J.C. Penney sues to block bondholders from declaring default

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February 5, 2013 10:07 AM EST

J.C. Penney Co Inc filed a lawsuit on Monday asking a Delaware judge to declare that it is not in a default of its bond agreements, protecting nearly $3 billion of debt from being due in the coming months.

The lawsuit was filed after J.C. Penney received a letter earlier on Monday from the Brown Rudnick law firm which said the retailer had breached a covenant of a bond indenture agreement by granting a lien on its inventory, according to the complaint which was filed in the Delaware Court of Chancery.

The indenture agreement related to $326 million of outstanding bonds that mature in 2037, although the letter said that J.C. Penney could be in default on all of its $2.9 billion bond debt, according to the lawsuit.

The letter also said bondholders believed that J.C. Penney's debt could be declared payable in less than three months, according to the lawsuit.

The letter said Brown Rudnick represented investors who hold more than half of the outstanding bonds due in 2037, according the complaint, which seeks to be heard on an expedited basis.

In the complaint, J.C. Penney noted that the demand from Brown Rudnick came as the company is investing significantly to update its stores.

J.C. Penney has been struggling with plunging sales for almost a year as chief executive Ron Johnson has tried to eliminate most discounts while also transforming each of its 700 largest stores into a collection of 100 shops for brands like Levi's and PVH Corp's Izod band.

Customers balked at the new pricing and the retailer has backtracked on some of its pricing policy.

The stock is down more than 50 percent in the past 12 months.

The case is JC Penney Company Inc v U.S. Bank National Association, Delaware Court of Chancery, No. 8276.

(Reporting By Tom Hals in Wilmington, Delaware; Editing by Tim Dobbyn)

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