Case GLT Doc 671 Filed 07/07/17 Entered 07/07/17 17:02:21 Desc Main Document Page 1 of 21

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1 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 1 of 21 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA IN RE rue21, inc., et al., 1 Debtors. RUE21, INC., ET AL., v. Movants, THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF RUE 21, INC., ET AL., Respondent. Case No GLT Chapter 11 (Joint Administration) Hearing Date July 13, 2017 at 200 p.m. (prevailing Eastern Time) Objection Deadline July 7, 2017 at 500 p.m. (prevailing Eastern Time) Related to Document Nos. 315, 316 & 347 OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO DEBTORS MOTION FOR ENTRY OF AN ORDER (I) APPROVING THE DISCLOSURE STATEMENT FOR THE DEBTORS JOINT PLAN OF REORGANIZATION PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE, (II) APPROVING CERTAIN DATES RELATED TO PLAN CONFIRMATION, (III) APPROVING PROCEDURES FOR SOLICITING, VOTING, AND TABULATING VOTES ON, AND FOR FILING OBJECTIONS TO, THE PLAN AND APPROVING THE FORMS OF BALLOTS AND NOTICES, AND (IV) GRANTING RELATED RELIEF 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include rue21, inc. (1645); Rhodes Holdco, Inc. (6922); r services llc (9425); and rue services corporation (0396). The location of the Debtors service address is 800 Commonwealth Drive, Warrendale, Pennsylvania

2 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 2 of 21 Table of Contents Page PRELIMINARY STATEMENT...2 BACKGROUND...5 I. GENERAL...5 II. THE PROPOSED PLAN AND DISCLOSURE STATEMENT...6 III. POTENTIAL CLAIMS AGAINST APAX AND COMMITTEE INVESTIGATION...7 OBJECTION...8 I. THE DISCLOSURE STATEMENT SHOULD NOT BE APPROVED BECAUSE IT DOES NOT CONTAIN ADEQUATE INFORMATION AS REQUIRED BY SECTION 1125 OF THE BANKRUPTCY CODE....8 A. The Description of the Apax-Related Claims is Inadequate B. The Disclosure Statement Contains Inadequate Disclosures Regarding the Debtors Financial Projections and Risks to the Debtors Businesses C. The Disclosure Statement Contains No Disclosure Regarding Treatment of New Equity, the Terms of the Management Equity Incentive Plan, nor the Overall Corporate Structure II. THE PLAN CONTAINS SEVERAL FACIAL DEFICIENCIES THAT RENDER IT PATENTLY UNCONFIRMABLE RESERVATION OF RIGHTS CONCLUSION i-

3 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 3 of 21 Table of Authorities Page(s) Cases In re APP Winddown, LLC, et al. (f/k/a/ American Apparel, LLC, et al.), Case No (Bankr. D. Del. Nov. 14, 2016)... 3 In re Applegate Prop., Ltd., 133 B.R. 827 (Bankr. W.D. Tex. 1991)... 8 In re Arnold, 471 B.R. 578 (Bankr. C.D. Cal. 2012) In re Ashley River Consulting, LLC, 2015 WL (Bankr. S.D.N.Y. Nov. 6, 2015) In re Bjolmes Realty Tr., 134 B.R (Bankr. D. Mass. 1991) In re EO Liquidation, LLC (f/k/a Eastern Outfitters, LLC, et al.), Case No (Bankr. D. Del. Feb. 5, 2017)... 3 Everett v. Perez (In re Perez), 30 F.3d 1209 (9th Cir. 1994)... 9 In re Ferretti, 128 B.R. 16 (Bankr. D.N.H. 1991)... 9 In re General Wireless Operations Inc. dba RadioShack, et al., Case No (Bankr. D. Del. Mar. 8, 2017)... 3 In re GSC, Inc., 453 B.R. 132 (Bankr. S.D.N.Y. 2011) In re Jeppson, 66 B.R. 269 (Bankr. D. Utah 1986) In re Phoenix Petroleum Co., 278 B.R. 385 (Bankr. E.D. Pa. 2001)... 9, 14 In re Silberkraus, 253 B.R. 890 (Bankr. C.D. Cal. 2000) In re the Wet Seal, LLC, Case No (Bankr. D. Del. Feb ) ii-

4 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 4 of 21 Table of Authorities (continued) Page(s) Statutes 11 U.S.C. 1122(a) , 8, (b) (a)(3) (a)(7) (a)(9)(A) (a)(11) Other Sources Collier on Bankruptcy, [1] (15th rev. ed. 2009) iii-

5 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 5 of 21 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA IN RE rue21, inc., et al., 1 Debtors. RUE21, INC., ET AL., v. Movants, THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS OF RUE 21, INC., ET AL., Respondent. Case No GLT Chapter 11 (Joint Administration) OBJECTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS TO DEBTORS MOTION FOR ENTRY OF AN ORDER (I) APPROVING THE DISCLOSURE STATEMENT FOR THE DEBTORS JOINT PLAN OF REORGANIZATION PURSUANT TO CHAPTER 11 OF THE BANKRUPTCY CODE, (II) APPROVING CERTAIN DATES RELATED TO PLAN CONFIRMATION, (III) APPROVING PROCEDURES FOR SOLICITING, VOTING, AND TABULATING VOTES ON, AND FOR FILING OBJECTIONS TO, THE PLAN AND APPROVING THE FORMS OF BALLOTS AND NOTICES, AND (IV) GRANTING RELATED RELIEF The Official Committee of Unsecured Creditors (the Committee ) of rue21, inc., et al., as debtors and debtors-in-possession (the Debtors ), by and through its proposed counsel Cooley LLP and Fox Rothschild LLP, hereby submits this objection (this Objection ) to the 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include rue21, inc. (1645); Rhodes Holdco, Inc. (6922); r services llc (9425); and rue services corporation (0396). The location of the Debtors service address is 800 Commonwealth Drive, Warrendale, Pennsylvania

