FILED: NEW YORK COUNTY CLERK 09/07/ :21 PM INDEX NO /2017 NYSCEF DOC. NO. 94 RECEIVED NYSCEF: 09/07/2017

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1 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK EATON VANCE MANAGEMENT, AGF FLOATING RATE INCOME FUND, EATON VANCE CDO X PLC, EATON VANCE CLO LTD, DAVINCI REINSURANCE LTD., EATON VANCE FLOATING-RATE INCOME PLUS FUND, EATON VANCE SENIOR FLOATING-RATE TRUST, EATON VANCE FLOATING-RATE INCOME TRUST, EATON VANCE INTERNATIONAL (CAYMAN ISLANDS FLOATING -RATE INCOME PORTFOLIO, EATON VANCE SENIOR INCOME TRUST, EATON VANCE SHORT DURATION DIVERSIFIED INCOME FUND, EATON VANCE INSTITUTIONAL SENIOR LOAN FUND, EATON VANCE LIMITED DURATION INCOME FUND, EATON VANCE FLOATING RATE PORTFOLIO, RENAISSANCE INVESTMENT HOLDINGS LTD., EATON VANCE VT FLOATING RATE INCOME FUND, SENIOR DEBT PORTFOLIO, HIGHLAND CAPITAL MANAGEMENT LP, BRENTWOOD CLO LTD., EASTLAND CLO LTD., GRAYSON CLO, LTD., GREENBRIAR CLO LTD., ROCKWALL II, STRATFORD CLO, LTD., and WESTCHESTER CLO, LTD., -against- Plaintiffs, WILMINGTON SAVINGS FUND SOCIETY, FSB, as ADMINISTRATIVE AGENT and COLLATERAL AGENT, J. CREW GROUP, INC., CHINOS INTERMEDIATE HOLDINGS A, INC., CHINOS INTERMEDIATE HOLDINGS B, INC., J. CREW INTERNATIONAL, INC., J. CREW OPERATING CORP., J. CREW INC., GRACE HOLMES, INC., H.F.D. NO. 55, INC., MADEWELL INC., J. CREW VIRGINIA, INC., J. CREW INTERNATIONAL CAYMAN LIMITED, J. CREW DOMESTIC BRAND, LLC, J. CREW BRAND HOLDINGS, LLC, J. CREW BRAND INTERMEDIATE, LLC, AND J. CREW BRAND, LLC, Defendants. X X INDEX NO /2017 AMENDED COMPLAINT 1 of 53

2 Plaintiffs Eaton Vance Management, AGF Floating Rate Income Fund, Eaton Vance CDO X PLC, Eaton Vance CLO LTD, DaVinci Reinsurance Ltd., Eaton Vance Floating- Rate Income Plus Fund, Eaton Vance Senior Floating-Rate Trust, Eaton Vance Floating-Rate Income Trust, Eaton Vance International (Cayman Islands Floating-Rate Income Portfolio, Eaton Vance Senior Income Trust, Eaton Vance Short Duration Diversified Income Fund, Eaton Vance Institutional Senior Loan Fund, Eaton Vance Limited Duration Income Fund, Eaton Vance Floating Rate Portfolio, Renaissance Investment Holdings Ltd., Eaton Vance VT Floating Rate Income Fund, and Senior Debt Portfolio (collectively, the Eaton Vance Plaintiffs, and Plaintiffs Highland Capital Management LP, Brentwood CLO Ltd., Eastland CLO Ltd., Grayson CLO, Ltd., Greenbriar CLO Ltd., Rockwall II, Stratford CLO, Ltd., and Westchester CLO, Ltd. (collectively, the Highland Plaintiffs, and together with the Eaton Vance Plaintiffs, the Plaintiffs, by their attorneys Brown Rudnick LLP, as and for their Amended Complaint against Defendants Wilmington Savings Fund Society, FSB, solely in its capacity as Administrative Agent and Collateral Agent ( WSFS, J. Crew Group, Inc., Chinos Intermediate Holdings A, Inc., Chinos Intermediate Holdings B, Inc., J. Crew International, Inc., J. Crew Operating Corp., J. Crew Inc., Grace Holmes, Inc., H.F.D. No. 55, Inc., Madewell Inc., J. Crew Virginia, Inc., J. Crew International Cayman Limited, J. Crew Domestic Brand, LLC, J. Crew Brand Holdings, LLC, J. Crew Brand Intermediate, LLC, and J. Crew Brand, LLC (collectively, the J. Crew Defendants, WSFS and the J. Crew Defendants, collectively, Defendants, allege as follows: PRELIMINARY STATEMENT 1. Defendants in this case supposedly found a secret trapdoor in their senior secured debt facility. Assisted by teams of lawyers and consultants, Defendants claim to have 2 2 of 53

3 opened this trapdoor and dropped out substantially all of the value of J. Crew Group, Inc., the parent company of the well-known apparel retailer (the Company. This value was then pledged to other creditors in exchange for financial accommodations. As a result, the Company s senior secured creditors, whose loans were meticulously secured by liens on a comprehensive collateral package, are now left holding what looks like an empty sack. Formerly unsecured creditors of the Company have had their loans refinanced and are now holding debt secured by the Company s crown jewel asset the J. Crew brand. According to the press, this maneuver is called pulling a J. Crew Defendants bad faith conduct would be actionable even if, arguendo, it was permitted by the loan documentation. Fortunately, however, for its secured creditors (including Plaintiffs, their Term Loan Agreement and the Term Loan Security Agreement include specific prohibitions against such depredation. Pursuant to this action, Plaintiffs will demonstrate that opening up the trapdoor and allowing the J. Crew brand and related intellectual property to be transferred required, not surprisingly, the consent of each of the Term Lenders, which the Company did not obtain. Without that consent, the Company s transfer of collateral must be declared void. By this action, Plaintiffs seek and are entitled to the restoration of their collateral or its equivalent in damages. 3. The Company s current desperate straits can be traced to 2011 when the retail chain was taken private by investors. The burden of debt incurred to finance the acquisition proved too much for the Company whose balance sheet has since been further depleted by poor performance, ill-timed retail expansion, and a failure to meet the challenges of on-line shopping. In 2013, the Company s new equity fund owners chose to further compound the problem with 1 Retail s creditors left grasping as brands are put out of reach, Chicago Tribune at of 53

