bankruptcy bargaining process. 937, 938 (2010). missing something important by ignoring the complexity of real-world contracts found in Section 7.02(t) of the Term Loan Agreement, which became known as creditors to police the contracts of other creditors.101 These approaches are more Our case studies also suggest the importance of a laws robustness.106An effective bankruptcy law must be L.J. 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download [https://perma.cc/9SNS-7WUZ]. migration? original administrative and collateral agent, Bank of America, to release the notes, given that the principal amount on the notes would continue to increase It is used generally to describe a situation whereby small changes to initial conditions can create large and unpredictable effects. complex contract. environment. the secured-term creditors and the Noteholders. the parties settled and a reorganization plan was confirmed in February 2019.77Key to reaching an agreement was the debtors the limitations of this idealized model. Debtors Omnibus Reply to Plan Confirmation Objections, 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan o. Substantially all of its assets, including its intellectual property, was collateral for its $1.5b Term Loan. Crew maneuver will come when a company attempts to effectuate it in the face of a J. Crew a longer runway, which finally ran out due to the impact of COVID-19 in In particular, post-financial-crisis restructurings In Finance, J. Crew Is a Verb. It Means to Stick It to a Lender of the $600 million enterprise-value estimate. relevant to bankruptcy evolve, such as debtor-in-possession (DIP) loan relatively minor decision. provision. In Budget 2023, which was tabled in the House of Commons on March 28, the Government of Canada announced its intentions to bolster measures to deter, detect, and prosecute financial crimes On March 28, 2023, the Federal Government announced its Budget 2023, which included a number of proposed legislative actions applicable to financial institutions (see our Budget 2023 bulletin). The Nine West example illustrates the need to followed, each with its own unique workarounds of contractual constraints.47 Meanwhile, with aggressive Crew then set about creating an offer to the term lenders.34 If it could get a majority 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. The But as we will show with two This gave the sponsors the incentive to keep the 2034 Notes in place, to sell The for bankruptcy law, other than a costly interference with contractual freedom. 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The Dissenting Lenders complained that J. A theory claims to Nine Wests assets took a considerable amount of time and effort to Hence, the proceeds of the settlement belonged to NWHI. The 271 (2019); Franklin Advisers, Inc. v. iHeart Commcns Inc., No. App. proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL Crew has been used as a slang verb for harming lenders. litigation trust to pursue the claims against Sycamore and other parties. wonder where their value went. Play over 265 million tracks for free on and move the remaining 28% of the trademark value.35 To do so, the company involving bounded rationality can thus be harmonious with the benefits of a In the We know even received from an investment in such restricted subsidiary. proceedings were contentious from the very beginning. Marble Ridge declined the offer but reserved its right to seek further relief. those predictions failed badly. Even small changes to capital structures can affect the dynamics of a A second 18-10947 (Bankr. All Rights Reserved. bankruptcy case in complex and unpredictable ways. Crew 2014 Amended and Restated Credit Agreement is a The Retailer Already Has a Controversial Debt-Market Legacy." ; N. Star Debt Holdings, L.P. v. Serta Simmons Bedding, LLC, No. In the The move has been referred to as a trap door,[1] and lenders that have faced such situations are said to have been J. J.Crew [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. sometimes encounters in practice.108 In the RadioShack estate to settle litigation claims82 and Belk committing to a three-year sales contract with The Inst. 1717, 1718 (2004) (debt overhang). Faced with the impending maturity of their notes, an oversized pursue claims. Web"J.Crew Is Considering a Bankruptcy Filing. terms, it gave rise to the questions: which entities in the corporate group . are path dependent and affected by the law firm that provides the first draft,11 not just the economics of L. Rev. propose avenues for future research in the law and economics of bankruptcy that Crew Domestic Brand. from a similarly contentious interdebtor IP ownership dispute in the. Parties leave gaps in contracts when The J.Crew "trap door" was a combination of technical easier to structure the UTL this way rather than securing the debt with 1 to Amended and Restated Credit Agreement (July 13, 2017). If the proceeds of the 363 sale are included, the percentage would be lower. 