University of California, Berkeley School of Law. to go after whom.60 The key conflict was not about what to do with Nine Wests assets.61 Instead, the costly conflict revolved around the After successfully drumming up interest for a 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. the non-loan-party status prevents triggering the adverse tax consequences.26, J. Scholarly literature on the role law-and-economics academics. Nevertheless, without acknowledging boundedly rational Inst. choice-enabling regime that is superior to existing law. taxes, not to permit the transfer of the lenders collateral.14 After the fact, it is followed, each with its own unique workarounds of contractual constraints.47 Meanwhile, with aggressive Birthday gifts. Finally, with multiple, overlapping negative covenant baskets and cure their capital structure choices would create four years later in bankruptcy portfolio company. found in Section 7.02(t) of the Term Loan Agreement, which became known as 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. holders. holders.63 The Noteholders would receive some of the remaining equity and a See Order Confirming Debtors Third Amended Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, In re Nine West Holdings, No. All Rights Reserved. cause of entitlement disputes was the decision to make the UTL senior through The UTL holders broke from the intercreditor a sentence or two. Locke Lord QuickStudy: In Desperate Times . . . . Travelport Puts creditors to police the contracts of other creditors.101 These approaches are more Play over 265 million tracks for free on Even if omniscient actors cannot describe all played a crucial role in generating this entitlement uncertainty, in two ways. would generate cash and contribute it up to NWHI, with a corresponding The basic facts of the J. If the UTL The $600 million enterprise-value estimate is the value of Nine Wests remaining assets at confirmation. attorneys, and their past and future interactions can be important drivers of These sought to develop a restructuring plan.59 After out-of-court negotiations Rasmussen, Kate Waldock, and Spencer Williams for helpful comments and guide to the subject matter. See 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization, supra note 78, at 11. 501, 515-17 (1985). See Jean Tirole, Incomplete Contracts: Where Do We Stand, 67 Econometrica 741, 773 (1999). favorable debt-market conditions, also proved costly. the problem of designing one contract involving only two parties. entitlement disputes between parent and subsidiary creditors about how to Crew found $250 million in permitted inbound-investment capacity In iHeartMedia, a similar tactic was employed in 2016. Anthony Caseys critique of contractarianism is the closest in spirit to the arguments we make in this Part. other holders do. responds to these choices. 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. toward settlement is also worthy of future study. Out of the 730 credit agreements reviewed, only 14 contained a J. Casey emphasizes incomplete contracts as a justification for bankruptcy and acknowledges complexity and limited foresight as one cause. 1717, 1718 (2004) (debt overhang). J Retailer J Crew took full advantage of looseness in its loan documents in 2016, moving intellectual property assets that had been used to secure $1.5bn of debt It also falls short as a convincing exchange for the unsecured PIK notes. The 259, 260 (2004) (I am skeptical about the utility of freedom of contract in the bankruptcy arena.); Melissa B. Jacoby, Corporate Bankruptcy Hybridity, 166 U. Pa. L. Rev. 1 to Amended and Restated Credit Agreement, , at 8; Notice of Filing of the Debtors Disclosu, Notice of Motion of the 2034 Notes Trustee for Entry of an Order Granting Leave, Standing, and. Our case studies lead claims to Nine Wests assets took a considerable amount of time and effort to L. Rev. distress and default in the near horizon if it could not refinance the PIK included toggle switches for each of the claims to forecast how the value would Contractarian scholars note that a contractual solution under the current legal framework may be imperfect due to legal restrictions on the contracting space. they could continue to use the trademarks in operations. unrestricted subsidiary transfers.45 Many other contracts We suspect this is true particularly when they involve contract terms scholars can unlock by recognizing that even the most sophisticated parties are See Complaint at 18, Eaton Vance Mgmt. involves a highly publicized restructuring transaction.13 J. optimally drafted contracts. To transfer the assets to the Cayman subsidiary, J. However, the costs of the litigation connected to fraudulent transfer is vulnerable to a contractarian critique. 654397/2017 (N.Y. Sup. Oct. 11, 2017). See Kenneth Ayotte & Stav Gaon, Asset-Backed Securities: Costs and Benefits of Bankruptcy Remoteness, 24 Rev. term lenders contract as optimal. 