Financial services company Bread Financial Holdings Inc. and its CEO have asked an Ohio federal judge to toss a proposed investor class action over the alleged "death spiral" of a now-bankrupt spinoff company, saying the suit actually details Bread's "good faith efforts" to establish the spinoff as a successful independent venture.

In a dismissal bid Friday, Bread and CEO Ralph Andretta told U.S. District Judge Edmund A. Sargus Jr. and U.S. Magistrate Judge Elizabeth Preston Deavers that allegations from New York-based financial management firm Newtyn Partners LP should be dismissed with prejudice. Setbacks sustained by Bread spinoff Loyalty Ventures after it became a separate company, the defendants argued, "are not a basis for claiming fraud."

Bread pointed out that it had retained a "significant" 19% equity stake in its spinoff, which was at one point valued at about $50 million, as support for its contention that Bread had a literal vested interest in Loyalty Ventures' prosperity.

Based on that investment, Bread argued, the most plausible inference would be that it "believed that the spinoff would be in the best interests of [Bread] stockholders, and that Loyalty Ventures had sound prospects for success as a stand-alone company."

In the most recent version of the investor suit, filed in March, Newtyn Partners alleges that Loyalty Ventures was in "absolute freefall" at the time that Bread spun it off.

Bread Financial, previously known as Alliance Data Systems Corp., issues credit cards for retailers including the NFL, roadside service organization AAA, and Ulta Beauty. It also offers other financial products, such as personal loans and savings accounts.

Loyalty Ventures was created to operate "data-driven, tech-enabled global" loyalty programs for Bread's retailer clients, according to Bread.

According to Newtyn Partners, the spinoff deal saw Loyalty Ventures raise over $650 million in new debt that allegedly was used to help fund a $750 million cash payment to Bread as Bread was "struggling mightily" to fund its credit card operations.

But only 16 months after the spinoff, Loyalty Ventures filed for bankruptcy in Texas and kicked off insolvency proceedings in Canada, telling the U.S. bankruptcy court that it had $656 million in secured debt and citing the loss of sponsor contracts among the key drivers of its issues. Loyalty Ventures "subsequently liquidated its assets for pennies on the dollar," Newtyn Partners alleges.

At the heart of Loyalty Ventures' troubles was a decision by its second-largest client, Canadian grocery chain Sobeys, to terminate its contract with the company by the end of 2022, Newtyn Partners alleges. The suit claims Bread knew of this for months prior to the spinoff and should have disclosed this to investors.

In Friday's dismissal bid, Bread also argued that it had no duty to disclose that Sobeys had "threatened to terminate its contract prior to the spinoff, and was renegotiating its terms," telling the court that Sobeys had just "exercised a contractual right to accelerate the date on which it could terminate its sponsor agreement."

"[That] does not mean (nor does the complaint allege particularized facts showing) that Sobeys permanently broke off renewal negotiations or gave definitive notice that it would not ultimately sign a new sponsor contract," Bread's motion states, adding that it would have been premature to disclose its dealings with Sobeys. It would "put companies in untenable positions that do not serve the investing public" if they were required to disclose things like that, Bread argued.

Bread's characterization of Sobeys' termination statements stand in contrast to the complaint's allegation that Sobeys "unequivocally informed ADS in January 2021" that it was terminating its contract.

Bread also said certain of its statements cited in the complaint were inactionable "rosy affirmation commonly heard from corporate managers and numbingly familiar to the marketplace," citing 2011 precedent from the same judicial district regarding corporate puffery.

Among other things, Bread also claimed Loyalty Ventures properly highlighted relevant risks in its registration statement—a filing that Bread noted it was not responsible for. Bread further pointed out that the complaint cites certain events that occurred outside its proposed class period.

Newtyn Partners seeks to hold Bread Financial, Andretta, and two Loyalty Ventures executives, Charles J. Horn and John J. Chesnut, liable for its losses.

Horn and Chesnut also sought to see the claims they face dismissed with prejudice in a separate Friday filing, arguing that their company's disclosures made clear that "Loyalty faced significant challenges to retain sponsors."

On Tuesday, a representative for Bread told Law360 via email the company doesn't comment on pending litigation.

Representatives for the investors and the Loyalty Ventures executives did not immediately respond to requests for comment Tuesday.

Newtyn Partners is represented by Maya Saxena, Lester R. Hooker, Dianne M. Pitre, Jonathan Lamet, Steven B. Singer, Kyla Grant, David J. Schwartz and Rachel A. Avan of Saxena White PA and John C. Camillus of the Law Offices of John C. Camillus LLC.

Bread Financial and CEO Ralph J. Andretta are represented by Charles S. Duggan, Benjamin S. Kaminetzky, Michael V. Pucci and Oliver A. Kaufman of Davis Polk & Wardwell LLP, and Daniel J. Guttman, Douglas Vonderhaar and Mathew Drocton of BakerHostetler.

Loyalty Ventures executives Charles J. Horn and John J. Chesnut are represented by Peter A. Stokes and Michael A. Swartzendruber of Norton Rose Fulbright LLP, and Joseph Steven Justice of Dungan & LeFevre Co LPA.

The case is Newtyn Partners LP et al., v. Alliance Data Systems Corp. et al., case number 2:23-cv-01451, in the U.S. District Court for the Southern District of Ohio.