A new wrinkle in the planned bankruptcy of retailer JC Penney (NYSE:JCP) emerged Thursday as a group of lenders, including Aurelius Capital Management, is attempting to oust the original lenders from the process by offering JC Penney a loan with better terms.

When JC Penney filed for Chapter 11 bankruptcy in mid-May, its bankruptcy financing appeared to be settled. Silver Point Capital and H/2 Capital Partners led a group of creditors offering JC Penney $900 million in financing while imposing a strict restructuring schedule on the retailer. 

A lawyer holding bankruptcy papers.

Image source: Getty Images

Now, however, a challenge has emerged from Aurelius and its allied lenders. Supported by JC Penney’s unsecured creditors, they are offering it a more lenient, flexible loan package which will help it avoid liquidation. Lawyers for the new group say the “court and the debtors should not be bullied into yielding to the threats of predatory lending terms that come at the expense of employees, customers, vendors and other creditors.”

The attorneys also claim Silver Point and H/2 “threatened to use their 75% position in the first lien debt to force the debtors into a liquidation if they don’t get their way.” One of the lawyers, Cathy Herschcopf, additionally stated that given JC Penney’s $1 billion in unencumbered real estate and $450 million in cash reserves, the bankruptcy filing itself may be unnecessary.

Joshua Sussberg, a lawyer for JC Penney, said that the retailer would have accepted the Aurelius group’s offer, but Wells Fargo (NYSE:WFC), one of its creditors, nixed the deal. He added that if JC Penney tried to buck Wells Fargo’s veto, management would end up “embroiled in a nasty litigation and spend the next 45 days trying to keep the company alive.”

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