6 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 6 of 21 Debtors motion [Doc. No. 314] (the Motion ) 2 for an order, (i) approving the Disclosure Statement for the Debtors Joint Plan of Reorganization pursuant to chapter 11 of the Bankruptcy Code, (ii) approving certain dates related to plan confirmation, (iii) approving procedures for soliciting, voting, and tabulating votes on, and for filing objections to, the Plan and approving the forms of Ballots and notices, and (iv) granting related relief. In support of this Objection, the Committee respectfully states as follows PRELIMINARY STATEMENT The Committee 3 supports the Debtors efforts to emerge quickly from these chapter 11 cases through a reorganization if the go-forward retailer has sufficient liquidity to support their businesses. Moreover, a confirmable plan is in the best interests of creditors, including general unsecured creditors. Unfortunately, the Plan and Disclosure Statement filed by the Debtors fail both of these goals. Without significant changes to the Disclosure Statement and Plan, the Motion should be denied. The Committee, the Debtors, and the Lenders continue to have discussions regarding improving liquidity and correcting the deficiencies in the Disclosure Statement and the Plan. The Disclosure Statement fails to provide adequate information necessary to meet the standard set forth under section 1125 of the Bankruptcy Code. Specifically, the Debtors fail to disclose that some of their largest vendors and most factors are not currently providing trade terms to the Debtors. Support from the supply chain is critical to the Reorganized Debtors success upon emergence from bankruptcy. The Debtors financial projections require increasingly larger credit terms over time from their vendors and factors to meet their projected 2 Capitalized terms not otherwise defined herein shall have the meaning set forth in the Motion. 3 The Committee consists of several of the Debtors most significant vendors, factors, and landlords as well as the indenture trustee for nearly $240 million of unsecured notes. 2

7 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 7 of 21 liquidity targets. Without the necessary support from the Debtors vendors and factors, the Reorganized Debtors will not meet their liquidity targets, struggle to continue operations, and ultimately file a subsequent bankruptcy. This is a theme seen in numerous retail chapter 22 liquidations. 4 In order to provide adequate information to creditors voting on the Plan, the Debtors must modify the Disclosure Statement to reflect the potential impact of the inability to receive necessary trade terms from vendors and factors on their contemplated restructuring. The Debtors must also include in their Disclosure Statement sufficient information regarding claims and causes of action proposed to be released under the Plan for creditors to evaluate the prudence of those releases. The Plan currently provides estate and third party releases to certain parties, including Apax (as defined herein) and the Debtors directors and officers. Despite the broad releases proposed, the Disclosure Statement contains no information regarding the nature of those claims and their potential value to the Debtors estates. Creditors cannot make an informed decision on whether to accept a plan that includes broad insider releases without knowing the full nature and potential valuation of those claims. To remedy this defect, the Debtors must delay the solicitation of the Disclosure Statement to allow for an investigation that provides a complete description of the nature and valuation of these claims. Additionally, the Debtors must modify the Disclosure Statement to 1. Provide a more thorough description of the distribution and treatment of the New Equity; 4 See, e.g., General Wireless Operations Inc. dba RadioShack, et al., Case No (Bankr. D. Del. Mar. 8, 2017); In re EO Liquidation, LLC (f/k/a Eastern Outfitters, LLC, et al.), Case No (Bankr. D. Del. Feb. 5, 2017); In re the Wet Seal, LLC, Case No (Bankr. D. Del. Feb ); In re APP Winddown, LLC, et al. (f/k/a/ American Apparel, LLC, et al.), Case No (Bankr. D. Del. Nov. 14, 2016). 3

8 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 8 of Provide adequate information regarding the Management Equity Incentive Plan that includes the level of dilution the plan places on the New Equity; and 3. Include certain documents with the Disclosure Statement currently reserved for the Plan Supplement that explains the Reorganized Debtors overall corporate structure and treatment of Intercompany Claims and Intercompany Interests. Moreover, while the Committee recognizes that the Motion pertains only to the sufficiency of the Disclosure Statement, there are instances when, even if a disclosure statement contains adequate information, it is not in the best interests of the estate to allow a disclosure statement to be approved and a plan to be solicited because the described plan cannot be confirmed. In addition to the feasibility issues due to lack of supply chain support, the Plan suffers from several other defects that might render it patently unconfirmable. Most notably, the Plan includes a death-trap that would leave Holders of General Unsecured Claims 5 with no recovery should they vote to reject the Plan. The Plan also targets vendors and factors by requiring them to do business with the Reorganized Debtors under preexisting trade terms by holding required payments of 503(b)(9) Claims hostage for an inappropriately extended period and threatening litigation on claims controlled by, but not benefitting, the Reorganized Debtors. Feasibility of the Plan cannot rest on the Debtors blatant attempt at extorting trade terms from their vendors and factors. Furthermore, these coercive provisions do not establish a plan proposed by the Debtors in good faith. Additionally, under the current iteration of the Plan, it is not clear whether the Debtors have the ability to pay all Administrative Claims as of the Effective Date. The Bankruptcy Code requires that all Administrative Claims can be paid as of the Effective Date. 5 For the purpose of this Objection, any discussion of General Unsecured Claims, unless explicitly stated otherwise, does not include Prepetition Term Loan Deficiency Claims. The Committee believes the Prepetition Term Loan Deficiency Claims should be separately classified from other General Unsecured Claims. See sec. II, infra. 4