4 massive borrowing to finance a dividend. After first burying the Company under a mountain of debt, the Company s equity fund owners restructured that debt to stave off imminent default. 4. Seeking to free up collateral to refinance, the Company came up with a scheme to wipe out the Term Lenders lien on the J. Crew brand and other intellectual property so that the brand could be re-pledged. The purported logic behind this scheme is clear: a lien on the J. Crew brand is essentially a lien on the entire Company. Any unsecured lender of the distressed retailer would be eager to offer financial accommodations in exchange for a lien on the J. Crew brand and related intellectual property. But one creditor group s gain is another creditor group s loss. Without the brand, the Company s other assets, such as its high-price leases for brick-and-mortar stores and expensive store fixtures, have little, if any, value as collateral. In fact, they look like liabilities. Without the brand, nothing distinguishes the retailer from innumerable no-name competitors offering comparable clothing at lower prices. 5. As an obstacle to this scheme, substantially all of the assets of the Company were already pledged to secure borrowings under the Term Loan Agreement. Under that Agreement, the release of all or substantially all of the Collateral is prohibited unless one of two conditions is satisfied. First, such a release is permitted if it is otherwise permitted under Sections 7.04 or 7.05 of the Agreement. Second, such a release is permitted with the written consent of each Term Lender. 6. On December 8, 2016, the then-administrative Agent, Bank of America, N.A., was duped into releasing the Term Lenders lien on the J. Crew brand, purportedly in reliance on Sections 7.04 and/or 7.05 of the Term Loan Agreement. Then, on or about July 13, 2017, WSFS, as the successor Administrative Agent and Collateral Agent, acting without the consent of each Term Lender, acknowledged an amendment of the Term Loan Agreement that included a 4 4 of 53

5 purported retroactive consent to the release of collateral and purported ratification of every step in the scheme. As alleged herein, WSFS s conduct, to the extent it violates Plaintiffs rights, should be declared null and void ab initio. 7. In this action, Plaintiffs seek, inter alia, recovery from the Company and its corporate parents and from WSFS for the improper release of collateral and for breach of the Term Loan Agreement. THE PARTIES I. Plaintiffs 8. Eaton Vance Management is a Massachusetts Business Trust created and existing under the laws of The Commonwealth of Massachusetts with its principal place of business in Boston, Massachusetts. 9. AGF Floating Rate Income Fund, Eaton Vance CDO X PLC, Eaton Vance CLO LTD, DaVinci Reinsurance Ltd., Eaton Vance Floating-Rate Income Plus Fund, Eaton Vance Senior Floating-Rate Trust, Eaton Vance Floating-Rate Income Trust, Eaton Vance International (Cayman Islands Floating-Rate Income Portfolio, Eaton Vance Senior Income Trust, Eaton Vance Short Duration Diversified Income Fund, Eaton Vance Institutional Senior Loan Fund, Eaton Vance Limited Duration Income Fund, Eaton Vance Floating Rate Portfolio, Renaissance Investment Holdings Ltd., Eaton Vance VT Floating Rate Income Fund, and Senior Debt Portfolio are funds managed by Plaintiff Eaton Vance Management. The Eaton Vance funds currently hold approximately $92 million of the Term Loans. 10. Highland Capital Management LP, ( Highland, is a Delaware limited partnership with its principal place of business in Dallas, Texas. 11. Brentwood CLO Ltd., Eastland CLO Ltd., Grayson CLO, Ltd., Greenbriar CLO Ltd., Rockwall II, Stratford CLO, Ltd., and Westchester CLO, Ltd. are funds managed by 5 5 of 53

6 Plaintiff Highland. The Highland funds currently hold approximately $61 million of the Term Loans. II. Defendants 12. Defendant WSFS is a federal savings bank with its principal place of business in Wilmington, Delaware. It serves as Administrative Agent under the Term Loan Agreement and Collateral Agent under Term Loan Security Agreement. 13. Defendant J. Crew Group, Inc. ( J. Crew Group or the Company is a Delaware corporation with its principal place of business in New York, New York and is the Borrower (as defined in the Term Loan Agreement under the Term Loan Agreement and a Grantor (as defined in the Term Loan Security Agreement. 14. Defendant Chinos Intermediate Holdings A, Inc. ( Holdings A is a Delaware corporation with its principal place of business in New York, New York and is the direct parent and controlling shareholder of Holdings B (defined herein. 15. Defendant Chinos Intermediate Holdings B, Inc. ( Holdings B is a Delaware corporation with its principal place of business in New York, New York and is a direct parent and controlling shareholder of J. Crew Group. Holdings B is also a party to the Term Loan Agreement, and has unconditionally guaranteed all obligations under the Term Loan Agreement. 16. Defendant J. Crew Operating Corp. ( J. Crew OpCo is a Delaware corporation with its principal place of business in New York, New York, and is a Guarantor (as defined in the Term Loan Agreement under the Term Loan Agreement and a Grantor under the Term Loan Security Agreement. 17. Defendant J. Crew Inc. is a Delaware corporation with its principal place of business in New York, New York, and is a Guarantor under the Term Loan Agreement and a Grantor under the Term Loan Security Agreement. 6 6 of 53

