International law firm Milbank, Tweed, Hadley & McCloy LLP should be barred from representing Gymboree in its bankruptcy case because the firm also represents potential adversaries, a federal bankruptcy watchdog said.

Milbank’s former and current representation of Bank of America and Goldman Sachs in other matters creates an impermissible conflict of interest, the U.S. Trustee said in a Feb. 12 court filing.

The firm risks not getting paid for any of the work it performed for the liquidating retailer since the Jan. 17 bankruptcy filing if the court rejects its employment application.

The U.S. Trustee—an arm of the Justice Department charged with overseeing bankruptcy matters—also objected Feb. 12 to Gymboree’s request that it be allowed to pay certain employees bonuses.

Children’s apparel merchant Gymboree filed Chapter 11 Jan. 17 for the second time, only roughly 16 months after emerging from a Chapter 11 case it filed in 2017. Kirkland & Ellis LLP represented the company in its first trip through bankruptcy.

Gymboree reduced its debt in the first case, but because of persistent, significant operational challenges it’s now seeking to close all its stores and liquidate its assets, the company said in court filings.

Milbank can’t represent Gymboree because it fails to meet the requirement that it be “disinterested,” meaning that it doesn’t represent any interests potentially adverse to the debtor, the trustee said.

Other Clients, Different Interests

Milbank currently represents Bank of America and Goldman Sachs in unrelated matters, as the firm said in its employment application.

Goldman comprised over 4 percent of Milbank’s annual revenues in 2017 and 2018, and Bank of America accounted for more than 1 percent of 2017 and 2018 income, the trustee said.

At the same time, Gymboree lists Goldman and BofA as “potential parties in interest.” The trustee said they are both “significant creditors” of Gymboree.

Gymboree lists Bank of America as a banker and lender, and says Goldman Sachs is an equity holder and lender.

Goldman is also an affiliate of the proposed purchaser of Gymboree’s assets, Special Situations Investing Group, Inc.

Bank of America was the administrator of pre-bankruptcy asset-based loans that were paid off in full early in the case, “upon negotiations with Milbank,” the trustee said.

No conflict waiver “can insulate Milbank from the disqualifying factors,” the trustee said.

Judge Keith L. Philips of the U.S. Bankruptcy Court for the Eastern District of Virginia will consider Milbank’s employment application Feb. 15.

The trustee also objected to Gymboree’s motion for permission to pay certain employees bonuses as part of “key employee” retention and incentive plans. The majority of a proposed bonus/severance pool of $2.2 million is going to at least one insider of the company, tied to the valuable Janie and Jack brand, the trustee says.

It says that Gymboree failed to show that paying the bonuses is necessary and represents an exercise of “sound business judgment.”

The case is In re: Gymboree Group, Inc., Bankr. E.D. Va., 19-30258, Objection to Application 2/12/19.