Party City Holdco Inc. has filed an adversary complaint in its ongoing bankruptcy case seeking to protect its former executives from parallel litigation related to employee layoffs that occurred just before the company filed for Chapter 11 protection.
In a filing submitted February 26 to the U.S. Bankruptcy Court for the Southern District of Texas, Party City asked the court to declare that the automatic stay provisions of bankruptcy law should block a lawsuit pending in New Jersey federal court against numerous former executives and employees.
The retailer, which filed for Chapter 11 protection on December 21, 2024 (Case No. 24-90621), contends that former employees are pursuing identical claims under the Worker Adjustment and Retraining Notification (WARN) Act in two separate forums—directly against the company in bankruptcy court and against former executives in New Jersey.
"The Defendants assert claims under the WARN Act and the New Jersey WARN Act related to their termination by Party City on December 20, 2024," the complaint states. "The Defendants are prosecuting parallel claims against the Debtors, as reflected by the fact that the proceedings were filed by the same plaintiffs, assert the same claims, based on the same alleged actions, and the Defendants are represented by the same lawyers in both suits."
Party City argues that allowing the New Jersey litigation to proceed would drain limited insurance resources and divert attention away from the bankruptcy proceedings. The company notes that it has a liability insurance policy covering attorneys' fees to defend WARN Act claims, but only up to a $1 million threshold, which would be depleted by defending multiple proceedings.
The company also cited its broad indemnification obligations to former executives under its corporate charter, suggesting that any judgment against the executives would effectively become a judgment against the bankrupt estate.
"It is prejudicial to the Debtors' defense to have parallel litigation pending elsewhere regarding the exact same issues and the exact same alleged conduct, and where all of the relevant information concerning the claims belongs to the Debtors, not the individual defendants," Party City stated in its complaint.
The retailer is represented by Porter Hedges LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP in the bankruptcy proceedings.
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