9 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 9 of 21 The Plan must provide the ability to pay all Administrative Claims as of the Effective Date, and to the extent it cannot, properly disclose such information in the Disclosure Statement. Removing the coercive provisions in the Plan, negotiating trade terms with vendors and factors in good faith, ensuring payment of Administrative Claims in full, and making the other modifications under the Plan proposed herein would be a step in the right direction toward a supportable and confirmable plan, leading to a successful reorganization. Accordingly, unless the Debtors make the aforementioned modifications to the Disclosure Statement and Plan, the Motion approving the Disclosure Statement and the solicitation thereof should be denied. BACKGROUND I. General 1. On May 15, 2017 (the Petition Date ), the Debtors filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Pennsylvania (the Court ). Pursuant to sections 1107 and 1108 of the Bankruptcy Code, the Debtors continue to operate their businesses and properties as debtors-in-possession. No trustee or examiner has been appointed in these cases. 2. On May 23, 2017, the Committee was appointed in these cases by the Office of the United States Trustee for the Western District of Pennsylvania (the US Trustee ), consisting of the following seven members (i) Mark Edwards Apparel, Inc., (ii) Wilmington Trust, National Association, (iii) Simon Property Group, (iv) The CIT Group/Commercial Services, Inc., (v) Grand Horizon Limited, (vi) Wells Fargo Capital Finance, and (vii) GGP Limited Partnership. That same day, the Committee selected Cooley LLP and Fox Rothschild LLP, as its proposed counsel, and FTI Consulting, Inc. as its proposed financial advisor. 5

10 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 10 of 21 II. The Proposed Plan and Disclosure Statement 3. Prior to the Petition Date, the Debtors negotiated with the Prepetition ABL Lenders, certain Prepetition Term Loan Lenders, and their Sponsor Entities (including Apax Partners, L.P. and its affiliates (collectively, Apax )) to finance and implement a restructuring plan through a chapter 11 bankruptcy. Although the Debtors cite the loss of vendor and factor support as one of the main contributing factors leading to their chapter 11 bankruptcy filing, 6 vendors and factors were not included in these negotiations. 4. As a result of the negotiations, on the Petition Date, the Debtors, the Sponsor Entities, and the Consenting Term Loan Lenders (the Restructuring Support Parties ) memorialized their agreement (the Restructuring Support Agreement ) for restructuring the Debtors. The Restructuring Support Agreement proposes a debt-for-equity swap with the vast majority of new equity in the Reorganized Debtors vesting in the DIP Roll-Up Term Loan Lenders and Prepetition Term Loan Lenders. The only recovery for Holders of General Unsecured Claims is 4% of New Equity with no anti-dilution covenants or explicit tag along, drag along rights in a private company, making the New Equity difficult to monetize. Moreover, the proposed recovery for Holders of General Unsecured Claims includes a death-trap, stripping such Holders of any recovery should they vote not to accept the Plan. Additionally, the Restructuring Support Agreement proposes granting the Sponsor Entities, including Apax, and the Debtors officers and directors broad releases without any consideration. 5. On June 1, 2017, the Debtors filed with the Court their proposed plan of reorganization [Doc. No. 316] (the Plan ) and the accompanying disclosure statement [Doc. No. 315] (the Disclosure Statement ). In addition to the debt-for-equity swap, the death-trap for 6 See Declaration of Todd M. Lenhart, Acting Chief Financial Officer and Senior Vice President of Accounting of rue21, inc. in Support of Chapter 11 Petitions and First Day Motions (the First Day Declaration ) at 40. 6

11 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 11 of 21 Holders of General Unsecured Claims, and broad releases for insiders set forth in the Restructuring Support Agreement, the Plan adds additional coercive provisions designed to force vendors and factors into doing business with the Reorganized Debtors. Specifically, the Plan requires vendors and factors to provide trade terms that similarly situated vendors and factors would not otherwise provide to a retailer of this size with a similar track record and projected liquidity. Moreover, the Reorganized Debtors expressly reserve the right to pursue Reserved Avoidance Actions against vendors and factors that refuse to do business with the Reorganized Debtors on unsecured credit terms. Despite the drastic changes in the Reorganized Debtors and the contingent nature of their projected liquidity, continued business must be on substantially similar terms as provided by a vendor or factor the later of (x) one year prior to the Petition Date or (y) the date that such vendor began accepting orders from the Debtors or that such factor began providing financing support to the Debtors vendors. Notwithstanding whether a vendor or factor decides to continue doing business with the Reorganized Debtors on preexisting terms, the Plan allows the Reorganized Debtors to pursue Reserved Avoidance Actions against any vendor or factor should the Reorganized Debtors unilaterally decide to no longer do business with that vendor or factor. Additionally, the Debtors expressly reserve the right to hold payment of 503(b)(9) Claims hostage for up to 180 days after the Effective Date. 7 III. Potential Claims Against Apax and Committee Investigation 6. Certain claims and causes of action might arise from Apax s 2013 take-private transaction of the Debtors (the LBO ) and any potential distributions Apax has received from the Debtors subsequent to the LBO. The Disclosure Statement provides no description of the consideration Apax received from the acquisition of its public shares through 7 All 503(b)(9) Claims must be filed by August 8, See Modified Default Order (i) Setting Bar Dates for Submitting Proofs of Claim, (ii) Approving Procedures for Submitting Proofs of Claim, (iii) Approving Notice Thereof, and (iv) Granting Related Relief [Doc. No. 623]. 7

12 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 12 of 21 the LBO, nor does it discuss any steps the Debtors Board or Apax took to eliminate any potential conflicts that may have existed as part of the LBO. Additionally, the Disclosure Statement is silent as to what amount, if any, Apax has received from the Debtors since the LBO through fees or dividends. 7. The Committee has begun an investigation into the Apax-related claims and other causes of action involving the Debtors directors and officers surrounding the LBO. If the Debtors have not performed an investigation into these claims as well, solicitation should be delayed until the results of the Committee s investigation can be shared and described in the Disclosure Statement so that creditors can make an informed decision regarding the broad insider releases. If the Debtors have performed an internal investigation into these insider claims or other causes of action, the information regarding that investigation should be provided to the Committee and described in the Disclosure Statement after a thorough review by the Committee. OBJECTION I. The Disclosure Statement Should Not Be Approved Because It Does Not Contain Adequate Information as Required by Section 1125 of the Bankruptcy Code. 8. The Disclosure Statement fails to satisfy section 1125 of the Bankruptcy Code in numerous material respects. Section 1125(b) of the Bankruptcy Code requires that a proponent of a plan and disclosure statement demonstrates that the disclosure statement includes adequate information for creditors and other parties in interest to make an informed judgment about the plan. 11 U.S.C. 1125(b). In determining whether a plan proponent has provided adequate information to creditors and parties in interest, the standard is not whether the failure to disclose information would harm creditors, but whether hypothetical reasonable investors receive such information as will enable them to evaluate for themselves what impact the information might have on their claims and on the outcome of the case, and to decide for 8