7 18. J. Crew International, Inc. ( J. Crew International is a Delaware corporation with its principal place of business in New York, New York, and is a Guarantor under the Term Loan Agreement and a Grantor under the Term Loan Security Agreement. 19. Defendant Grace Holmes, Inc. is a Delaware corporation with its principal place of business in New York, New York, and is a Guarantor under the Term Loan Agreement and a Grantor under the Term Loan Security Agreement. 20. Defendant H.F.D. No. 55, Inc. is a Delaware corporation with its principal place of business in New York, New York, and is a Guarantor under the Term Loan Agreement and a Grantor under the Term Loan Security Agreement. 21. Defendant Madewell, Inc. is a Delaware corporation with its principal place of business in New York, New York, and is a Guarantor under the Term Loan Agreement and a Grantor under the Term Loan Security Agreement. 22. Defendant J. Crew Virginia, Inc. is a Virginia corporation with its principal place of business in New York, New York, and is a Guarantor under the Term Loan Agreement and a Grantor under the Term Loan Security Agreement. 23. Upon information and belief, Defendant J. Crew International Cayman Limited ( J. Crew International Cayman is a company incorporated and existing in the Cayman Islands, and registered on October 14, 2016, with its principal place of business in New York, New York. 24. Upon information and belief, Defendant J. Crew Brand Holdings, LLC ( Brand Holdings is a Delaware limited liability company formed on October 14, 2016, with its principal place of business in New York, New York. 7 7 of 53

8 25. Upon information and belief, Defendant J. Crew Brand Intermediate, LLC ( Brand Intermediate is a Delaware limited liability company formed on October 14, 2016, with its principal place of business in New York, New York. 26. Upon information and belief, Defendant J. Crew Brand, LLC ( Brand is a Delaware limited liability company formed on October 14, 2016, with its principal place of business in New York, New York. 27. Upon information and belief, Defendant J. Crew Domestic Brand, LLC ( Domestic Brand is a Delaware limited liability company formed on October 14, 2016, with its principal place of business in New York, New York. 28. Upon information and belief, Defendant J. Crew Brand Corp. ( Brand Corp. is a Delaware corporation formed on October 14, 2016, with its principal place of business in New York, New York. JURISDICTION AND VENUE 29. This Court has jurisdiction over the parties based on consent to the jurisdiction of this Court in Section of the Term Loan Agreement and/or because, upon information and belief, the parties transact business in New York state, have their principal place of business in New York state, are subsidiaries of J. Crew Group, which transacts business within New York state, or have participated in the acts alleged herein, causing injury to persons or entities within New York state. 30. Venue is proper pursuant to Rule 501 of the CPLR because Plaintiffs and certain Defendants have fixed venue in this Court in Section of the Term Loan Agreement. Venue is proper with respect to the remaining Defendants under Rule 503 of the CPLR because certain 8 8 of 53

9 Defendants are residents of New York County and maintain their principal place of business in New York County. 31. Section of the New York General Obligations Law also provides for this Court s jurisdiction over this action and the parties because the action arises out of a contract that: (i contains a clause in which the parties have submitted to jurisdiction in New York; (ii contains a clause selecting New York as the governing law over all matters arising out of, in connection with, or relating to that contract; and (iii relates to an obligation arising from a transaction involving more than $1 million in the aggregate. STANDING 32. As alleged further herein, Plaintiffs have standing to sue WSFS in this action because Plaintiffs had no obligation to demand that WSFS institute an action against itself, as such a demand would be futile. Thus, Plaintiffs are relieved of the obligation to request that WSFS proceed with such litigation pursuant to Section of the Term Loan Agreement. 33. Further, as also alleged herein, Section 10.01, which sets forth the consent requirements for each lender from time to time that is a party to the Term Loan Agreement ( Term Lender for certain amendments to, waivers of, or departures from the requirements of the Term Loan Agreement or any Loan Document (as defined in the Term Loan Agreement regarding a transaction involving the transfer of all or substantially all of the Collateral (as defined in the Term Loan Agreement and the Term Loan Security Agreement requires the consent of each Term Lender. As such, each Term Lender has an individual right to contest transfers of all or substantially all of the Collateral, and such actions are not subject to the collective action provisions of the Term Loan Agreement. 9 9 of 53

10 34. The J. Crew Defendants have taken the position that this action is barred by the dismissal of the Agent Litigation (defined herein and the purported ratification of the transactions complained of herein. However, because each Term Lender has an individual right to contest the transfer of all or substantially all of the Collateral under the Term Loan Agreement, any dismissal of the Agent Litigation (whether effective or not and any purported ratification of the complained of transactions by less than all of the Term Lenders is completely ineffective to vitiate Plaintiffs rights to challenge the transactions. FACTUAL ALLEGATIONS I. Background of the Company 35. The Company is a retailer that sells apparel and accessories. In 2011, it was acquired from its public shareholders by two private equity firms, TPG Capital, L.P. ( TPG Capital and Leonard Green & Partners, L.P. ( Leonard Green, and their respective affiliates, for $43.50 per share, or approximately $3.1 billion. The transaction was funded with $1.6 billion of debt. Upon information and belief, TPG Capital, Leonard Green, and their affiliates are controlling shareholders of Chinos Holdings, Inc. ( Holdings, the ultimate corporate parent of the Company. Holdings is the direct corporate parent of defendant Holdings A. Holdings A is the direct corporate parent of defendant Holdings B. Holdings B is the direct corporate parent of the Company. A Term Loan Agreement and Associated Documents 36. On March 7, 2011, in connection with the acquisition, the Company and certain of its affiliates entered into an agreement with Bank of America, N.A. ( BofA as Administrative Agent that provided for senior secured financing of $1.2 billion (with additional loans of up to $275 million in certain circumstances. This financing facility was documented by a term loan of 53