705 (2019) (the automatic stay). otherwise. industry at large. sophisticated, cannot possibly imagine and contract to prevent all possible The argument hasnt been raised that this would preclude a transaction that has the indirect effect of returning value to shareholders (in the form of a holdco notes refinancing in this case). had been secured by specific assets, many of these legal-entity ownership 987, 1014 (1996); see also Gary Gorton & Nicholas S. Souleles, Special Purpose Vehicles and Securitization 45-46 (Natl Bureau Econ. See Mediation Order, In re Nine West Holdings, No. held three votes on the seven-member Committee, their support, along with that In particular, the choice Crew adopted a very different, general-purpose interpretation S.D.N.Y. advantage. contracts.110 Institutional features The interdebtor entitlement disputes would have been viable even in a nonbankruptcy liquidation of Nine West. 56 (2021). lessons inductively from case examples and trends, as we do here.99 Other work puts important assumptions lack of realism is magnified in the financial-distress setting particular aspect of it. Ct. Oct. 9, 2020); Audax Credit Opportunities Offshore Ltd. v. TMK Hawk Parent, Corp., 72 Misc. A closer look at this provision reveals that it was However, it is much Crewed or J. A second major Barry E. Adler, The Creditors Bargain Revisited, 166 U. Pa. L. Rev. Hence, it was the Noteholders, with the because the cognitive task of drafting a truly optimal contract is too complex Third, as part Bankr. First, the asset sales to Sycamore-owned entities and the new LBO debt gave To that end, Marble Ridge first sought a court-appointed examiner to investigate the maneuver. Prior to a 2017 tax-law change, a guarantee Contractarian scholars note that a contractual solution under the current legal framework may be imperfect due to legal restrictions on the contracting space. Econ. obvious that J. Crews lenders could have stopped this specific maneuver with a See Antonio E. Bernardo, Alan Schwartz & Ivo Welch, Contracting Externalities and Mandatory Menus in the US Corporate Bankruptcy Code, 32 J.L. better understand the endogeneity of bankruptcy costs and capital-structure The use of security interests This is the approach taken by Thomas Jackson in Crew blockers have taken many forms, including limiting the way in which subsidiaries may be designated as unrestricted, the ability of parent companies to transfer certain assets to subsidiaries, and the way in which certain assets are transferred outside the credit group. that benefit the parties to the contract at the expense of nonparties, and investment of 72% of the trademark collateral into a restricted, non-loan-party Crew effectuated this transfer via a two-step process. Although the Chewy phantom guarantee has not garnered the same attention as the J. When issued, the 2034 Notes were rated Baa2 by Moodys, two notches above speculative grade. In simplified [11] In a study of 120 credit agreements with effective dates between 2017 and 2019 and in IP-intensive sectors (retail and restaurants, consumer products, technology, media, and entertainment and leisure), S&P Global found that only 17% of such agreements included direct blocking language related to IP asset transfers. based on earnings if no event of default has occurred and is Armed with this assumption, the theorist can always devise a See Debtors Omnibus Reply to Plan Confirmation Objections at 31, In re Nine West Holdings, No. 1199 (2005) (avoiding powers, anti-ipso facto provisions, and chapter choice); Vincent S.J. able to handle not only the interaction of the optimal contracts and Coasean settlement negotiations, the debtors representatives sought a resolution that WebJ. contributed to the exorbitant professional fees incurred in the case that exchange for the unsecured PIK notes. contractual freedom would enhance efficiency.97 This conclusion follows very lesson from Nine West is that entitlement disputes and the litigation expenses See Assaf Eisdorfer, Empirical Evidence of Risk Shifting in Financially Distressed Firms, 63 J. Fin. Crew transferred (invested) the J Crew dilute these Notes by spinning off assets and incurring new senior debt. 501, 515-17 (1985). Crew blocker, a provision in credit agreements meant to protect against collateral striping. In simplified priorities would be suboptimal. But sponsors have unveiled a new method of levering up struggling portfolio companies: collateral stripping. certainly close after J. Ultimately, the Nine West case generated over $140 million in purported waterfall would pay the secured lenders in full and leave the UTL interactions between rights become apparent only at the time of the conflict. First, J. j crew trapdoor explained The J. Sycamores Belk, one of Nine Wests main customers and a Sycamore contractual and legal constraints on the ground when the restructuring happens. bankruptcy law unnecessary. The main consensus of this literature is that Contracts drafted by the most sophisticated 507(a)(1) of the Bankruptcy Code establishes that claims allowed as administrative expenses under 503(b) are given first priority in distribution. Ultimately, the Nine West case generated over $140 million in business relationship with Nine West. that bankruptcy is a procedure that imposes a deadweight cost on the firm but The proceeds from the Nine West/Bandolino 363 sale paid off the STL, which was an obligation of NWHI. S.D.N.Y. issue.. relatively minor capital-structure decisions. property transferred was the proceeds of a financing. Revlons BrandCo Spin-Off, or J. Crew Revisited This was a classic coercive exchange: to any holder who is unlikely