Shareholders of Bankrupt J.C. Penney Get a $250,000 Lifeline

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J.C. Penney Co. shareholders got a helping hand Tuesday from U.S. Bankruptcy Judge David Jones.

Jones will order the retailer to pay as much as $250,000 in professional fees to support an informal group of shareholders who have been challenging the bankruptcy, he said in a hearing Tuesday. In exchange, the group of retail investors agreed to nix its attempt to have the whole case thrown out along with its request for status as an official group, which could’ve resulted in huge legal bills for J.C. Penney.

Shareholders typically get no recovery in a Chapter 11 bankruptcy, but the legal fights that result from pugnacious stockholders can slow down a case and hurt recoveries for creditors. Jones said he views the compromise as a way to help educate shareholders on where the case is headed and how bankruptcy works.

“I’m looking at this as a very reasonable expenditure to further education and promote discussion,” Jones said. “It’s not a war chest.”

The news comes on the heels of a head-scratching surge in the stock prices of J.C. Penney and other bankrupt companies. Some of the retailer’s bonds, which rank well above shares in the repayment line, were recently preliminarily valued at just 1.375 cents on the dollar in a credit-default swap auction, implying extremely slim odds of any payout to equity investors.

Still, J.C. Penney shareholders have been active participants in its bankruptcy proceedings to date. Several have asked questions during hearings, including cross-examining witnesses and pleading with Jones to prevent a wipeout of the stock. In court papers, the informal stockholder group decried recent bonus payments to executives and insisted that bankruptcy could’ve been avoided.

“If there is any possible way — any way — to give a meaningful recovery to shareholders, we will fight for it,” Joshua Sussberg of Kirkland & Ellis, J.C. Penney’s bankruptcy lawyer, said in the hearing. But he added that not filing for bankruptcy “would have left the company on a desolate island without a chance for survival.”

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