11 credit agreement dated as of March 7, 2011 (the Prior Term Loan Agreement. In connection with the Prior Term Loan Agreement, J. Crew Group, Holdings B, and BofA as the predecessor Collateral Agent entered into the Term Loan Security Agreement dated as of March 7, 2011 (the Term Loan Security Agreement, which provided the Term Lenders under the Term Loan Agreement with security interests in specified pledged collateral. B. The 2013 PIK Notes and Associated Documents 37. On November 4, 2013, Holdings A issued $500 million of 7.75% / 8.50% Senior PIK Toggle Notes (the PIK Notes to fund a dividend to Holdings. The proceeds were ultimately used to fund dividends to TPG Capital and Leonard Green. The PIK Notes were senior unsecured obligations of Holdings A. Neither the Company nor its subsidiaries were obligated on the PIK Notes either as a primary obligor or guarantor. 38. In connection with their purchase, holders of the PIK Notes were informed that the proceeds of the PIK Notes would be applied to fund dividends and not for any corporate purpose of the Company or its subsidiaries. 39. The PIK Notes were to mature on May 1, 2019, earlier than the maturity of the Term Loans in During fiscal year 2016, 2 Holdings A paid interest on the PIK Notes in kind (through the issuance of additional PIK Notes. On October 28, 2016, Holdings A gave notice that it was electing the same payment-in-kind treatment with respect to the May 1, 2017 interest payment date. This payment-in-kind election increased the outstanding principal balance of the PIK Notes to $566.5 million as of that date. 2 The Company s fiscal year runs from February 1 through the January of the following calendar year of 53

12 C. Declining Performance of the Company 41. After the amendments to the Term Loan Agreement on or about March 5, 2014, the Company experienced significant declines in its financial performance. 42. In 2013, the Company had a net income of $88.1 million. In 2014, the Company experienced a net loss of $657.8 million. In 2015, the Company had a net loss of $1,242.7 million. In fiscal year 2016, the Company reported a net loss of $23.5 million. 43. Moreover, the declining performance is reflected in the Company s declining sales overall, including store sales per gross square foot. In fiscal year 2014, the Company s store sales per gross square foot were $618, which fell to $540 in fiscal year 2015, and to $493 in fiscal year in Upon information and belief, the decline was attributable in part, to deteriorating conditions being faced generally by the retail industry and missteps by management with regard to consumer tastes and trends. D. The 2014 Amendments to the Term Loan Agreement 45. On March 5, 2014, J. Crew Group, Holdings B, the Term Lenders, and BofA (as Administrative Agent and Collateral Agent entered into an amended and restated credit agreement (the Term Loan Agreement, which provided for a $1.567 billion facility. The proceeds of the borrowing under the Term Loan Agreement were used to refinance the Prior Term Loan Agreement and to satisfy and discharge the Company s obligations under a $400 million notes facility. The maturity date of the obligations under the Term Loan Agreement (the Term Loans is March 5, The Term Loans are secured by a lien on substantially all of the assets of the specified Grantors. These include J. Crew Group, Holdings B, J. Crew OpCo, J. Crew Inc., J of 53

13 Crew International, Grace Holmes, Inc., H.F.D. No. 55, Inc., Madewell Inc., and J. Crew Virginia, Inc. To document the liens securing the Term Loans, the Grantors executed and delivered to BofA several security agreements, including three security agreements specifically prepared to cover intellectual property (each, a Trademark Security Agreement. II. The Scheme to Improperly Transfer the IP Assets 47. J. Crew Group s financial performance continued its decline following the refinancing of the Term Loan Agreement. The declining performance of the Company from 2014 onwards, as well as the overall poor outlook for the retail segment, resulted in a decline in the trading value of the PIK Notes and the Term Loans. While the debt obligations lost material trading value, as of the time of the Step 1 Transactions, the Term Loans, sitting at the top of the capital structure and backed by substantially all of the assets of the Company, held their trading value far better than the unsecured PIK Notes. As the Company veered toward insolvency, the decline in the PIK Notes was precipitous. Upon information and belief, certain funds that participate in the market for distressed debt saw an opportunity in acquiring the PIK Notes for a fraction of their par value. Because the maturity of the PIK Notes was relatively imminent, such holders would be in a position to leverage their PIK Note holdings and use them to induce concessions in exchange for a longer maturity and other economic accommodations. Upon information and belief, large holdings in the PIK Notes were acquired by such funds with plans to use them to extract value. 48. For its part, management was well aware of the trouble that had been created. They knew that Holdings A would not be able to repay the PIK Notes upon maturity. And, since the PIK Notes were the first major obligation to mature, their concerns focused on dealing with of 53

