WPS Looks To Recover Cash

Brent Felgner, May 16, 2005

New York — In the final days before it goes on the auction block, WestPoint Stevens has filed more than 170 lawsuits against unsecured creditors seeking to recover payments it made to them in the 90 days before it filed for bankruptcy.

The actions, coming almost exactly two years after the mill entered Chapter 11, are being filed under a provision of the Chapter 11 laws enabling debtors-in-possession to recover “preferential” payments made during the effective prepetition insolvency of the company.

WestPoint's Special Conflicts Counsel, Stein Riso Mantel, LLP, filed the suits but referred all inquiries about the scope and size of the actions to the mill's lead bankruptcy lawyers at Weil, Gotshal & Manges LLP. Messages left for lead attorney John Rapisardi at Weil went unreturned late last week.

Effectively all of WestPoint's assets are scheduled to be sold at auction June 21 as part of a reorganization plan. The New York auction will probably pit investors Wilbur Ross and Carl Icahn against each other in a contest that will likely preclude any hope of the unsecured creditors realizing even partial repayments.

WestPoint made the payments prior to the filing. The effort at the recoveries, perhaps seeming contradictory to the uninitiated, are actually a reflection that WestPoint became two different entities before and after the Chapter 11 filing.

“When you're outside of bankruptcy and you're solvent, your fiduciary responsibility lies with the shareholders and they're the ones who are going to be helped or hurt by every dollar gained or lost,” explained bankruptcy expert Daniel Keating, a professor of law at Washington University, St. Louis. But once in bankruptcy, the debtor-in-possession's responsibility shifts to the creditors.

A random review of two dozen filings by HTT found that the claims averaged about $44,000. If that average holds within the larger group, the total being sought could add up to about $7.5 million — not a particularly significant amount for a company with more than $2 billion in outstanding debt.

But that's not necessarily the point.

“They have a fiduciary responsibility to augment the estate … so to the extent they can make any recoveries, then they ought to be doing so,” Keating said.

The claims among the reviewed actions ranged from a low of $6,361.03 involving Imex Vinyl Packaging, to a high of $172,549 against Hanes Converting.

As of late last week, none of the companies reviewed had answered the mill's complaints.

But the unsecured creditors might still have a viable argument to counter those claims. According to Keating, there is an exception to the preference liability.

“If you can show that the payment was made in the ordinary course of business, according to ordinary business terms, then it's not 'avoidable,'” he said. “But a creditor would have to litigate that and it's going to cost them some money. And, in the end, it's a subjective judgment.”

He added, “Maybe they're just going to sue everyone (paid in the 90 days leading up to the filing) hoping they can get some quick settlements that won't cost a lot in litigation fees.”

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