UPDATE 1: Forever 21, UST Agree to Limit Paul Weiss Retention to Non-Bankruptcy Advice, Documentation of Asset Sales

Thu Apr 17, 2025 09:52 AM ET: The Forever 21 debtors reached a deal with the U.S. Trustee on the terms of the debtors’ retention of Paul Weiss as special corporate and finance counsel, according to a revised retention order filed last night, April 16. Today’s continued retention hearing has been canceled, according to an amended agenda.

According to a blackline attached to the revised retention order, the parties have agreed that Paul Weiss’ retention will be limited to non-bankruptcy advice and documentation of asset sales, exclusive of inventory liquidations and transactions assigning intellectual property.

The UST challenged the retention application based on Paul Weiss’ prepetition representations of equityholders SPARC, Simon Property Group and IP-licensor Authentic Brands Group in matters related to the debtors, including J.C. Penney’s 2024 acquisition of debtor-parent SPARC, as well as the firm’s concurrent representations of these parties in matters unrelated to the debtors.

Forever 21 Obtains Final Cash Collateral Approval After Deal Reached With UCC; Court Expresses Concern Over Paul Weiss’ Prepetition Involvement, Continues Retention Hearing to April 17

Relevant Document:
Final Cash Collateral Order

At the second day hearing this afternoon, Judge Mary F. Walrath approved the Forever 21 debtors’ final cash collateral order after the debtors reached a deal resolving an objection from the official committee of unsecured creditors. The court adjourned the debtors’ application to retain Paul Weiss as special corporate and finance counsel to Thursday, April 17, at 10 a.m. ET, after expressing concern about the firm’s prepetition involvement with preparing the debtors’ cases.

The debtors said today that they would work with the Office of the U.S. Trustee to resolve its objection to the Paul Weiss retention application ahead of Thursday’s hearing. In its objection, the UST argues that Paul Weiss holds an adverse interest to the debtors’ estates because the firm represented equityholders SPARC, Simon Property Group and IP-licensor Authentic Brands Group in matters related to the debtors, including J.C. Penney’s 2024 acquisition of debtor-parent SPARC.

According to the certification of counsel filed on April 14 attaching the debtors’ revised proposed final cash collateral order and budget, the changes reflected in the blackline resolved all objections to the final order, including from the official committee of unsecured creditors.

The revisions include the release of ABL and subordinated loan adequate protection liens on avoidance actions and proceeds if a plan goes effective before June 30 and an increase in the UCC’s prepetition lien investigation budget to $100,000 from $50,000. Although the 506(c) and marshaling doctrine waivers remain in place, Justin Alberto of Cole Schotz, for the official committee of unsecured creditors, explained today that the “collateral is fully unencumbered going forward if a plan is confirmed, but if not, the debtors can marshal away from previously unencumbered collateral.”

The court also heard the debtors’ application to retain Paul Weiss as special corporate and finance counsel at today’s hearing. Andrew Magaziner of Young Conaway Stargatt & Taylor, the debtors’ general bankruptcy counsel, argued that Paul Weiss’ involvement in the chapter 11 cases is in the best interest of the debtors’ estate given the firm’s institutional knowledge of the debtors. In response to the UST’s objection, Magaziner pointed out that the firm stopped representing other parties in matters related to the debtors in January 2025. As a result, Paul Weiss holds no adverse interests to the debtors in any matter for which it would be retained, Magaziner maintained.

Megan Seliber, counsel for the UST, pressed the UST’s objection and argued that the scope of Paul Weiss’ retention includes the work the firm did prepetition, including its extensive involvement in drafting the plan and working on cash collateral matters, and is impermissible under the Bankruptcy Code’s retention requirements.

Judge Walrath seemed to agree with the debtors that Paul Weiss’ January 2025 cessation of various nondebtor representations related to the chapter 11 cases means that the firm does not hold an adverse interest to the debtors. However, the judge seemed troubled by the scope of the firm’s work, questioning how Paul Weiss could be retained as special counsel if the firm “do[es] the entire bankruptcy case before filing,” including drafting a plan or postpetition financing.

After a short break during which the debtors and the UST attempted to resolve the UST’s objection, Joe Graham of Paul Weiss said that the firm had agreed to additional limitations on the scope of its involvement in the debtors’ cases, including the elimination of any involvement in the debtors’ ongoing liquidation of inventory and leases.

Judge Walrath seemed pleased by this development: “I don’t have any major concerns with the scope you are discussing,” she said. The judge encouraged the parties to continue working together to resolve the UST’s objection and added that if the parties reach an agreement, they can file a revised order under certification of counsel and cancel Thursday’s continued hearing on the Paul Weiss retention application.