14 the PIK Notes in order to buy time to possibly turn the Company around. In short, the Company utilized negotiations with the PIK Note holders in order to buy time. 49. Upon information and belief, beginning as early as October 2015, the Company was engaged in restructuring discussions with holders of the PIK Notes. On the part of the Company, the objective of such negotiations was to avoid default (and resulting cross-defaults by inducing the holders of the PIK Notes to extend the 2019 maturity of the PIK Notes, and for the holders of the PIK Notes to provide other financial accommodations, including the reduction in the principal of the PIK Notes. On the part of the PIK Note holders, the objective was to add value to their holdings. Due to, among other factors, the PIK Notes being the unsecured obligation of a holding company and the financial condition of the Company, the PIK Notes continued to trade lower. Their market value was just a fraction of their face value. 50. Ultimately, discussions between the PIK Note holders and the Company led to a scheme to remove collateral from the Term Loan collateral package and to shift that collateral to secure the deeply discounted obligations represented by the PIK Notes. At some point in negotiations between the PIK Note holders and management, the J. Crew brand and other intellectual property was targeted as the collateral to extract from the Term Lenders collateral package so that it could be pledged to secure new indebtedness. This new indebtedness would be used to refinance the PIK Notes. Importantly for the achievement of this scheme, certain PIK Note owners increased their holdings in the Term Loans. If these crossover investors were able to scoop up enough of the Term Loans, they could use their Term Loan positions to consent to a collateral release that would benefit their PIK Note position. This strategy of obtaining a controlling position in the Term Loans in order to benefit the PIK Notes was essential to the deployment of the trapdoor of 53

15 51. Foreseeably, the value of the Term Loan positions of these crossover holders would decline upon the release of collateral securing the Term Loans. However, these same investors would benefit greatly when the released collateral was re-pledged as collateral securing their newly-issued replacement PIK Notes. Since the holders of the new PIK Notes would control the disposition of the Company s essential intellectual property, in the event of a later restructuring or bankruptcy, these holders, who had purchased PIK Notes at a fraction of face value, would hold the keys to the kingdom. 52. The scheme was implemented in two related steps, both of which were taken in bad faith and in breach of the Term Loan Agreement. Upon information and belief, Step 2 Transactions were contemplated at the time Step 1 Transactions were implemented. III. The Step 1 Transactions A. The October 2016 Creation of New Entities and Improper Designations of Unrestricted Subsidiaries 53. The Step 1 Transactions 3 were designed to create the false appearance of compliance with the Term Loan Agreement without, however, actually complying with it literally or in spirit. In fact, the Step 1 Transactions were transparently a breach of the Term Loan Agreement. The gamble taken by the Company and the PIK Note holders was that, were they able to get their hands on enough Term Loans to waive and release the claims of the other Term Loan holders, they could push through the Step 1 Transactions, and later the Step 2 Transactions. 54. As has been emphasized by the J. Crew Defendants, the Term Loan Agreement includes what are referred to as baskets. These baskets are exceptions to the general proscription 3 The Step 1 Transactions include the 2016 creation of new entities and improper designation of such entities as Unrestricted Subsidiaries, the release of Collateral by BofA, and the Drop Down Assignments (as defined herein. These transactions occurred, upon information and belief, between October and December 2016, as further described here of 53

16 against sales and other dispositions in that they allow for the release and transfer of collateral up to specified dollar amounts provided the other conditions for the use of these baskets are met. Supposedly, the Step 1 Transactions take advantage of these baskets, but go no further. In reality, implementing the Step 1 Transactions involved breaching the Term Loan Agreement. 55. Critical to the Step 1 Transactions was the creation of Unrestricted Subsidiaries J. Crew controlled entities that could hold the released collateral beyond the liens of the Term Lenders and the restrictions of the Term Loan Agreement. The Term Loan Agreement creates three categories of entities within the affiliated entities making up the consolidated financial enterprise. These categories are Loan Parties, Restricted Subsidiaries and Unrestricted Subsidiaries. Loan Parties (as defined in the Term Loan Agreement include the Company (as the Borrower and certain subsidiaries that are guarantors of the Term Loans and whose assets are subject to the liens of the Collateral Agent. Loan Parties and Restricted Subsidiaries (as defined in the Term Loan Agreement are bound by the covenants and restrictions of the Term Loan Agreement. In contrast, an Unrestricted Subsidiary (as defined in the Term Loan Agreement is free to incur debt, grant liens and make transfers that would be prohibited by a Restricted Subsidiary. Assets owned by Unrestricted Subsidiaries may be pledged as collateral to secure debt otherwise permitted under the Term Loan Agreement. 56. The first step in the implementation of the Company s scheme to improperly transfer the collateral away from the Term Lenders was the creation of new, wholly-owned indirect subsidiaries and their designation (albeit improperly as Unrestricted Subsidiaries, i.e., J. Crew controlled entities that could hold the released collateral beyond the liens of the Term Lenders and the restrictions of the Term Loan Agreement of 53

17 57. On October 21, 2016, as an integral part of the scheme, J. Crew Group submitted an Officer s Certificate (the Designation Certificate to BofA in which it purported to designate eight newly-formed subsidiaries as Unrestricted Subsidiaries and to re-designate two existing Restricted Subsidiaries, J. Crew Holdings A, LLC and J. Crew Holdings B, LLC as Unrestricted Subsidiaries. 58. The Company had no contractual right to create the Unrestricted Subsidiaries necessary to the scheme. Section 6.14 of the Term Loan Agreement permits the Company to designate a Restricted Subsidiary as an Unrestricted Subsidiary only if the ratio of debt to EBITDA, calculated in accordance with the Term Loan Agreement, is less than or equal to 6.0 / 1.0. This ratio, i.e., the Total Leverage Ratio, is defined in the Term Loan Agreement as, with respect to any Test Period, the ratio of (a Consolidated Total Debt outstanding as of the last day of such Test Period to (b Consolidated EBITDA of the Borrower for such Test Period. 59. The Designation Certificate certified that the Total Leverage Ratio for the applicable Test Period was less than or equal to 6.0 / 1.0 as of June 30, 2016 for the Borrower. Attached as Exhibit B to the Designation Certificate is a document purporting to demonstrate that the Total Leverage Ratio for the Test Period ending on July 30, 2016 was 5.78x. 60. The achievement of a ratio below 6.0 / 1.0 required multiple adjustments of the Company EBITDA which, unadjusted, was negative for fiscal years 2015 and Upon information and belief, several of the adjustments to EBITDA set forth on Exhibit B of the Designation Certificate are misleading, unsupported, and not authorized by the Term Loan Agreement. For example, in one such adjustment, pursuant to Section 1.08 of the Term Loan Agreement, the Borrower may include a maximum amount of $30 million for cost savings and synergies projected by the Borrower in good faith to be realized as a result of specified actions of 53

