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Frederick’s of Hollywood, the racy lingerie maker that recently filed for Chapter 11 bankruptcy protection, will try to fend off creditors holding about $70 million in debt by arguing they overlooked a technicality nullifying their secured status. The lenders, led by Banque Indosuez, failed to file a crucial Uniform Commercial Code form in Arizona, where most of Frederick’s assets are held, said Michael Tuchin, a partner at Los Angeles-based law firm Klee, Tuchin, Bogdanoff & Stern LLP, which is representing the company in the bankruptcy. “A creditor is required to perfect its security interest in collateral,” Tuchin said. “[In] the bankruptcy court, you can void any liens that aren’t perfected.” Another tack Tuchin said he may pursue is to get about $30 million in loans cancelled by arguing the money paid out to shareholders in the company’s 1997 leveraged buyout constituted a so-called fraudulent transfer. “The company and its counsel are investigating potential fraudulent transfer against lenders [led by Credit Agricole, which acquired IndoSuez in 1996] with regard to the LBO,” Tuchin said. “The lender provided approximately $30 million of loans, but the money went to company’s shareholders and expenses of the LBO and not to the company.” LBOs often take on debt to finance a payout to shareholders and fees associated with the transaction, but it’s not unusual for companies in Chapter 11 to fight to nullify such borrowings, Tuchin said. “We’re investigating whether we can establish the fraudulent transfer argument,” he said. Chicago-based private equity firm Knightsbridge Inc. had taken the company private in a $67.4 million LBO. The company, which has $65 million in assets, now labors under $70 million in debt. About three weeks ago, Wilshire Partners, a Newport Beach, Calif.-based investment firm, bought Frederick’s out from Knightsbridge with the intention of engineering a turnaround. Wilshire officials didn’t return calls, but Tuchin said the firm had hoped it could renegotiate the company’s burdensome debt with lenders, even though it knew a Chapter 11 filing was a distinct possibility. “Wilshire had hoped to work something out with creditors – in particular, with secured creditors,” Tuchin said. “They bought the company because they believed in the brand. They recognized that a Chapter 11 filing may be necessary, but they wanted to pursue all options before that.” Frederick’s said it’s getting some help in the form of $12 million debtor-in-possession financing from Ableco Finance LLC, an affiliate of Cerberus Capital Management LP, and Gabriel Capital Group. The company also has hired a turnaround adviser, Crossroads LLC, also of Newport Beach. Copyright (c)2000 TDD, LLC. All rights reserved.

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