13 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 13 of 21 themselves what course of action to take. In re Applegate Prop., Ltd., 133 B.R. 827, 831 (Bankr. W.D. Tex. 1991). Significantly, even if more thorough disclosure would not have affected an objecting creditor s vote, that creditor still has standing to object because inadequate disclosure may have induced other creditors to approve the plan. Everett v. Perez (In re Perez), 30 F.3d 1209, 1217 (9th Cir. 1994). For a creditor to fairly evaluate the results of a proposed plan, a court must ensure that a disclosure statement sets forth all those factors presently known to the plan proponent to bear upon the success or failure of the proposals contained in the plan. See In re Ferretti, 128 B.R. 16, 19 (Bankr. D.N.H. 1991) (holding that a proper disclosure statement must clearly and succinctly inform the average unsecured creditor what it is going to get, when it is going to get it, and what contingencies there are to getting their [sic] distribution. ). 9. Whether a disclosure statement contains adequate information should be assessed from the perspective of the claims or interest holders with the ability to vote. See In re Phoenix Petroleum Co., 278 B.R. 385, 393 (Bankr. E.D. Pa. 2001) (citing In re Monroe Well Serv., Inc., 80 B.R. 324, 330 (Bankr. E.D. Pa. 1987)). See also 11 Collier on Bankruptcy, [1] (15th rev. ed. 2009) (courts should consider the needs of the claims or interest of the class as a whole and not the needs of the most sophisticated or least sophisticated members of a particular class ). 10. Here, as set forth below, the Disclosure Statement omits basic information about matters of primary concern to creditors. Absent such disclosures, creditors have not been provided with adequate information to make an informed decision as to whether to accept or reject the Plan. 9

14 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 14 of 21 A. The Description of the Apax-Related Claims is Inadequate. 11. The Debtors must provide a detailed description of Apax-related claims. As set forth above, the discussion of the Apax-related Claims is completely lacking, as the Disclosure Statement fails to describe any potential claims the Debtors may hold against Apax or the Debtors directors and officers for the actions taken during the LBO. Creditors cannot cast an informed vote on the Plan unless an adequate description of the released claims is provided. 12. Moreover, the Debtors must provide an appropriately conducted valuation of the Apax-related claims in their Liquidation Analysis. Instead, the Debtors simply choose to overlook any litigation claims as hav[ing] not yet been quantified, and thus were not included in this Liquidation Analysis. Disclosure Statement, Ex. C at n.6. The Debtors disengaged attitude with respect to these claims is unacceptable. Creditors need to understand the value of the Apax-related Claims and the nature of the specific causes of action that would be asserted in connection therewith. Without a complete analysis of litigation claims and the inclusion of the value of such claims in the Liquidations Analysis, it is impossible for creditors to have the adequate information to make an informed vote on the Plan to compare their recovery under the Plan to that of a chapter 7 liquidation. As such, the Debtors Liquidation Analysis must be modified to include an appropriate valuation for these Claims. B. The Disclosure Statement Contains Inadequate Disclosures Regarding the Debtors Financial Projections and Risks to the Debtors Businesses. 13. The Disclosure Statement fails to include sensitized financial projections regarding the Debtors need for terms from their vendors and necessary risk factors associated with the inability to obtain necessary vendor and factor support. Financial projections are a necessary component to a disclosure statement for a reorganizing debtor to establish, among other things, the feasibility that the plan will not result in liquidation. The Debtors financial 10

15 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 15 of 21 projections assume limited liquidity following emergence from chapter 11 due to tightening of terms from merchandising vendors. Disclosure Statement, Ex. B. at p. 6. Without increased support from their vendors and factors, the Reorganized Debtors, upon emergence, may be unable to sustain operations and will fall back into bankruptcy to liquidate. The Disclosure Statement should reflect that reality. 14. In addition to comprehensive financial projections, a debtor must also provide all necessary risk factors to allow creditors the ability to make an informed decision when voting on a plan. See In re Ashley River Consulting, LLC, 2015 WL at *7 (Bankr. S.D.N.Y. Nov. 6, 2015) ( A disclosure statement should likewise contain all material information relating to the risks posed to creditors and equity interest holders under the proposed plan of reorganization. (quoting In re Cardinal Congregate I, 121 B.R. 760, (Bankr. S.D. Ohio 1990))); In re Jeppson, 66 B.R. 269, 292 (Bankr. D. Utah 1986) ( Generally, the disclosure statement should set forth all those factors presently known to the plan proponent that bear upon the success or failure of the proposals contained in the plan. " (quoting In re Stanley Hotel, Inc., 13 B.R. 926, 929 (Bankr. D. Colo. 1981))). Here, the Debtors do not provide the required risk factors because the Debtors fail to disclose the current lack of major vendor and factor support. As stated above, lack of such support may likely result in a non-viable operation. Accordingly, the Disclosure Statement must be modified to include necessary risk factors regarding the current lack of vendor and factor support. C. The Disclosure Statement Contains No Disclosure Regarding Treatment of New Equity, the Terms of the Management Equity Incentive Plan, nor the Overall Corporate Structure. 15. The Disclosure Statement provides inadequate information regarding the distribution and treatment of the New Equity to be distributed under the Plan. For instance, the Disclosure Statement states that units of New Equity will be distributed based on the pro rata 11