18 taken, committed to be taken or expected to be taken.... The amount of such cost savings and synergies must be reasonably identifiable, quantifiable and factually supportable in the good faith judgment of the Borrower. Upon information and belief, the $30 million line item for projected cost savings and synergies in Exhibit B of the Designation Certificate is incorrect, not made in good faith, and based on assumptions that are not reasonably identifiable, quantifiable, or factually supportable. Other supposed adjustments to EBITDA were also bogus and were improperly concocted to manipulate the Total Leverage Ratio. 61. If the Total Leverage Ratio had been calculated in accordance with the Term Loan Agreement, it would have far exceeded 6.0 / 1.0 for the Test Period ending on July 30, Accordingly, the designation of subsidiaries as Unrestricted Subsidiaries constituted a Default under Section 6.14 of the Term Loan Agreement. 62. This Default became an Event of Default no later than April 24, Moreover, by representing that the Total Leverage Ratio did not exceed 6.0 / 1.0, the Designation Certificate was untrue in a material respect and, therefore, also constituted an Event of Default pursuant to Section 8.01(d of the Term Loan Agreement. B. An Undivided Interest in the IP Assets 64. Even had the Company been legitimately entitled to create Unrestricted Subsidiaries, the Term Loan Agreement limited the amount of assets that could be transferred from Restricted Subsidiaries to Unrestricted Subsidiaries to at most, assets having a fair market value of $277 million. To overcome this restriction, the J. Crew Defendants concocted the idea of purporting to transfer a percentage of an undivided interest in the J. Crew brand and other domestic intellectual property rights. An undivided interest is an ownership right to use and of 53

19 possess property that is shared by two or more co-owners. When this form of ownership is used, no co-owner has an exclusive right to any portion of the property. 65. The J. Crew Defendants also came up with the false notion that, although the value of the J. Crew brand and other domestic intellectual property rights (the IP Assets clearly far exceeded the Term Loan Agreement cap of $277 million, the Company could purportedly comply with the covenants in the Term Loan Agreement by transferring a percentage of an undivided interest. In this way, the J. Crew Defendants concocted a scheme pursuant to which a percentage of and a right to exclusive use of the IP Assets could be transferred even though supposedly only a percentage of total value had been removed from the Term Loan collateral package. 66. Notwithstanding the scheming of the J. Crew Defendants, the planned transfer was plainly prohibited by the Term Loan Agreement. First, the IP Assets, measured at fair market value, in fact constituted substantially all of the Collateral securing the Term Loans. As such, pursuant to Section of the Term Loan Agreement, their transfer required the consent of each Term Lender. Second, even if, arguendo, the IP Assets did not represent substantially all of the Collateral as a whole, such IP Assets still far exceeded the limits of the baskets for Permitted Investments relied on by the Company to implement the scheme. Third, the idea that a percentage of an undivided interest in the IP Assets represented less than all of the value of the IP Assets was demonstrably and objectively wrong. No sooner did Domestic Brand, an Unrestricted Subsidiary, receive a 72.04% undivided interest in the IP Assets, then did it grant J. Crew International the exclusive right to use an undivided 72.04% interest (the Majority Interest. Problematically, however, since an undivided interest (regardless of the percentage of 53

20 tacked on to it is a right to use or license the entirety, an exclusive license to a percentage of an undivided interest is indistinguishable from the exclusive license to the whole. 67. The Majority Interest undoubtedly is worth more than $250 million (72.04% of the purported overall value of the IP Assets because the Majority Interest carried with it the right to control the J. Crew brand and the right to convey a full, 100% license. 68. Disregarding law and logic, the J. Crew Defendants nonetheless moved forward with the scheme that rested on the notion that the value of an undivided interest in the IP Assets could be made to fit into the baskets by the purported transfer of only a percentage of the undivided interests. 69. Before the creation of sham undivided interests could take place, it was necessary to come up with a value for the IP Assets as a whole. In furtherance of the scheme to improperly transfer the IP Assets in violation of the Term Loan Agreement, J. Crew Group engaged Ocean Tomo LLC ( Ocean Tomo to provide a manipulated valuation of the IP Assets and two fairness opinions used pretextually to attempt to justify the transfer of the IP Assets. 70. First, on October 7, 2016, Ocean Tomo and J. Crew Group, or its representatives, entered into a confidentiality agreement, which, upon information and belief, was entered into for the purposes of discussing the transfer of the IP Assets contemplated by J. Crew Group. 71. On October 21, 2016, counsel for J. Crew Group, engaged Ocean Tomo to assist with the valuation of certain intellectual property owned by J. Crew Group in connection with certain intellectual property transaction planning activities engaged in by the Company. 72. On November 27, 2016, pursuant to a separate engagement letter, Ocean Tomo was engaged to serve as an independent financial advisor to the special committee of the board of directors of Defendant J. Crew OpCo (the Special Committee. According to the of 53

