Opinion Filed: June 23, 2022)
                                        OPINION *

AMBRO, Circuit Judge

       In May 2020, menswear company John Varvatos Enterprises, Inc. (“Varvatos”)—

like many retailers in recent years—filed for bankruptcy. Just prior to filing, the company

became liable for millions in damages stemming from a class action challenging its policy

of giving free clothes to male, but not female, employees. Bankruptcy would leave this

class of judgment creditors (the “Class”) with only a fraction of that sum. So the Class

filed an adversary complaint in the Bankruptcy Court seeking to subordinate the claim of

a senior secured creditor so its own unsecured claim could be paid in full. The Court

dismissed its complaint, and the District Court affirmed. We do the same.

                                             I.

       Varvatos sold its brand name “John Varvatos” menswear in stores nationwide. It

gave its male sales professionals $12,000 a year in brand clothing to wear at work. Female

sales professionals had no clothing allowance but were, in 2013, offered the ability to

purchase clothes at a 50% discount from a different retailer, AllSaints.

       In 2017, Tessa Knox, a former Varvatos employee, brought a sex-discrimination

class action alleging that the company’s clothing-allowance policy violated the Federal

Equal Pay Act, the New York Equal Pay Act, the New York Human Rights Law, and Title

* This disposition is not an opinion of the full Court and under I.O.P. 5.7 does not
constitute binding precedent.
                                             2
VII of the Civil Rights Act of 1964. The Court certified a class of 69 current and former

women sales professionals, with Knox serving as class representative.

       A jury found that Varvatos violated the civil rights laws and was liable for punitive

damages under Title VII. On March 24, 2020, a judgment was entered in favor of the Class

and against the company for $3,516,051.23. On May 6, Varvatos and two affiliated entities

(collectively, the “Debtors”) filed voluntary petitions for bankruptcy protection under

Chapter 11 of the Bankruptcy Code.

       The Debtors signed that same day an asset purchase agreement with Appellee

Lion/Hendrix Cayman Limited (“LHCL”). At the time, LHCL owned Lion/Hendrix Corp.,

which owned Varvatos. LHCL in turn was majority-owned and controlled by affiliates of

Lion Capital Fund III Partnerships. Under the proposed purchase agreement, LHCL would

buy substantially all the Debtors’ assets for $19,450,000 in cash and a credit bid of $76

million in secured debt held by it.

       Because the sale would, if approved, leave little for holders of unsecured claims, the

Class filed an adversary proceeding in the Bankruptcy Court seeking to equitably

subordinate (that is, deprioritize) LHCL’s secured claim. It alleged it would be unjust for

LHCL to be paid before the Class because LHCL and its affiliates “encouraged” and

“facilitated” Varvatos’s unlawful clothing-allowance policy.         App. 52 ¶ 45.      The

Bankruptcy Court held that the Class failed to state a claim for equitable subordination and

dismissed its complaint without providing leave to amend. The District Court affirmed,

and the Class now appeals to us.

                                             3
                                              II. 1

       We review de novo a district court’s appellate review of a bankruptcy court’s

decision, exercising the same standard of review as the district court. In re Winstar

Commc’ns, Inc., 554 F.3d 382, 389 n.3 (3d Cir. 2009). At the motion-to-dismiss stage, we

accept all factual allegations as true to determine whether the complaint states a plausible

claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 678–79 (2009). But this assumption of

truth does not apply to “naked assertion[s]” or “[t]hreadbare recitals of the elements of a

cause of action.” Id. at 678. Where the well-pled allegations fail to “nudge[] the[] claims

across the line from conceivable to plausible, the[] complaint must be dismissed.” Bell Atl.

Corp. v. Twombly, 550 U.S. 544, 570 (2007).

                                              III.

       The claims of a debtor’s creditors are paid per a priority scheme. As relevant here,

secured claims (like that of LHCL) are given priority and paid before unsecured claims

(like that of the Class). This scheme is “fundamental to the Bankruptcy Code’s operation.”

Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 984 (2017).