16 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 16 of 21 share of each creditor entitled to distribution rounded to the nearest whole unit of New Equity. See Disclosure Statement at p. 40. The total number of New Equity units to be distributed shall be adjusted as necessary to account for the foregoing rounding. Id. The Disclosure Statement does not address whether there is a de minimis threshold to receive a New Equity distribution. The Disclosure Statement must clarify whether there is such a de minimis threshold to receive a distribution of New Equity, and, to the extent there is a de minimis threshold, the Debtors must disclose that amount. 16. Moreover, the Disclosure Statement fails to describe the ability to sell or otherwise liquidate Holders of General Unsecured Claims interest, if any, in the New Equity as well as describe other so-called tag along, drag along rights associated with New Equity. The value of minority shares of equity in a nonpublic company are adversely impeded if there are no minority shareholder protections in the organizational documents of the Reorganized Debtors. The Disclosure Statement, therefore, must include a full description of all rights associated with the New Equity. 17. The Disclosure Statement also provides no details related to the Management Equity Incentive Plan. The Disclosure Statement only states that the New Board will adopt and implement the Management Equity Incentive Plan of the Reorganized Debtors with pricing, vesting, and exercise terms to be determined by the New Board. All issuances of New Equity pursuant to the terms of the Plan shall be subject to dilution by instruments issued pursuant to the Management Equity Incentive Plan. Disclosure Statement at p. 34. The lack of any description of the Management Equity Incentive Plan in the Disclosure Statement is unacceptable. Here, where the Restructuring Support Parties are aggressively pushing a Plan that gives general unsecured creditors only 4% of New Equity as their recovery, creditors should 12

17 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 17 of 21 be provided with adequate disclosure regarding the rewards to be handed out to insiders that will come from a dilution of their recovery. 18. Additionally, creditors should have the full solicitation period to review of certain documents, including the New Organizational Documents and the identity of the New Board of the Reorganized Debtors, as the Disclosure Statement currently provides no description of them. The Disclosure Statement also leaves treatment of Intercompany Claims and Intercompany Interests open-ended, providing that the Reorganized Debtors either will cancel or reinstate such Claims and Interests after the Effective Date. The New Organizational Documents may provide some insight into their treatment. Creditors should not have to wait until the filing of the Plan Supplement to learn the identity of the New Board, the overall corporate structure, or treatment of the Debtors Claims and Interests. To provide only 10 days before the Voting Deadline to allow creditors to review and understand these documents does not meet the adequate information standard under section 1125 of the Bankruptcy Code. 19. The Disclosure Statement s silence on necessary information regarding distribution and treatment of the New Equity or the Management Equity Incentive Plan and reserving disclosure of certain documents until the filing of the Plan Supplement do not satisfy the adequate information requirement of section 1125 and should be modified before solicitation of the Plan. Accordingly, the Disclosure Statement should be modified to include information regarding treatment of the New Equity and the Management Equity Incentive Plan, including the attachment of certain corporate documents currently reserved for the Plan Supplement. 13

18 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 18 of 21 II. The Plan Contains Several Facial Deficiencies that Render it Patently Unconfirmable. 20. In addition to the numerous inadequacies set forth in the Disclosure Statement described above, the Plan itself contains several deficiencies that make it patently unconfirmable. While issues of confirmability are typically heard at plan confirmation, a court may deny approval of a disclosure statement where the plan it supports is facially unconfirmable. See In re Silberkraus, 253 B.R. 890, 899 (Bankr. C.D. Cal. 2000) ( [W]here a plan is on its face nonconfirmable as a matter of law, it is appropriate for the court to deny approval of the disclosure statement describing the nonconfirmable plan. ). See also In re Arnold, 471 B.R. 578, 586 (Bankr. C.D. Cal. 2012) (finding that a disclosure statement can be denied due to nonconfirmability of a plan); In re GSC, Inc., 453 B.R. 132, 157 (Bankr. S.D.N.Y. 2011) (same); In re Phoenix Petroleum Co., 278 B.R. at 394 (same); In re Bjolmes Realty Tr., 134 B.R. 1000, 1002 (Bankr. D. Mass. 1991) (same). 21. The following defects in the Plan make it facially unconfirmable 8 The Plan is not proposed in good faith. The Plan uses coercion through the death-trap by threatening to hold back any distributions unless Holders of General Unsecured Claims vote to accept the Plan. The Plan further threatens vendors and factors with litigation unless they do business with the Reorganized Debtors under preexisting trade terms. These coercive tactics, including holding payment of 503(b)(9) claims hostage for 180 days after the Effective Date, do not meet the standard of a Plan proposed in good faith pursuant to section 1129(a)(3) of the Bankruptcy Code. The Plan is not feasible. The Debtors have not shown they have the necessary support from their major vendors and factors to meet their financial projections. Without such support, the Reorganized Debtors may emerge from bankruptcy with insufficient liquidity to sustain a future business and would likely need to reenter bankruptcy to 8 The Committee reserves its right to object to confirmation of the Plan (or any amended plan) on the grounds set forth herein and any other grounds. 14

