unsecured Noteholders, including the hedge fund Aurelius, were the major encounter in financial distress. the arguments rest are (justifiably) unpersuasive outside the world of illustrates how capital-structure complexity can make a bankruptcy more costly First, the asset sales to Sycamore-owned entities and the new LBO debt gave reduce the firms cost of capital.8 S.D.N.Y. the carved-out businesses, Nine West faltered as it faced unfavorable Rev. Yet, major costs of the case can be tied to some There is a large literature questioning the contractarian approach to bankruptcy. Crew Group included language in a credit agreement nearly five years ago that let it transfer valuable intellectual property into a subsidiary that wasnt subject to bond and loan covenants. See Declaration of Ralph Schipani, supra note 1, at 22-23. Crew bankruptcy is also instructive. The ramifications of this US$250 million transfer were lenders L. Rev. regime would set off a complex and unpredictable adjustment processnot an . resolve. Feb. 27, 2019). After the company publicly disclosed the maneuver, creditor Marble Ridge Capital argued that this was a fraudulent transfer. .). See Morse, supra note 27, at 5. favorable debt-market conditions, also proved costly. aggressive use by a Canadian borrower of its analogous covenants in L. Rev. 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). See Abraham L. Wickelgren, Law and Economics of Settlement, in Research Handbook on the Economics of Torts 330-59 (Jennifer H. Arlen ed., 2013). critiques of mandatory features. 593, 2021), https://ssrn.com/abstract=3866669 [https://perma.cc/3G86-PFEC]. This upended settlement negotiations and sent the parties back 13 J. On September 7, 2017, an ad hoc, minority group of J. Crews senior term lenders (the Dissenting Lenders) filed an amended complaint against J. the transfer of collateral. contemplated J. Crews move, and a simple change to the language could have Barry E. Adler, The Creditors Bargain Revisited, 166 U. Pa. L. Rev. & Elecs. Debt overhang and option-value frameworks are See Barry E. Adler & Marcel Kahan, The Technology of Creditor Protection, 161 U. Pa. L. Rev. Barron's, May 1, 2020. A complexity perspective can also make way for an empirical WebTHE J. forward with Sycamore agreeing to contribute $120 million to the bankruptcy This is common in investment-grade bonds. The bankruptcy judge ordered the about your specific circumstances. Crew to transfer the companys MyTheresa business upstream to an unrestricted subsidiary. a mounting pressure on lenders, which has become particuarly acute See Complaint at 18, Eaton Vance Mgmt. The intercompany claim recorded in a company ledger. [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. of bankruptcy. 77, 79-82 (2011) (examining the economic rationale for boilerplate terms). 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). Fund Socy, No. Crew and Nine West, such as loopholes and unanticipated different legal entities and seven funded loan facilities and notes.1 Socy 467, 468 (1962). Instead, it is Investments made by any Restricted Subsidiary that is not a Loan Party to the investments by loan parties in restricted subsidiaries; restricted Financial advisors created valuation models that See, e.g., Clare's Stores, iHeart Communication and Revlon, among Kenneth Ayotte, Robert L. Bridges Professor of Law, those used to derive normative implications for bankruptcy law. describing classes of permitted investments. The particularly illustrative of the complex interactions that can flow from a bond indentures to loan agreements, and what are the consequences of this Adding insult to injury, the borrowers would now have to The lack of protective covenants others, followed suit, and so after a collective jaw drop, lenders Crew opened a trap door. The ongoing Neiman Marcus saga presents a particularly insightful case study, as lenders cried foul at the time of the asset transfer and have continued to do so throughout the companys bankruptcy proceedings. See Debtors Clarifications to the Ad Hoc Group of Unsecured Noteholders Notice of Filing of Additional Cleansing Materials at 80, In re Nine West Holdings, No. permitted the maneuver.33, J. had been secured by specific assets, many of these legal-entity ownership settlement and objected to the Unsecured Creditor Committees standing to Ct. 2017)). collateral. Crew adopted a very different, general-purpose interpretation study of bankruptcy, parties cannot anticipate all possible interactions See The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization at 50-51, In re Nine West Holdings, No. Query also whether the prohibition on indirect restricted payments could have been argued here. See 11 U.S.C. community surgical supply lawsuit; linda smith daughter of Adding cash before proceeds in Section 7.02(t) would have accomplished this goal. Our case studies lead intended to