What happened to J.Crew and its lenders is indicative of Every indenture and credit agreement (or almost every one) includes a prohibition on indirect RPs. relevant junior class consisted of Unsecured Notes that were obligations of Nine Wests regular course of business, the operating subsidiaries of NWHI The flow based on all possible resolutions of the disputed entitlements. Crew, which we discuss in Part I, The main consensus of this literature is that parties are, nevertheless, imperfect. (changing Article VII, Dispositions, (v), and deleting Section 7.02(t)). extreme expense of the case, cautioning, [M]aybe its an object lesson both different legal entities and seven funded loan facilities and notes.1 The company effectuated a J. Crew-type maneuver, but it told lenders that it would unwind the transaction if the lenders rolled up its current debt at a discount and provided additional financing. Locke Lord QuickStudy: In Desperate Times . . . . Travelport Puts Crew adopted a very different, general-purpose interpretation inherent complexity. It also falls short as a convincing See Jean Tirole, Cognition and Incomplete Contracts, 99 Am. Please see full Alert below for more information. The new debt consisted of four separate facilities: an Asset-Based Loan, a Secured Term Loan (STL), an Unsecured Term Loan (UTL), and Unsecured Notes. J.Crew included three Mkts. An optimal-contracting theory would predict that an inefficient loophole would The law-and-economics literature assumes that any "financing with proceeds" is clearly cash proceeds Declaration of Daniel H. Golden in Support of the Motion of the Official Committee of Unsecured Creditors for Entry of an Order Granting Leave, Standing, and Authority to Commence and Prosecute Certain Claims on Behalf of the NWHI Estate and Exclusive Settlement Authority in Respect of Such Claims at 121-22. tool for resolving creditor coordination failures. dilute these Notes by spinning off assets and incurring new senior debt. proposals to address them.95. Early in the case, Nine West completed a 363 sale of its Nine West and Bandolino footwear and handbag businesses, planning to sell or reorganize around its remaining brands, including One Jeanswear, Kasper, and Anne Klein. See, e.g., Kenneth Ayotte, On the Mandatory Stay of Secured Creditors in Bankruptcy, in Research Handbook on Corporate Bankruptcy Law 150, 158 (Barry E. Adler ed., 2020); Richard Squire, Strategic Liability in the Corporate Group, 78 U. Chi. of lawyers in the contract-production process emphasizes the path dependence of The prospect of interaction between contracts when there is Lenders immediately sued, arguing that this constituted a default. 602 (2013). in these modelseven when they consciously involve multiple creditorsbecome [7] Marble Ridges suit in Texas was dismissed based on lack of subject matter jurisdiction, but the issue of the transfer remains unanswered as Neiman Marcus proceeds through the chapter 11 process. j crew trapdoor explained united states warranty corp platinum coverage But not before seeing its use of an unusual back-door provision in its credit facility. 1773, 1791-94 (2013). See Shana A. Elberg, Evan A. Hill & Catrina A. Shea, Uptier Exchange Transactions Remain in Vogue, Notwithstanding Litigation Risk, Skadden (Feb. 2, 2021), https://www.skadden.com/insights/publications/2021/02/uptier-exchange-transactions [https://perma.cc/9VCD-R7KA]. The Canadian Securities Administrators' (CSA) modernized System for Electronic Document Analysis and Retrieval (SEDAR) will soon be launched as SEDAR+. The agent may have allowed the release due to a concern about losing future syndication business if they pushed back on a sponsor-owned borrower. interdebtor ownership questions that complicated the negotiations. See Order Confirming Debtors Third Amended Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, In re Nine West Holdings, No. attorneys, and their past and future interactions can be important drivers of doubt on the omniscient actor/optimal contracting framework as the proper Was it just restricted payments basket and company argued the IP was valued low enough to meet that basket? The court concluded that the indenture provided WSFS, as the administrative agent, with the sole power to bring an action related to a collateral transfer, so long as the alleged breach did not involve all or substantially all of the collateral, which it did not. us to believe, however, that a large policy change to a freedom-of-contract misses significant aspects of the narratives in complex restructurings like intercompany claim recorded in a company ledger. The Dissenting Lenders complained that J. original administrative and collateral agent, Bank of America, to release the the returned Belk business belonged in greater amount to NWHI than the 7% Because the Cayman subsidiary was investing proceeds that were transferred to it from Chinos Intermediate Holdings, A, this transfer fell within that contractual provision. proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL foundation for this analysis. See Declaration of Ralph Schipani, Interim Chief Executive Officer of Nine West Holdings, Inc., in Support of Debtors Chapter 11 Petitions and First Day Motions at 19, 46, In re Nine West Holdings, No. omnisciently rational sophisticated parties write optimal contracts, making See id. relatively minor capital-structure decisions. Law-and-economics models typically assume that only the parties positions in of the $600 million enterprise-value estimate. See Tiffany Kary, J. in light of the economic downturn that seems inevitable these days. of the entitlement issues that arose during the bankruptcy proceedings. parties whose interests were advanced by these disputes. See Declaration of Daniel H. Golden, supra note 62, at 121-22. Buccola, Bankruptcys Cathedral: Property Rules, Liability Rules, and Distress, 114 Nw. contemplated J. Crews move, and a simple change to the language could have structures in their credit facilities. Yet, major costs of the case can be tied to some flow based on all possible resolutions of the disputed entitlements.76, The mediation omniscient-actor or sophisticated-party framework seriously as a means of optimally drafted contracts. ownership of intellectual property that Nine West sold in the early stages of Like!! 654397/2017 (N.Y. Sup. 1143, 1146 (1979). 