J.C. Penney has received a notice of default from some of its bondholders, but the company has declared it “invalid and utterly without merit.”

According to a Feb. 4 Penney press release, Brown Rudnick, a law firm claiming to represent more than 50 percent of the company’s 7.4 percent bondholders, sent Penney a letter asserting it has violated the terms of its bond agreement by entering into an inventory-secured credit agreement without proving security for the holders.

The company counters that the agreement in question never involved inventory, and has filed an action in Delaware state court seeking an order enjoining the trustee from declaring a default, as well as a declaration that it is not in default.

The suit says the letter’s “very existence exposes JCP to imminent, irreparable harm.”

“The purported Notice of Default is defective for a variety of reasons,” the suit asserts. “First, JCP has never borrowed money under the 2012 CreditFacility, and owes no money under it. Although JCP has the ability to borrow, it has not done so. JCP is not indebted for money borrowed under the 2012 Credit Facility.”

While concerns about the chain’s financial condition have increased since it began its recent transformation, some observers have rallied to Penney’s side.

“Brown Rudnick came in with a long-shot argument, and now the market is realizing that it’s really unlikely they’ll win,” Adam Cohen, founder of Covenant Review, told Bloomberg.

Still, Penney does appear to be trying to cut costs, with The New York Post reporting that the company plans to slash hundreds of jobs in its home office. 

Rob Bates

JCK News Director