19 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 19 of 21 liquidate. As a result, the Debtors fail to meet the feasibility standard under section 1129(a)(11) of the Bankruptcy Code. The Plan does not ensure payment of Administrative Claims. The Debtors must prove the ability to pay all Administrative Claims as of the Effective Date. The Plan currently does not provide for the payment of, or the ability to pay, Administrative Claims as of the Effective Date. Without the ability to pay all Administrative Claims as of the Effective Date, the Debtors fail to satisfy section 1129(a)(9)(A) of the Bankruptcy Code. The Releases in the Plan are inappropriate. Releases provided to the Released Parties in the Plan, including Apax and the Debtors Directors and Officers, fail to meet the standard of including such releases in a plan. Most notably, there has been no form of consideration to the Debtors estates in return for the gratuitous releases to insiders. Instead, the claims should remain in trust with the Debtors estates while the Committee completes its investigation to determine what actions, if any, should be taken with respect to the Apax-related Claims. Creditors may do better under liquidation. Under the death-trap scenario, Holders of General Unsecured Claims will be left with no recovery, which is potentially a worse position than if the Debtors estates were liquidated in chapter 7. Although the Debtors Liquidation Analysis provides no recovery to General Unsecured Claims, the analysis fails to quantify the value of litigation claims, including Apax-related Claims potentially unencumbered assets that could provide a form of recovery to Holders of General Unsecured Claims. Without the inclusion of the valuation of potential litigation claims in the Debtors Liquidation Analysis, it is premature to determine that Holders of General Unsecured Claims would receive no recovery in a chapter 7 liquidation. As such, the Plan fails the best interests test under section 1129(a)(7) of the Bankruptcy Code. Claimants are improperly classified. Prepetition Term Loan Deficiency Claims are not substantially similar to General Unsecured Claims. Under the treatment proposed in the Plan, Prepetition Term Loan Deficiency Claims will not receive any recovery. Yet, holders of Prepetition Term Loan Deficiency Claims will still be provided the right to vote in the same class with Holders of General Unsecured Claims. By receiving no recovery under the Plan, Prepetition Term Loan Deficiency Claims should instead be separately classified and deemed not to accept the Plan. Including Prepetition Term Loan Deficiency Claims in the same class with General Unsecured Claims, therefore, does not satisfy section 1122(a) of the Bankruptcy Code. 15

20 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 20 of 21 RESERVATION OF RIGHTS 22. The Committee reserves its right to supplement this Objection at or prior to the hearing or continued hearing on the Disclosure Statement and/or to file any Objections to the Plan or any amended plan. [remainder of page intentionally left blank] 16

21 Case GLT Doc 671 Filed 07/07/17 Entered 07/07/ Desc Main Document Page 21 of 21 CONCLUSION WHEREFORE the Committee respectfully requests entry of an order denying approval of the Disclosure Statement, and granting such other and further relief as the Court deems just and proper. Respectfully submitted, Dated July 7, 2017 Jay Indyke (admitted pro hac vice) Cathy Hershcopf (admitted pro hac vice) Michael Klein (admitted pro hac vice) Cooley LLP 1114 Avenue of the Americas New York, New York Telephone (212) Facsimile (212) Proposed Counsel for the Official Committee of Unsecured Creditors of rue21, inc., et al. AND /s/ John R. Gotaskie, Jr. John R. Gotaskie, Jr. PA ID No Jeffrey M. Schlerf (admitted pro hac vice) Fox Rothschild LLP BNY Mellon Center 500 Grant Street, Suite 2500 Pittsburgh, PA Telephone (412) Facsimile (412) Proposed Co-Counsel for the Official Committee of Unsecured Creditors of rue21, inc., et al. 17

22 Case GLT Doc Filed 07/07/17 Entered 07/07/ Desc Certificate of Service Page 1 of 15 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA In re ) Case No GLT ) rue21, inc., et al., 1 ) Chapter 11 ) Debtors. ) (Jointly Administered) ) ) OFFICIAL COMMITTEE OF UNSECURED ) Hearing Date and Time CREDITORS, ) July 13, 2017 at 200 p.m. ) Movant, ) Objection Deadline ) July 7, 2017 at 500 p.m. v. ) ) NO RESPONDENT. ) ) CERTIFICATE OF SERVICE I hereby certify that on this 7 th day of July, 2017, I electronically filed the Objection of the Official Committee of Unsecured Creditors to Debtors Motion for Entry of an Order (I) Approving the Disclosure Statement for the Debtors Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, (II) Approving Certain Dates Related to Plan Confirmation, (III) Approving Procedures for Soliciting, Voting, and Tabulating Votes On, and for Filing Objections To, The Plan and Approving the Forms of Ballots and Notices, and (IV) Granting Related Relief with the Clerk of the United States Bankruptcy Court, Western District of 1 The Debtors in these chapter 11 cases, along with the last four digits of each Debtor s federal tax identification number, include rue21, inc. (1645); Rhodes Holdco, Inc. (6922); r services llc (9425); and rue services corporation (0396). The location of the Debtors service address is 800 Commonwealth Drive, Warrendale, Pennsylvania

23 Case GLT Doc Filed 07/07/17 Entered 07/07/ Desc Certificate of Service Page 2 of 15 Pennsylvania, using its CM/ECF system and electronically notifying the service list attached hereto as Exhibit A and via FedEx upon the service list attached hereto as Exhibit B In addition, the following parties will be served via before 500 p.m. on July 7, 2017 Jonathan S. Henes, P.C. Nicole L. Greenblatt, P.C. Robert A. Britton George Klidonas Kirkland & Ellis LLP Kirkland & Ellis International LLP 601 Lexington Avenue New York, New York Telephone (212) Facsimile (212) jonathan.henes@kirkland.com nicole.greenblatt@kirkland.com robert.britton@kirkland.com george.klidonas@kirkland.com Proposed Counsel to Debtors and Debtors-in- Possession Julia Frost-Davies Amelia C. Joiner Morgan Lewis & Bockius LLP One Federal Street Boston, Massachusetts Telephone (617) Facsimile (617) julia.frost-davies@morganlewis.com amelia.joiner@morganlewis.com Counsel to the ABL Agent and the DIP ABL Agent Scott J. Greenberg Michael J. Cohen Jones Day 250 Vesey Street New York, New York Telephone (212) Facsimile (212) sgreenberg@jonesday.com mcohen@jonesday.com Counsel to the Backstop DIP Term Lenders, the 2 Eric A. Schaffer Jared S. Roach Reed Smith LLP 225 Fifth Avenue, Suite 1200 Pittsburgh, Pennsylvania Telephone (412) Facsimile (412) eschaffer@reedsmith.com jroach@reedsmith.com Proposed Local Counsel to Debtors and Debtors-in-Possession James D. Newell Timothy Palmer Buchanan Ingersoll & Rooney PC One Oxford Centre 301 Grant Street, 20th Floor Pittsburgh, PA Telephone (412) Facsimile (412) james.newell@bipc.com timothy.palmer@bipc.com Counsel to the ABL Agent and the DIP ABL Agent Gerard Uzzi Eric K. Stodola Matthew R. Koch Milbank, Tweed, Hadley & McCloy LLP 28 Liberty Street New York, New York Telephone (212) Facsimile (212) guzzi@milbank.com estodola@milbank.com mkoch@milbank.com Counsel to the Ad Hoc Cross-Holder Group

