End the free passes at bankruptcy court

Not long ago, at malls and strip centers across Illinois, shoppers could count on finding Dress Barns, Lane Bryants, Ann Taylors, Justices and other apparel stores run by Ascena Retail Group. Five years ago, the retailer operated nearly 5,000 bricks-andmortar locations catering to women, teens and tweens. As of 2020, that number had been halved and the bankrupt chain has agreed to sell off its surviving stores.

Fashion apparel is a tough business for any merchant, given powerful e-commerce competition and the effects of the pandemic on all retail sectors. In the case of Ascena, some of its wounds were self-inflicted, and the efforts of its leaders to avoid a courtroom reckoning have turned its bankruptcy case into a landmark. We hope the U.S. Supreme Court will take notice.

Ascena’s troubles began in 2015, when it paid more than $2 billion for Ann Inc., parent of Ann Taylor, Loft and other retail clothing chains. Over the next two years, executives at the then-publicly held company told investors on at least several occasions that business was going well. In May of 2017, Ascena warned of trouble ahead and its stock plunged. Weeks later, it took a $1.3 billion restructuring charge, and the operation only went downhill from there.

In its bankruptcy reorganization, Ascena received sweeping legal protections for the company’s former senior officers and other insiders. These so-called third-party releases protect individuals who never filed for bankruptcy themselves from lawsuits arising from their conduct, ending potential claims that normally would be resolved by judges or juries in other courts.

These legal releases have become common in corporate bankruptcy cases, and, to put it bluntly, they stink.

Whenever publicly held companies take huge writedowns, as Ascena did, securities fraud claims typically follow. Often those claims go nowhere or settle for relatively small amounts.

Still, the claims deserve to be heard, and it’s fundamentally wrong that a bankruptcy judge can, as a regular practice, waive them away. If there was misconduct, those involved should be held accountable.

In a sharply worded ruling, U.S. District Judge David Novak last month overturned the Ascena bankruptcy settlement and sent it back to bankruptcy court, pointedly directing it to a new judge. Novak described the broad legal releases in Ascena’s reorganization plan as “shocking,” saying they would have released practically everyone involved from practically every possible claim, including a pair of former executives targeted in the investor fraud case.

Novak called out a lack of due diligence undertaken by the bankruptcy court before the sweeping releases were granted. Novak found that no thorough analysis was done before the releases were OK’d over objections from the U.S. Department of Justice, U.S. Securities and Exchange Commission and attorneys representing investors.

Enough, already. There may be rare instances where these releases are needed, but their mindless proliferation has got to stop.

While legislation is pending in Congress to address the issue, the ultimate authority is the U.S. Supreme Court. We urge the nine justices to take up the first available case to rein in this disturbing practice once and for all.