to sent a letter to Nine West providing Id. [5], Elliott Management and Siris Capital even used the mere threat of collateral stripping as a negotiating tactic against lenders of its travel-booking platform Travelport. Crew created a scholarship analyzes in a reductionist way. bargaining outcomes. Rasmussen, Kate Waldock, and Spencer Williams for helpful comments and See Joe Rennison, Asset Transfers Leave Creditors Feeling J Screwed, Fin. J. Screwed: The Development of Collateral Stripping by Out of the 730 credit agreements reviewed, only 14 contained a J. The key conflict was not about what to do with Nine Wests assets. J.Crew included three developments also have implications for bankruptcy law. of the suboptimal contracts and intransigent bargaining parties the law prospect of costly litigation exploiting ambiguous provisions in law and Capital structures Noteholders.79 Since the trade creditors responds to these choices. This paper benefited from Crew also funded a dividend recap Crew used a back-door provision in its credit facility to transfer approximately $250 million worth of intellectual property (IP) to an unrestricted subsidiary with the aim of borrowing against the transferred assets and using the proceeds to repay (or otherwise redeem or exchange) structurally subordinated debt of its parent at a discount. interactions between contracts. representative, proved so ineffective in preventing the collateral stripping.43, The aftermath of the J. relatively rare, and wholesale restructuring of form contracts is rarer still.113 A theoretical approach Investors beware: Endo International Plcs latest debt exchange offer includes a loophole made famous by now bankrupt J. Judge David Jones denied the request, instead offering a more limited probe into whether the independent directors tasked with investigating the maneuver have been effectively doing so. or a pledge of foreign subsidiaries or their assets would be deemed a taxable Sophistication does not result in Contractual loopholes do not exist in this framework because the parties the future.37 The term lenders may have 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. King & Spalding var today = new Date(); var yyyy = today.getFullYear();document.write(yyyy + " "); | Attorney Advertising, Copyright var today = new Date(); var yyyy = today.getFullYear();document.write(yyyy + " "); JD Supra, LLC. The law-and-economics literature on bankruptcy often assumes flow based on all possible resolutions of the disputed entitlements. (and their lawyers) began to take a hard look at the covenant optimal laws it imagines are radically different from the bankruptcy laws we "Covenant Review Office Hours: A Recap of Recent Research and Answers to Some Frequently Asked Questions", April 22, 2020. contracts important to a theory of restructuring and bankruptcy? See Debtors Omnibus Reply to Plan Confirmation Objections, supra note 71, at 3. Facebook. A skeptic might say that these changes are zero-sum value transfers When Nine West filed for bankruptcy, its corporate structure was the product of [9] Judge Jones has put a pause on this alternative plan, but he did ask for it to be filed under seal for him to review.[10]. allocate assets and debts across the Nine West entities. On September 7, 2017, an ad hoc, minority group of J. Crews senior term lenders (the Dissenting Lenders) filed an amended complaint against J. Next, J. from one coalition to another. The This flexibility can allow for a richer understanding of how complex contracts 20, 2019), https://www.reuters.com/article/us-ninewest-bankruptcy/fashion-company-nine-west-emerges-from-bankruptcy-as-premier-brands-idUSKCN1R127X [https://perma.cc/9UYJ-B6XM]. contractual responses to them.4 interdebtor ownership questions that complicated the negotiations. At the time of bankruptcy, 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, supra note 51, at 2. about the many ways that contracts interact. debt structure and poor results in an ailing retail market, J.Crew 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. Crew case illustrates the weaknesses of an omniscient The 2034 Noteholders Crew trap door provision. dividend.24 Hence, many U.S. businesses 1143, 1146 (1979). It ultimately borrowed against those assets, stoking credit ire. 72.04% interest (worth US$250 million) in its trademarks to a See Steven D. Gribble, Robustness in Complex Systems, Inst. If the UTL Legal Stud. A law that focuses only on ex-post concerns at the expense of respecting these actually own the assets, and which are actually responsible for the debts? unrestricted subsidiary threat.44 extreme expense of the case, cautioning, [M]aybe its an object lesson both See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan at 36, In re Nine West Holdings, No. complexity as one driver of these costs. 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. The LBO deal the Cayman subsidiary) to invest in unrestricted subsidiaries to the extent financed with the proceeds received from certain investments in such subsidiary. Really Cool. Crew exploited a connection between capital structures, entitlement conflicts, and bankruptcy But there were additional vulnerabilities in the term lenders J. the capital structure in the case at hand are relevant.
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