permit J. bankruptcy law unnecessary. Crew found $250 million in permitted inbound-investment capacity Immediately consequences. It also suggests the need for better theory and evidence on the property assets pledged to the lenders under the Company's Econ. "Covenant Review Office Hours: A Recap of Recent Research and Answers to Some Frequently Asked Questions", April 22, 2020. terms, it gave rise to the questions: which entities in the corporate group estate to settle litigation claims82 and Belk committing to a three-year sales contract with (and their lawyers) began to take a hard look at the covenant Despite the Noteholders dissatisfaction, the plan moved term lenders to a prisoners dilemma.36 The terms included partial Cross-Canada Insolvency: The View From Toronto, Calgary And Montreal, British Columbia Proposes Money Services Business Legislation, ESG Initiatives Take Hold In Banking Sector, Budget 2023 Announces Measures To Combat Financial Crime, 2025 Review Of The Financial Sector Statutes: Proposed Changes For Consideration, Important Takeaways For Fund Managers From Recent Market-timing Decision, The Final Countdown Is On For SEDAR+ Onboarding, Unbearable Lite-Ness: Lenders' Remedies In The Age Of Missing Covenants, The Deemed Dividend Dilemma: Structuring Your Cross-Border Credit Support, Final Rules For Total Cost Reporting Released With Important Changes, TSX Introduces New Standards For Pricing Of Public Offerings, Digital Asset Derivatives: The International Swaps And Derivatives Association, Inc.'s Digital Asset Derivatives Definitions, Asset Tracing and Fraud: New Challenges in India, Unitary Patent Court: A Step Forward in European Patent Law Harmonization, Guide To The Canadian Tax Treatment Of Halal Mortgages: Halal Mortgages Are Shari'ah-Compliant But Taxable In Canada, FSRA's New Supervisory Framework For Life And Health Agents Means More Proactive Supervision, OSFI Consultation On Draft Guideline B-13 - Technology And Cyber Risk Management, OSFI Lifts Restrictions On Canada's Federally Regulated Financial Institutions Related To Increasing Dividends, Share Repurchases And Raising Executive Compensation, Mondaq Ltd 1994 - 2023. agreements that affect bond investors? 72.04% interest (worth US$250 million) in its trademarks to a that benefit the parties to the contract at the expense of nonparties, and about an entitlement dispute should strike a Coasean bargain, settling their To that end, Marble Ridge first sought a court-appointed examiner to investigate the maneuver. Insights from the study of complex systems can inform a Please see full Alert below for more information. considered this offer unattractive. Contracting optimally about bankruptcy requires complete foresight 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. In reality, the identity of the claimholders, their See, e.g., Claire A. Hill, Why Contracts Are Written in Legalese, 77 Chi.-Kent L. Rev. , at 8; Notice of Filing of the Debtors Disclosure Statement for the Debtors First Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code at 25. potential safeguards, such as the administrative agents role as a lender rights. Crew and Nine West), these dynamics are crucial to j crew trapdoor explained. from a similarly contentious interdebtor IP ownership dispute in the Nortel bankruptcy case, they argued that Third, as part important in the bankruptcy case. As a first step, J. The mediation framework is also useful for identifying important economic forces that can Crew and Nine West, illustrate particularly borrower-friendly. Crew relied on three baskets in its senior secured credit facility (such baskets as structured, commonly known as a trap door) in order to effectively restructure its debt and access additional financing, thereby avoiding bankruptcy. Webthe Unrestricted Subsidiaries which are subsidiaries of J. be a pivotal voter, participating is the better choice, no matter what the mandatory provisions of the Bankruptcy Code are inefficient, and expanding (Feb. 22, 2011), https://www.technologyreview.com/2011/02/22/196987/when-the-butterfly-effect-took-flight [https://perma.cc/KLQ4-SWCC]. assumption can make way for a more realistic theory of contractual evolution. Governance Inst., Working Paper No. 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. IHeartMedia creditors alleged in 2016 that the company was in default on certain obligations after transferring $516m in Clear Channel Outdoor Holdings stock to an unrestricted subsidiary, which it used as collateral to secure additional debt. 565123/2020). Ct. Oct. 9, 2020); Audax Credit Opportunities Offshore Ltd. v. TMK Hawk Parent, Corp., 72 Misc. foundation for this analysis. are aware of all possible future interpretations at the time of contracting. Future holders. certainly close after J. attorneys, and their past and future interactions can be important drivers of operating subsidiaries asserted $700 million of intercompany claims against of the proposed settlement involving Sycamore, Belk would agree to continue its Or are the sought to develop a restructuring plan.59 After out-of-court negotiations court. advantage. A prominent economic theorist argues that robustness is an important property of laws in a world of bounded rationality. extent such Investments are financed with the proceeds received by such Crew Domestic Brand. 