       The Code does, however, permit a bankruptcy court to disturb the claim hierarchy

“under principles of equitable subordination.” 11 U.S.C. § 510(c)(1). That doctrine lets

the court subordinate distribution of all or part of a higher priority claim in favor of a lower

priority claim where justice so requires. Id.; Winstar, 544 F.3d at 411. For it to apply,

1
  The Bankruptcy Court had subject matter jurisdiction under 28 U.S.C. §§ 1334 and 157.
The District Court had jurisdiction over the appeal under 28 U.S.C. § 158(a). We have
jurisdiction under 28 U.S.C. §§ 158(d) and 1291.
                                               4
three factors must be met: (1) the higher priority creditor must have engaged in inequitable

conduct, (2) that conduct injured a lower priority creditor or unfairly advantaged the

misbehaving creditor, and (3) claim subordination would not be inconsistent with the

Bankruptcy Code. Winstar, 544 F.3d at 411.

       We begin and end with the first factor, as we agree with the Bankruptcy and District

Courts that the Class failed to allege any inequitable conduct. See Citicorp Venture Cap.,

Ltd. v. Comm. of Creditors Holding Unsecured Claims, 323 F.3d 228, 234 (3d Cir. 2003)

(noting that “inequitable conduct may arise out of any unfair act by the creditor as long as

the conduct affects the bankruptcy results of the other creditors”). The Class asserts that

LHCL—though not a party in the class action proceedings—acted inequitably by

“encourag[ing]” and “facilitat[ing]” Varvatos’s discriminatory clothing-allowance policy.

App. 52 ¶ 45. It premises this conclusion on a single allegation: that during the class action

trial Ann Byron, Varvatos’s former Vice President of Human Resources, testified that the

“head of Lion” spoke with John Varvatos about Varvatos’s clothing-allowance policy and

“agreed that they would simply offer women sales professionals a 50 percent discount off

the full retail price of certain clothes at another store in Lion’s Fund III portfolio,

AllSaints.” App. 50 ¶ 28. This allegation overreads Byron’s actual trial testimony:

       Q. Ms. Byron, do you recall when the AllSaints discount policy was
       instituted?
       A. I believe it was talked about potentially or instituted in 2013.
       Q. And how did it come to be put in place?
       A. The head of L[i]on Capital and John Varvatos spoke about the possibility
       of wanting to provide our female associates with a benefit since we did not
       produce any clothing for female associates.

App. 17. That testimony suggests only that an individual from “Lion Capital” discussed

                                              5
with Varvatos the possibility of providing some benefit to the latter’s women sales

professionals. It does not support a reasonable inference that LHCL acted inequitably

toward the Class. 2

       The Class submits that, if given another chance, it could offer more facts indicating

LHCL’s inequitable conduct. It thus contends the Bankruptcy Court erred in holding that

any amendment to the complaint would be futile. We review a court’s “denial of leave to

amend for abuse of discretion, and review de novo its determination that amendment would

be futile.” U.S. ex rel. Schumann v. AstraZeneca Pharms. L.P., 769 F.3d 837, 849 (3d Cir.

2014). Applying that standard, we also conclude amendment would be futile. The Class

specifies no additional facts that might raise a reasonable inference that LHCL behaved

badly. The Class broadly asserts that it could allege facts demonstrating that LHCL—

rather than some other Lion entity—offered Varvatos the AllSaints discount and that

Varvatos would, in the absence of that benefit, have changed its clothing-allowance policy.

Op. Br. at 15–16, 36. But even if available and proven, this would suggest only that the

provision of an LHCL-related benefit to Varvatos’s women sales professionals contributed

to Varvatos’s decision to continue its prior misconduct, not that LHCL itself engaged in

misconduct.

       For these reasons, we affirm.

2
  The Class also argues that the Bankruptcy and District Courts erred by requiring it to
allege that LHCL’s conduct affected the “ordering of creditors” in the bankruptcy.
Appellant Br. at 27. Because the Class’s failure to plead inequitable conduct is fatal to its
equitable subordination claim, we need not address this argument.
                                             6