21 Company, the Special Committee was not formed until November 30, Upon information and belief, Ocean Tomo was hired to provide a fairness opinion on behalf of the Special Committee in regard to a multi-step intellectual property transaction contemplated by the Company. 73. Ocean Tomo was directed to provide two fairness opinion letters, with the first letter to be delivered prior to December 2, 2016, and the second to be delivered at a date to be determined. Upon information and belief, Ocean Tomo was engaged to provide two fairness opinions because when it was planning Step 1, the Company already knew that it intended to execute the Step 2 Transactions discussed herein. 74. On November 29, 2016, Ocean Tomo issued a specious valuation of the IP Assets, in which it opined that the value of the IP Assets is $347 million (the Ocean Tomo Valuation. In its valuation, Ocean Tomo explained its methodology for valuing the IP Assets. The Ocean Tomo Valuation did not address the issue of valuing a purported percentage of undivided majority or minority interest in the IP Assets. Instead, an officer of J. Crew Group falsely certified that the value of a 72.04% undivided interest in IP Assets worth $347 million was $250 million. 4 According to this tortured logic, the 27.96% undivided interest in the IP Assets left with J. Crew International purportedly had a value of $97 million. 75. For purposes of rendering its opinion, Ocean Tomo purportedly made a number of unidentified assumptions and, with the consent of counsel for J. Crew Group, purportedly relied on the accuracy of alleged estimates, evaluations, forecasts, and projections provided by J. 4 J. Crew repeatedly informed this Court in its papers and in statements at oral argument, that the Ocean Tomo Valuation confirmed the value of the IP Assets, thus, suggesting that J. Crew Group had performed its own valuation of the IP Assets prior to the engagement of Ocean Tomo. To date, J. Crew Group has refused to produce such a valuation, or even confirm whether one exists of 53

22 Crew s management regarding J. Crew and the IP Assets, the material lack of accuracy of which is a central claim in this case. C. Mechanics of the Step 1 Transactions 76. J. Crew International is a Restricted Subsidiary and a Loan Party under the Term Loan Agreement. As part of the Step 1 Transactions, the Majority Interest of the entirety of the interest in the IP Assets owned by J. Crew International was transferred from J. Crew International to J. Crew International Cayman, another Restricted Subsidiary, but not a Loan Party. From J. Crew International Cayman, the Majority Interest was then transferred to Brand Holdings, a newly created Unrestricted Subsidiary. Brand Holdings subsequently transferred the Majority Interest to Brand Intermediate, also a newly created Unrestricted Subsidiary. A further paper transfer resulted in the Majority Interest becoming the asset of Brand, similarly a newly created Unrestricted Subsidiary. Finally, Brand transferred the Majority Interest to Domestic Brand, a newly created Unrestricted Subsidiary. Following these transfers (the Drop Down Assignments, J. Crew International ostensibly retained ownership of a 27.96% undivided interest in the IP Assets (the Minority Interest. 77. In connection with the transfer of the Majority Interest to the Unrestricted Subsidiary, BofA, as Collateral Agent for the Term Lenders, released the lien on the Majority Interest. 78. As of the date of the Drop Down Assignments, Plaintiffs were the owners of approximately $152 million in aggregate principal amount of Term Loans, and Plaintiffs still hold approximately $152 million today of 53

23 D. December 5, 2016 Officer s Certificate 79. Pursuant to Section 7.12(d of the Term Loan Security Agreement, J. Crew Group and J. Crew International issued an Officer s Certificate, dated December 5, 2016, certifying that as of that date, J. Crew International had transferred to J. Crew International Cayman the Majority Interest, in which the Term Lenders held a first priority security interest (the Trademark Release Certificate. The Trademark Release Certificate was subsequently delivered to BofA. E. Execution of the Step 1 Transactions 80. As of December 6, 2016, the day after the transfers of the Majority Interest from J. Crew International to Domestic Brand, pursuant to an intellectual property license agreement, Domestic Brand granted to J. Crew International an exclusive license to use Domestic Brand s Majority Interest (the December 2016 IP License Agreement. 81. In exchange for the December 2016 IP License Agreement, J. Crew International agreed to pay to Domestic Brand a fixed fee to be determined at a later time, as set forth in a future amendment to the December 2016 IP License Agreement. The parties agreed to negotiate to reach agreement on the consideration to be provided by J. Crew International to J. Crew Brand for use of the Majority Interest. F. BofA s Release of the Collateral 82. Three days after the completion of the Drop Down Assignments, J. Crew Group provided BofA with the Trademark Release Certificate, which inaccurately certified that the release of the Majority Interest was permitted pursuant to Section 7.12(b of the [Term Loan] Security Agreement. Upon information and belief, J. Crew Group did not provide any support of 53

24 to BofA for the proposition that the Majority Interest had a value of $250 million or for the proposition that a Majority Interest in intellectual property could be transferred. 83. Shortly thereafter, on December 8, 2016, BofA executed a document purporting to release the Majority Interest from the liens and security interests under the Term Loan Agreement and the Term Loan Security Agreement. 84. BofA did not seek or obtain the consent of any of the Term Lenders to release such collateral. G. The Release of the Lien on the Majority Interest by BofA Did Not Comply with the Term Loan Security Agreement 85. Section 9.11 of the Term Loan Security Agreement provides that the Administrative Agent and Collateral Agent are permitted to release collateral only when a transaction is permitted in the Term Loan Agreement. 86. In releasing the lien on the Majority Interest, upon information and belief, BofA relied solely on documents provided by J. Crew designed to convey that the Drop Down Assignments complied with the Term Loan Agreement, and BofA took J. Crew at their word that the Drop Down Assignments were permitted under the Term Loan Agreement, even though they were not. 87. Where owners have an undivided interest in property, each co-owner has an unrestricted claim to all the property and no co-owner has exclusive claim to any part of the property. The notion that each percentage point of an undivided interest in the IP Assets would have a fair market value equal to one percent of the value of the undivided whole is entirely and blatantly unsound because, inter alia, the value of intellectual property, such as the J. Crew brand, is in the ability to control utilization of the brand for commercial gain, which requires use and control of the whole. Yet, without any support, J. Crew Group submitted to BofA, and BofA of 53