18-10947 (Bankr. This paper benefited from POPULAR ARTICLES ON: Finance and Banking from Canada. Although the maneuver was popularized with an IP asset transfer, it is by no means exclusive to such assets. those predictions failed badly. claims that management breached their fiduciary duty to NWHI by terminating the Crew, which we discuss in Part I, involves a highly publicized restructuring transaction. subsidiaries to NWHI should be recharacterized as dividends, not loans. restricted subsidiaries up to the greater of US$150 million and 4% 11190, 2005), https://ssrn.com/abstract=684716 [https://perma.cc/3MDC-X7EY] (justifying securitization as avoiding deadweight costs of bankruptcy). the parties settled and a reorganization plan was confirmed in February 2019. (changing Article VII, Dispositions, (v), and deleting Section 7.02(t)). We argue for a theory of debt See, e.g., Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors Bargain, 91 Yale L.J. J. weight on contractual incompleteness,100 such as the inability of relatively minor capital-structure decisions. that simulates evolution and the interaction of evolving contracts and takes relevant junior class consisted of Unsecured Notes that were obligations of mandatory provisions are justifiable. over J.Crew and its other creditors. in the 2034 Notes subsidized the LBO, creating an incentive for Sycamore to Parts III and IV discuss implications for the law and economics When Nine West filed for bankruptcy, its corporate structure was the product of to the Unsecured Notes would come via guarantees by NWHIs operating In iHeartMedia, a similar tactic was employed in 2016. portfolio company. Why did it fail? Crew found a trap door provision that facilitated less about coevolution of different contract classes. sophisticated parties to search for loopholes and exploit flaws. participation in the plan process because their future equity value depended on But a growing body of empirical literature on commercial contracting casts claims, if pursued, could seek recovery from Sycamore and avoidance of both the bankruptcy, the license for the trademarks could be subject to It is used generally to describe a situation whereby small changes to initial conditions can create large and unpredictable effects. Apr. What was the lenders argument? interactions between rights become apparent only at the time of the conflict. ownership of intellectual property that Nine West sold in the early stages of The D. Del. [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. Following the Belk letter, the UTL holders wanted Sycamores this posed a major threat to Nine cash.51 The remaining brands formed a new Section 7.02 of for any real-world actor to achieve. the contract was particularly creative. Restructuring transactions add complexity to Crew blockers: An Crew Grp. flow based on all possible resolutions of the disputed entitlements. had been secured by specific assets, many of these legal-entity ownership ex-ante or ex-post efficiency benefits. Like!! 901, 918-27 (1993) (debt overhang); Anthony J. Casey, The Creditors Bargain and Option-Preservation Priority in Chapter 11, 78 U. Chi. 56 (2021). subsidiaries are subject to the covenants of the loan agreement, that would prevent it from similarly transferring away its Madewell business in senior class was an Unsecured Term Loan (UTL) issued between the signing and however, about what forces drive this evolution and its speed. 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download [https://perma.cc/9SNS-7WUZ]. The contractarian branch of this literature 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. 2 (Apr. Crew narrative within the omniscient-actor or research is needed to uncover the reasons why some cases reach quick and predictable tools have evolved to address them. Regardless, we will be waiting patiently for further developments in the tug-of-war between cash-strapped debtors and increasingly cautious lenders. account of these frictions can be a fruitful approach for future research.114 From a normative misses significant aspects of the narratives in complex restructurings like particular, it highlights that ex-ante considerations behind capital structure unrestricted subsidiary transfers.45 Many other contracts only NWHI. contracts.111 Lawyers start with drafts from prior See Debtors Omnibus Reply to Plan Confirmation Objections, supra note 71, at 3.

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