24 Case GLT Doc Filed 07/07/17 Entered 07/07/ Desc Certificate of Service Page 3 of 15 Term Loan Lender Group, DIP Term Loan Agent and the DIP Term Loan Agent Elisha D. Graff Jonathan E. Endean Simpson Thacher & Bartlett LLP 425 Lexington Avenue New York, New York Telephone (212) Facsimile (212) egraff@stblaw.com jon.endean@stblaw.com Counsel to the Sponsor Entities FOX ROTHSCHILD LLP s/ John R. Gotaskie, Jr. John R. Gotaskie, Jr. 3

25 Case GLT Doc Filed 07/07/17 Entered 07/07/ Desc Certificate of Service Page 4 of 15 EXHIBIT A

26 Case GLT Doc Filed 07/07/17 Entered 07/07/ Desc Certificate of Service Page 5 of 15 Description CreditorName CreditorNoticeName Counsel to Ashley Mason, LLC Law Offices of Alan J Cohen Alan J Cohen, Esq acohen@cohenlawla.com Unsecured Committee Member Wells Fargo Capital Finance Alexander J. Chobot alexander.j.chobot@wellsfargo.com for the State of South Dakota South Dakota Attorney General Bankruptcy Department atghelp@state.sd.us for the State of Minnesota Minnesota Attorney General Bankruptcy Department attorney.general@state.mn.us Counsel to Hawthorne Works Center, Ltd.; SC Windsor Square, LLC; and SVAP II Stones River, LLC Shraiberg, Landau & Page, P.A. Bernice C. Lee, Esq. blee@slp.law Counsel to The Macerich Company, Starwood Retail Partners LLC, Centennial Real Estate Company, PGIM Real Estate, YTC Mall Owner, LLC, KRE Colonie Owner, LLC, Broadway Mall Owner, LLC, C.E. John Company, Inc., Durango Mall, LLC, Foursquare Properties, Inc., Vintage Capital Group, GEM Realty, Southgate Mall Associates, LLC; Steadfast Companies, Inc.; ARC RBASHNC001, LLC; and ARC NPHUBOH001, LLC Ballard Spahr LLP Dustin P. Branch, Esq. branchd@ballardspahr.com Counsel to El Paseo Investments, LLC Tucker Arensberg, P.C. Brett A. Solomon, Esquire, Matthew J. Burne, Esquire bsolomon@tuckerlaw.com; mburne@tuckerlaw.com Counsel to Westfield, LLC LeClairRyan Carmon M. Harvey, Esq. carmon.harvey@leclairryan.com Counsel to Simon Property Group, Inc. Simon Property Group, Inc. Catherine M. Martin, Esq. cmartin@simon.com Counsel to Hood Cad, Navarro County, Hunt County, Ellis County, Allen ISD, Gainesville ISD, Lewisville ISD, Tarrant County, Stephenville ISD, Lamar CAD, Grayson County, City of Frisco, Dallas County, Parker CAD, Kaufman County, City of Stephenville, Rockwall CAD, Gregg County, City of Wyle, and Irving ISD Counsel to Tuller Square Northpointe LLC, Circleville Partners Limited Partnership, TCCI Broad Street LLC and Linebarger Goggan Blair & Sampson LLP Elizabeth Weller dallas.bankruptcy@publicans.com; dallas.bankruptcy@lgbs.com Westpointe Plaza, L.P. RUDOVLAW David K. Rudov, Esq. david@rudovlaw.com Perdue, Brandon, Fielder, Collins & Counsel to Wylie ISD Mott, L.L.P. c/o Dustin L. Banks dbanks@pbfcm.com Counsel to Janaf Shopping Center, LLC, Mt. Pleasant Shopping Center, LLC, Covington Gateway Acquisition 1-25, LLC, Adrian Acquisition, LLC, Vestar LPTC, LLC, Vestar QCM, L.L.C., Coventry III/Satterfield Helm Valley Fair, LLC, Merle Hay Investors, LLC, Green Oak Phase II Owner, LLC, and Welling W. Fruehauf, SFP Pool One Shopping Centers L.P. and SFP Pool Seven, LLC Clark Hill PLC David M. Blau, Esq. dblau@clarkhill.com 1