25 accepted, that the Majority Interest had a value of $250 million and that the Minority Interest retained a value of $97 million. 88. As demonstrated herein, the Step 1 Transactions did not involve the payment in full of the obligations under the Term Loan Agreement and was not permitted by the Term Loan Agreement, including Section Accordingly, the release of the Collateral violated the Term Loan Security Agreement and should not be given any force or effect. H. The Company Was Insolvent at the Time of the Step 1 Transactions 90. As reflected in publicly filed financial statements, shareholders equity in J. Crew Group has been negative on a book-value basis since January 30, 2016, following impairment charges recorded for fiscal years 2014 and 2015 that together reduced the book value by more than $2 billion. Such impairments were recognized based on the Company s management s determination of the value of its assets, which was reviewed and accepted by the Company s auditors. 91. J. Crew Group s Form 10-K for the fiscal year ended January 28, 2017 shows that, as of January 28, 2017, the reported shareholders equity for J. Crew Group was in fact a deficit of $786.2 million. In its report on Form 10-Q filed on June 12, 2017, the Company reported that because of less than expected revenues in its J. Crew reporting unit, it had recorded an additional non-cash impairment charge of $129.8 million with respect to the IP Assets. The asserted $250 million value attributed by J. Crew Group to the Majority Interest was reduced by $85 million as a result of the impairment loss recorded in the first quarter of fiscal At all times during the period beginning with the date of the Step 1 Transactions, the trading prices of debt instruments issued by the Company, which are substantially below par, of 53

26 show that J. Crew Group is insolvent, undercapitalized, and unable to pay its debts as they mature and become due, including the $1.5 billion owed under the Term Loan Agreement. 93. Following the Step 1 Transactions, the trading value of the Term Loans dropped sharply prompting a sell-off. Term Loan participations were acquired by holders of the PIK Notes whose interests would be served by making the IP Assets available as collateral to secure unsecured obligations owed to them by Holdings B. IV. Removal of BofA as Administrative and Collateral Agent and the Agent Litigation 94. Following the Step 1 Transactions, the Term Lenders removed BofA as Administrative Agent and Collateral Agent and sought the appointment of WSFS to fill those roles. 95. On February 1, 2017, the Company, certain of its subsidiaries, and Holdings B commenced an action against WSFS in its capacity as newly appointed Administrative Agent and Collateral Agent, captioned J. Crew Group, Inc., et al. v. Wilmington Savings Fund Society, FSB, Index No /2017, in the Supreme Court for the State of New York (the Agent Litigation, also referred to in Amendment No. 1 (as hereinafter defined to the Term Loan Agreement as the Specified Liability Management Transaction Litigation. 96. In a pleading (the Agent Litigation Complaint that was sharply critical of Term Lenders that questioned the Step 1 Transactions, the Company sought judicial declarations that the Drop Down Assignments had not resulted in a Default or Event of Default under the Term Loan Agreement and that such transactions were expressly permitted by and complie[d] with the terms of the Term Loan Agreement in all respects. The Agent Litigation Complaint makes clear that the Step 1 Transactions were just the first step in a plan to enable the IP Assets of 53

27 to be released from the Term Lenders collateral package so that they could be used to refinance other debt. For example, the Agent Litigation Complaint alleges: Claims supposedly threatened to be brought by WSFS threaten[ed] to cause imminent and substantial disruption to J.Crew s business operations... at the expense of months of planning and millions of dollars in legal and advisor fees [T]he overhang in the market caused by the threat of an impending declaration of a default by the Ad Hoc Group [of Term Lenders] and WSFS and litigation related thereto has already created a substantial and continuing hurdle to J.Crew and its financial advisors, as J.Crew pursues value maximizing strategies. Potential counterparties already expressed to J.Crew reluctance to seriously engage in discussions, much less a viable transaction, unless the overhang of threatened litigation or other actions to challenge the [Step 1 Transactions]... is resolved. The purpose of the [Step 1 Transactions] was to enable J.Crew to consider and evaluate potential value maximizing strategic transactions for J.Crew. 97. On March 24, 2017, WSFS answered the Agent Litigation Complaint, and asserted counterclaims against J. Crew Group and certain additional counterclaim defendants. WSFS sought declaratory relief that the actions taken by J. Crew Defendants, including the Step 1 Transactions, constituted Defaults or Events of Default under the Term Loan Agreement and that such Transactions violated the Term Loan Agreement and were fraudulent transfers that could be avoided pursuant to sections of the New York Debtor Creditor Law ( WSFS s Initial Counterclaims. 98. On April 13, 2017, the J. Crew counterclaim defendants replied to WSFS s Initial Counterclaims. 99. On June 15, 2017, three days after the announcement by J. Crew Group of certain transactions identified in the Restructuring Support Agreement, disclosed by the Company in its 8-K filed on June 13, 2017 (the Step 2 Transactions, WSFS sought leave to amend its Initial Counterclaims, and submitted a Proposed Amended Answer and Counterclaims ( WSFS s of 53