News & Analysis

Levine Leichtman sues Apollo over Linens ’n Things

In its third lawsuit in six years, Levine Leichtman has claimed Apollo failed to mark down assets used to collateralise its debt.

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Private equity firm Levine Leichtman Capital Partners is suing Apollo Management, alleging that Apollo made materially false statements about the health of its portfolio company Linens ’n Things prior to Levine Leichtman making a loan to the now-bankrupt retailer.

Also named in the suit are Apollo partners Peter Copses and Andrew Jhakar, Linens ’n Things executives Robert DiNicola and Francis Rowan, and co-investors NRDC Real Estate and Silver Point Capital.

One of Levine’s leveraged loan funds held $43.5 million in senior secured notes in Linens ’n Things, which has since filed for bankruptcy. Those notes were collateralised by the company’s equipment, intellectual property rights and general intangibles, as well as its “long-lived assets”, all of which were supposed to have been carried at fair value.

Levine alleges in the suit that Apollo made materially false statements about the fair value of these assets, violating Generally Accepted Accounting Principles and Securities and Exchange Commission rules and regulations.

“From 27 March 2007 until 2 May 2008, by not properly applying its stated policies, Defendants negligently portrayed Linens’s financial condition significantly better than it was to the detriment of noteholders such as plaintiff Levine,” the suit states.

Because impairment charges were not being taken in a timely fashion and recorded in accordance with GAAP, Levine says, some of the notes were in default. Because the cedit facility contained cross-default covenants, the cedit facility itself also was in default.

Yet DiNicola told a Levine analyst that “if you look at the credit facility, we have enough excess availability to support the business, and with the additional $100 million that will just give us more room to run the business and get through the turn around and grow the business going forward. . . So we’re comfortable with the credit facility today, and we’re excited about the support we received on a go-forward basis with the addition of $100 million by the end of the second quarter. “

Levine also claims in the suit that Apollo failed to follow through on its investment thesis of reducing square footage by closing underperforming stores, until after the company filed for bankruptcy.

The lawsuit is Levine’s third in six years. 

In October 2006, Levine sued Butler International, a Montvale, New Jersey-based provider of technology outsourcing, for “breach of contract and negligent misrepresentation” related to an agreement under which Levine Leichtman was to acquire more than one million shares of Butler’s common stock. Levine sought more than $1.3 million in damages, but was awarded $1.27 million.
In July 2001, Levine countersued General Motors Acceptance Corp. Commercial Credit, after GMAC sued Levine for $42.8 million for allegedly falsifying information in order to deceive the group into providing a $40 million loan for the firm’s takeover of California Fashion Industries in July last year. Levin in turn, claimed that GMAC and the owners of California Fashion Industries duped them into attempting a turnaround acquisition of the sportswear chain.