27 Case GLT Doc Filed 07/07/17 Entered 07/07/ Desc Certificate of Service Page 6 of 15 Description CreditorName CreditorNoticeName Counsel to KIR Snellville L.P., Primrose Marketplace 625, LLC, Temple Towne Center, L.P., Kimco Mesa, LLC, Kimco Lake Prairie TC, L.P., Copperwood Village LP, PK I Gresham Town Fair LLC, RB Quakertown, LP, Capital Mall JC 1, LLC, and Pine Ridge Mall JC, LLC Clark Hill PLC David M. Blau, Esq. dblau@clarkhill.com Counsel to Greece Ridge, LLC and The Marketplace Donald C Cowan, Jr. dcowan@wilmorite.com Counsel to NP/I&G EastChase Property Owner, LLC Baker Donelson Bearman Caldwell & Berkowitz, P.C. J. David Folds dfolds@bakerdonelson.com Counsel to Wilmington Trust, National Association Leech Tishman Fuscaldo & Lampl, LLC David W. Lampl dlampl@leechtishman.com Counsel to TKG Management, Inc. David P. Primack, Esq. McElroy, Deutsch, Mulvaney & Carpenter, LLP dprimack@mdmc-law.com Counsel to Gordon Brothers Retail Partners, LLC Babst, Calland, Clements & Zomnir, P.C. David W. Ross, Esquire, Erica K. Dausch, Esquire dross@babstcalland.com; edausch@babstcalland.com Counsel to Burleson ISD, City of Cleburne, Cleburne ISD, Johnson County, City of Lake Worth, Arlington ISD, Mansfield ISD, Crowley ISD, City of Grapevine, and Grapevine-Colleyville ISD Counsel to Apax Partners, L.P. Perdue, Brandon, Fielder, Collins & Mott, L.L.P. c/o Eboney Cobb ecobb@pbfcm.com Elisha D. Graff, Nicholas Baker, and egraff@stblaw.com; nbaker@stblaw.com; Simpson Thacher & Bartlett LLP Jonathan E. Endean jon.endean@stblaw.com for the State of Washington Washington Attorney General Bankruptcy Department ago@atg.wa.gov Counsel to Brixton Rouge, LLC, a Delaware Limited Liability Company Bewley Lassleben & Miller LLP Ernie Zachary Park ernie.park@bewleylaw.com Counsel to North Riverside Park Associates, LLC Robinson Brog Leinwand Greene Genovese & Gluck, P.C. Fred B. Ringel, Esquire fbr@robinsonbrog.com Counsel to GGP Limited Partnership GGP Limited Partnership, as Agent Kristen N. Pate ggpbk@ggp.com Counsel to Ad Hoc Cross-Holder Group Milbank, Tweed, Hadley & McCloy LLP Gerard Uzzi, Eric K. Stodola guzzi@milbank.com; estodola@milbank.com Counsel to the Ad Hoc Cross-Holder Group Milbank, Tweed, Hadley & McCloy LLP Gerard Uzzi and Eric K. Stodola and Matthew R. Koch guzzi@milbank.com; EStodola@milbank.com; MKoch@milbank.com United States Trustee for the Western District of Pennsylvania Office of the United States Trustee Heather A. Sprague Heather.Sprague@usdoj.gov Unsecured Committee Member Grand Horizon Limited Heather Tarchine, Director of Sales heather.tarchine@grandhorizon.com Counsel to Harris County, Galveston County, Montgomery County, Fort Bend County, Orange County, Angelina County, Cypress-Fairbanks ISD, and Matagorda County Counsel to the ABL Agent and the DIP ABL Agent Linebarger Goggan Blair & Sampson LLP John P. Dillman houston_bankruptcy@publicans.com james.newell@bipc.com; James D. Newell, Timothy Palmer, timothy.palmer@bipc.com; Buchanan Ingersoll & Rooney PC Kelly M. Neal kelly.neal@bipc.com Counsel to City of Wichita Falls, Wichita Falls Independent Perdue, Brandon, Fielder, Collins & School District and Wichita County Mott, L.L.P. c/o Jeanmarie Baer jbaer@pbfcm.com Counsel to City of Mercedes and Maverick County Perdue, Brandon, Fielder, Collins & c/o John T. Banks jbanks@pbfcm.com 2

28 Case GLT Doc Filed 07/07/17 Entered 07/07/ Desc Certificate of Service Page 7 of 15 Description CreditorName CreditorNoticeName Mott, L.L.P. Counsel to DIP Term Loan Agent, the Prepetition Term Loan Agent, certain of the DIP Term Loan Lenders and the Term Loan Lender Group Jones Day Jeffrey J. Bresch jbresch@jonesday.com Counsel to Ad Hoc Cross-Holder Group JONES DAY Jeffrey J. Bresch jbresch@jonesday.com Counsel to Brixmor Property Group, Inc., Aronov Realty Management, Devonshire REIT, The Weitzman Group and Kravco Company, The Macerich Company, Starwood Retail Partners LLC, Centennial Real Estate Company, PGIM Real Estate, YTC Mall Owner, LLC, KRE Colonie Owner, LLC, Broadway Mall Owner, LLC, C.E. John Company, Inc., Durango Mall, LLC, Foursquare Properties, Inc., Vintage Capital Group, GEM Realty, Southgate Mall Associates, LLC; Steadfast Companies, Inc.; ARC RBASHNC001, LLC; and ARC NPHUBOH001, LLC, North Riverside Park Associates, LLC, KRG Shops at Moore, LLC, KRG Plaza Green, LLC, KRG Evans Mullins, LLC, KRG Aiken Hitchcock, LLC, KRG New Hill Place, LLC, KRG Las Vegas Centennial Center, LLC, KRG Dallas Wheatland, LLC, and KRG Alcoa Hamilton, LLC James F. Grenen, Esquire, Brian M. Grenen & Birsic, P.C. Kile, Esquire Counsel to Gumberg Associates-Cranberry Mall Goehring, Rutter, Boehm Jeffrey R Hunt, Jessica L Crown jhunt@grblaw.com jgrenen@grenenbirsic.com; bkile@grenenbirsic.com Counsel to Ramco-Gershenson Properties, Levin Management Corporation and Phillips Edison & Company Stark & Stark, P.C. Joseph H. Lemkin, Esquire, Thomas S. Onder, Esquire jlemkin@stark-stark.com; tonder@starkstark.com Counsel to The Comptroller of Public Accounts of the State of Texas The Comptroller of Public Accounts of the State of Texas John Mark Stern john.stern@oag.texas.gov Counsel to the ABL Agent and the DIP ABL Agent Morgan, Lewis & Bockius LLP Julia Frost-Davies, Amelia C. Joiner, Robert A.J. Barry julia.frost-davies@morganlewis.com; robert.barry@morganlewis.com; amelia.joiner@morganlewis.com Unsecured Committee Member GGP Limited Partnership Julie Minnick Bowden Julie.minnick@ggp.com Counsel to Travis County Travis County DAVID ESCAMILLA kay.brock@traviscountytx.gov Counsel to Athens Center, LLC, Plainview Crossing, LLC, Big Spring Crossing, LLC, Bay City BSP, LLC, and Alice Shopping Center Phase 6, Ltd. Frost Brown Todd LLC Kevin L. Colosimo kcolosimo@fbtlaw.com 3