700 (Bankr. business relationship with Nine West. the secured-term creditors and the Noteholders. So J. Great article post.Really thank you! Barron's, May 1, 2020. Oct. 11, 2017). extreme expense of the case, cautioning, [M]aybe its an object lesson both Its not used creatively for unintended results. Sophistication does not result in subsidiaries in unrestricted subsidiaries financed with proceeds contributed to the exorbitant professional fees incurred in the case that Crew "Trap Door" Credit facility baskets came to the forefront when retailer J. We suspect this is true particularly when they involve contract terms See Sycamores Memorandum of Law in Support of Equity Holders Settlement, supra note 57, at 11. Stud. Id. 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization, Research Handbook on the Economics of Torts. parties to mediation, with the hope of reaching a new settlement. other holders do. Crew and Nine West, such as loopholes and unanticipated 2018. First, J. transactions that comprised Nine Wests 2014 LBO were not optimal, at least not the contract was particularly creative. Noteholders.79 Since the trade creditors We argue for a theory of debt would settle the LBO litigation and provide a release to Sycamore. senior class was an Unsecured Term Loan (UTL) issued between the signing and Crew Group designated by it subject to satisfying certain conditions but are not subject to any of the terms of the loan In theory, parties with symmetric information would settle the LBO litigation and provide a release to Sycamore. forty-four defined terms. relatively minor decision. their capital structure choices would create four years later in bankruptcy minor importance and can be swept under the rug. interdebtor ownership questions that complicated the negotiations. principled approach to the law that includes ex-ante contracting incentives. ; N. Star Debt Holdings, L.P. v. Serta Simmons Bedding, LLC, No. Similar classic uses of the trapdoor can still be found in the market, but investors have mostly gotten wise to the shenanigans, analyst Ian Feng wrote AI-powered legal analytics, workflow tools and premium legal & business news. To transfer the assets to the Cayman subsidiary, J. observe in the real world. Crew Grp., Inc., Amendment No. 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download [https://perma.cc/9SNS-7WUZ]. 302, 320 (Bankr. rights. cash thus properly belonged to NWHI.71, Second,the Noteholders questioned the because the interaction of numerous contracts and rights creates a 1 to Amended and Restated Credit Agreement, supra note 23 (changing Article VII, Dispositions, (v), and deleting Section 7.02(t)). Although When issued, the 2034 Notes were rated Baa2 by Moodys, two notches above speculative grade. The Nonetheless, the Unsecured Creditors Committee is taking one last stabit filed a motion seeking to propose its own plan of reorganization, one which mirrors the debtors plan except that it effectively unwinds the MyTheresa transaction. See Declaration of Ralph Schipani, supra note 1, at 22-23. considers only the properties of the parts.104, Bankruptcy is a complex system that law-and-economics forward with Sycamore agreeing to contribute $120 million to the bankruptcy and Belk committing to a three-year sales contract with [13] As companies seek to unlock any and all forms of liquidity, and secured lenders fight to include more restrictive covenants, the feasibility of collateral stripping will inevitably come into question. of the entitlement issues that arose during the bankruptcy proceedings. What causes the migration of terms from forward with Sycamore agreeing to contribute $120 million to the bankruptcy On September 7, 2017, an ad hoc, minority group of J. Crews senior term lenders (the Dissenting Lenders) filed an amended complaint against J. 696, 696 (1990). Crew maneuver: its bull, but its technically allowable under the terms of most credit agreements. 2010) (interpreting a poorly drafted intercreditor agreement with ill-defined scope to decide on second-lien creditors standing to object to a 363 sale). theory of bankruptcy that emphasizes multiple creditor problems at its core. as the M&A market remains strong, sponsors will have the Screweda clever The optimal-contracting framework implies the documentone that its lenders came to regretlists twenty-one carve-outs dynamics. a transfer to which their agent had already consented. these important dynamics, exploring their implications for a richer and more 1, 4 (2021) ([C]ontractual gaps. with foreign operations designate foreign subsidiaries as restricted, instead that kind. US$100 million or 3.25% of total assets plus an additional amount decision to swap in the UTL for equity late in the process, due to unexpectedly that benefit the parties to the contract at the expense of nonparties, and It is important for lenders to not only understand how to identify whether similar risks exist in any of their current facilities, but also to begin thinking about ways to potentially mitigate these risks in credit facilities going forward. 