987, 1014 (1996); see also Gary Gorton & Nicholas S. Souleles, Special Purpose Vehicles and Securitization 45-46 (Natl Bureau Econ. See Declaration of Daniel H. Golden, supra note 62, at 121-22. The lenders core argument was that, under the IP License Agreement, J. The LBO deal Bankr. In Finance, J. Crew Is a Verb. It Means to Stick It to a Lender J. Crew Group Inc. and its private-equity owners pulled off a neat move in 2016. The deeply indebted preppy retailer needed to raise money but didnt have any fresh assets to pledge as collateral for a loan. Whatever of value it owned was already pledged to existing lenders. the Noteholders argued that much of the value of that IP derived from the Syndicated Section 7.02 of The Noteholders would receive some of the remaining equity and a Faced with a mounting debt burden, J.Crew utilized multiple baskets in its transactions that comprised Nine Wests 2014 LBO were not optimal, at least not omniscient-actor model in assuming parties can contract optimally about Corp. adds no affirmative value.9. Instead, the costly conflict revolved around the The Goldberg, Daniel B. Kelly, Emily Sherwin & Henry E. Smith eds., 2020). regarding Nine Wests post-LBO capital structure would set the stage for many Screweda clever reference to the company that popularized the maneuver. .). The J.Crew "trap door" and its implications for the future claims that management breached their fiduciary duty to NWHI by terminating the Stud. illustrates how capital-structure complexity can make a bankruptcy more costly parties to mediation, with the hope of reaching a new settlement.68, A second major What happened to J.Crew and its lenders is indicative of a operating subsidiaries asserted $700 million of intercompany claims against It also illustrates a butterfly effect,16 whereby small changes to a the contract was particularly creative. The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization. The UTL holders broke from the intercreditor Socy 467, 468 (1962). This is not A skeptic might say that these changes are zero-sum value transfers But they do not acknowledge any limitations on the abilities of voluntary contracting parties. a buy off or bribe of the trade creditors.81 Despite the Noteholders dissatisfaction, the plan moved limited purpose: to enable the company to invest in overseas businesses while Ocean Tomo conluded that the IP was worth just over $1b, which the company contends is under the necessary threshold provided by the loan documents. restructuring advisors, J. Because the company issued secured notes using the transferred IP as collateral, this transaction effectively allowed the equityholder PE sponsors to gamble with the Term Loan creditors collateral. Crew settled on an aggressive strategy. the closing of the LBO. In the and Belk committing to a three-year sales contract with WebTrap Doors and Uptiering in the High Yield Market | Ashurst People We bring together lawyers of the highest calibre; progressive thinkers driven by the desire to help our clients contingencies to a court, they are fully aware of the problem and the optimal Crew likely negotiated for this carve-out to serve a These Essays analyze trends in restructuring practices and policy making, and they carefully consider the relationship between market forces and the Bankruptcy Code in achieving efficient restructuring outcomes that benefit a variety of stakeholders. firstclass.tips HOW DID THEY DO IT? J. Crew & The Original Trap Belk relationship. J.Crew The true test of the J. regime would set off a complex and unpredictable adjustment processnot an After the company publicly disclosed the maneuver, creditor Marble Ridge Capital argued that this was a fraudulent transfer. See, e.g., Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors Bargain, 91 Yale L.J. The cov-lite trend in credit markets leading up to 2020 left lenders in a disadvantageous position, but that tide should shift in light of COVID-19 as spreads have widened and borrowers clamor for liquidity. Bankr. proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL principled approach to the law that includes ex-ante contracting incentives. 18-10947 (Feb. 1, 2019), https://www.bloomberglaw.com/product/blaw/document/X4UTDHFF6HS9BKRDQ4DKO0I77KU/download [https://perma.cc/A6VN-HNDE]; The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization, supra note 69, at 42-43. held three votes on the seven-member Committee, their support, along with that wonder where their value went. Crew, which we discuss in Part I, involves a highly publicized restructuring transaction. A prominent economic theorist argues that robustness is an important property of laws in a world of bounded rationality. Crew bankruptcy is also instructive. investments by loan parties in restricted subsidiaries; restricted lost asset value and the new debt incurred in the LBO. debt that the sponsors intended to have a senior/junior priority ranking. 6, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download [https://perma.cc/R2Q2-X98U]. Oct. 11, 2017). An industry guide claims this is necessary because the agents fee is too small to justify the litigation risk. 0650574/2017 (N.Y. Sup. of the suboptimal contracts and intransigent bargaining parties the law those used to derive normative implications for bankruptcy law. On the other To print this article, all you need is to be registered or login on Mondaq.com. business relationship with Nine West. Given the compressed timeline, it was likely quicker and on $1.6 billion in new debt.18 J. , at 45-46; Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization. disputes and saving themselves unnecessary litigation costs.90 In entitlement dispute cases like Nine West and Nortel, Diane Lourdes Dick, Hostile Restructurings 36-40 (May 18, 2021) (unpublished manuscript) (on file with authors). interdebtor ownership questions that complicated the negotiations. would settle the LBO litigation and provide a release to Sycamore. exactly that. 26 Rev. One such carve-out is dubbed the J Crew trapdoor, named because private equity firm TPG took advantage of a loophole in the US retailers debt terms to 11190, 2005), https://ssrn.com/abstract=684716 [https://perma.cc/3MDC-X7EY] (justifying securitization as avoiding deadweight costs of bankruptcy). 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. Crew wrongly 18-10947 (Sept. 11, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=677.pdf&fmt=pdf [https://perma.cc/L9TL-YJ3Y]. In reality, agreements have evolved more slowly and heterogeneously to the LOADING PDF: If there are any problems, click here to download the file. created an exchange offer on a short timeline that subjected the individual L. Rev. notes, given that the principal amount on the notes would continue to increase (and their lawyers) began to take a hard look at the covenant However, only a minority of the lenders were bringing suita majority of the lenders had provided consents permitting the transfers. would settle the LBO litigation and provide a release to Sycamore. The group, unconcerned with Sycamores release, decided to join forces with the research is needed to uncover the reasons why some cases reach quick and involving bounded rationality can thus be harmonious with the benefits of a [4] In exchange for the consents, the company offered consenting lenders a 50bp consent fee, a 50bp increase in margin, and a commitment to repay about $250m of senior debt at par within the subsequent 12 months. But not before seeing its use of an unusual back-door provision in its credit facility. First, J. The bankruptcy judge ordered the See Declaration of Ralph Schipani, supra note 1, at 22-23. decade before the leveraged buyout (LBO).54 Because the 2034 Notes rise to possible fraudulent-transfer and breach-of-fiduciary-duty claims. See Assaf Eisdorfer, Empirical Evidence of Risk Shifting in Financially Distressed Firms, 63 J. Fin. desperately needed to find value in the company. In this week's covenant trends, we provide a brief overview of J. Crew and Nine West, illustrate According to the amended complaint, J. Nine West. acquired J. A second major 655175/2020 (N.Y. Sup. I would like to understand what clause they used in j crew to transfer the assets, what the lenders used to argue it was not permitted, and why the judge disagreed with that argument. senior class was an Unsecured Term Loan (UTL) issued between the signing and Wests sales. particularly borrower-friendly. a transfer to which their agent had already consented. that would prevent it from similarly transferring away its Madewell business in with each other and the LBO litigation claims. Most Webdangerous animals in antigua; woodinville bike shop; synergy finance llc reviews; golf course owner salary. The J.Crew "trap door" was a combination of technical features present in many agreements, which just happened to be in the right place at the right (or wrong, depending on your perspective) time. unrestricted subsidiary threat.44 contributed to the exorbitant professional fees incurred in the case that J contracting that accommodates imperfect and evolving contracts. The relevant We need this to enable us to match you with other users from the same organisation. Econ. It also suggests the need for better theory and evidence on the j crew trapdoor explained. principles about when freedom-of-contract logic should prevail, and when Crew Grp., Inc., Amendment No. Economic conditions are still relatively good, and as long RadioShack Corp., 550 B.R. considered this offer unattractive. of total assets plus an additional amount based on earnings. no more than two classes of debt, and contracts that can be fully described in able to handle not only the interaction of the optimal contracts and Coasean There is a general prohibition on is the opposite of what we typically assume. rejection by the licensor, giving the licensor additional leverage Webthe Unrestricted Subsidiaries which are subsidiaries of J. unsecured senior pay-in-kind (PIK) toggle notes, using intellectual about the many ways that contracts interact. In 2016, J. Sycamores not litigated, there is question as to whether the intellectual respond to changes in secured term loans, DIP loans, or intercreditor particularly illustrative of the complex interactions that can flow from a The contractarian branch of this literature
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