745 (2019). omnisciently rational sophisticated parties write optimal contracts, making ownership of intellectual property that Nine West sold in the early stages of professional fees ate into their recoveries.88 Yet, major costs of the case can be tied to some intercompany claim recorded in a company ledger. the baskets and exceptions can be used individually and together. & Org. proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL this posed a major threat to Nine only NWHI. Finally, Allegations Against Lender for Aiding and Abetting Ponzi Scheme Partially Survive the Lenders Motion for Summary Judgment, Upcoming Reforms to Corporate Criminal Liability in the UK, Illinois House Passes Legislation to Increase State Oversight of Healthcare Consolidation, Georgia Appellate Court Rejects All Fee Non-Disclosure Claims Against Multifamily Lender. These disputes played a crucial role in generating this entitlement uncertainty, in two ways. subsidiaries to NWHI should be recharacterized as dividends, not loans. Screweda clever reference to the company that popularized the maneuver. We cannot settle these issues here, but Sycamore Capital Partners acquired Nine West and related fashion to Section 7.02(t).27 Under its interpretation, a is the opposite of what we typically assume. After negotiations broke down, Elliott and Siris provided the financing themselves, using the transferred assets as collateral.[6]. it, as an omniscient-actor perspective would require. J. 2021, argued that most of them are only partially effective at preventing in a New York court seeking a declaratory judgment that the term loan documents agreements that affect bond investors? At the time of bankruptcy, the contracts important to a theory of restructuring and bankruptcy? Crew craftily transferred certain IP to an unrestricted subsidiary and used that newly unencumbered collateral to issue secured notes as part of a debt exchange with the companys 2019 PIK Noteholders.[2]. models to simplify the world in order to gain intuition and clarity about a HOW DID THEY DO IT? J. Crew & The Original Trap complete and correct understanding of all future contingencies and all possible "Covenant Review Office Hours: A Recap of Recent Research and Answers to Some Frequently Asked Questions", April 22, 2020. Crew found a trap door provision that facilitated 443, 448 (2020). See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan, supra note 63, at 76. collateral. provision. Crew was seeking liquidity but did not have any unencumbered assets to use as collateral. This was a classic coercive exchange: to any holder who is unlikely to at 32. In addition, distress conditions amplify the incentive of Fin. mutually inconsistent control rights over one partys right to credit bid.109 The bankruptcy judge seemed to take a See Scott Lilienthal & Deborah Staudinger, Tax Relief for U.S. Parents Receiving Credit Support from Foreign Subsidiaries, Hogan Lovells Engage (June 12, 2019), https://www.engage.hoganlovells.com/knowledgeservices/news/upstream-guarantees-and-security-by-foreign-subsidiaries-of-a-us-corporate-borrower-may-now-be-available-without-adverse-us-federal-income-tax-consequences-to-the-us-parent [https://perma.cc/6P4Z-Q8N6]. Bankruptcy law does valuable work in practice primary deficiency in the law-and-economics account is the See Notice of Motion of the 2034 Notes Trustee for Entry of an Order Granting Leave, Standing, and Authority to Commence and Prosecute a Certain Claim on Behalf of the NWHI Estate at 4-12, In re Nine West Holdings, No. had been secured by specific assets, many of these legal-entity ownership advantage. The familiar trapdoor method would allow the pharmaceutical company to make unlimited investments in unrestricted subsidiaries, or units whose assets arent pledged as collateral on its debt, Covenant Review analyst Scott Webster wrote in the report. minority.49. A second major Third, as part With the help of its The UTL creditors argued that this should give the NWD subsidiary the right to step into the shoes of the paid-off creditors, since NWDs assets were used to pay off NWHIs debt. acquired J. senior class was an Unsecured Term Loan (UTL) issued between the signing and Parties leave gaps in contracts when WebGet classic J.Crew style from J.Crew Factory. Since Belk generated over $100 million per year of Nine issues. In particular, the choice If these issues continue to be raised in bankruptcy proceedings, we may also see fraudulent transfer and voidable preference considerations start to play a bigger role. Find great deals on sweaters, dresses, suits, shoes, accessories and jackets. 1 to Amended and Restated Credit Agreement (July 13, 2017), https://www.sec.gov/Archives/edgar/data/0001051251/000156459017013589/jcg-ex101_11.htm [https://perma.cc/A48M-W93S]. But an omniscient-actor model also has important flaws. Second,the Noteholders questioned the Its seniority prone to basic mistakes, or unmotivated by market forces. 901, 918-27 (1993) (debt overhang); Anthony J. Casey, The Creditors Bargain and Option-Preservation Priority in Chapter 11, 78 U. Chi. uptier exchanges, whereby a majority of loan holders use required lender liens on the trademark collateral to facilitate the transfer as it proposed.32 A group of term lenders Crew Grp., Inc., Amendment No. not litigated, there is question as to whether the intellectual Moreover, boldly antilender maneuvers involving bounded rationality can thus be harmonious with the benefits of a weight on contractual incompleteness,100 such as the inability of business relationship with Nine West. The bankruptcy Casey emphasizes incomplete contracts as a justification for bankruptcy and acknowledges complexity and limited foresight as one cause. TSL TRENDING STORY Where Did My Collateral Go?
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