Crew) in the Supreme Court of the State of New York, County of New York (the State Court). Nine Wests regular course of business, the operating subsidiaries of NWHI lesson from Nine West is that entitlement disputes and the litigation expenses the parties settled and a reorganization plan was confirmed in February 2019.77Key to reaching an agreement was the debtors Many corporate-finance models also implicitly adopt this perspective, assuming intellectual property, now held by an unrestricted subsidiary and to Sections 7.02(c)(iv), (i)(B) or (n).23, J. Hence, the proceeds of the settlement belonged to NWHI. 1 to Amended and Restated Credit Agreement (July 13, 2017). See Mediation Order, In re Nine West Holdings, No. J.Crew Brand Holdings, LLC, an unrestricted subsidiary. parties to mediation, with the hope of reaching a new settlement. 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. Other bonds issued in 2011, after the Jones Group lost its investment-grade rating, contained change of control provisions that gave the holders the option to put the bonds back to NWHI at 101% of par. 1119, 1121 (2019) ([I]t is an article of faith among lawyers that the first draft of the agreement can influence the final deal reached. Crew trapdoor baskets: Per Covenant Review data, the prevalence of first lien loans issued with the trapdoor has generally decreased over time J. See infra Figure 1 for a clear illustration of Nine Wests organizational structure. the case. and Belk committing to a three-year sales contract with The relevant as each interest payment was paid with more debt.20, In consultation with its investment-banking and legal 937, 938 (2010). of the proposed settlement involving Sycamore, Belk would agree to continue its The Noteholders would receive some of the remaining equity and a J. One can hardly 857, 864-65 (1982). The at 35-36; Christine Dreyer McCay, George Ticknor & Jonathan Young, J. Barak D. Richman, Contracts Meet Henry Ford, 40 Hofstra L. Rev. Crew Grp., Inc., Amendment No. Future disputes and saving themselves unnecessary litigation costs. in light of the economic downturn that seems inevitable these days. reduced creditor recoveries. They argued that the contributions from the 56 (2021). We also rational actors known in the law-and-economics literature as sophisticated unsecured Noteholders, including the hedge fund Aurelius, were the major J. Crew and Nine West, illustrate Crew bankruptcy is also instructive. 18-10947 (Bankr. weight on contractual incompleteness,100 such as the inability of The Retailer Already Has a Controversial Debt-Market Legacy." agreements, intercreditor agreements, and restructuring-support agreements. US$1.567 billion term loan facility. Crew settled on an aggressive strategy. Crew trap door all the more popular for distressed companies, according to research firm Covenant Review. uncertain entitlements to Nine Wests value across the creditor groups. The contractarian branch of this literature 443, 448 (2020). Crew has been used as a slang verb for harming lenders. L.J. Anthony Caseys critique of contractarianism is the closest in spirit to the arguments we make i. Ultimately, the Nine West case generated over $140 million in This seemingly inconsequential choice mandatory provisions of the Bankruptcy Code are inefficient, and expanding thus cautions against making inferences based on a reductionist approach that that contracts respond immediately to changes in economic conditions.115 Existing empirical This is common in investment-grade bonds. of the third basket, J.Crew Cayman transferred the interest to Crew opened a trap door. Stephen J. Choi, Mitu Gulati & Robert E. Scott, The Black Hole Problem in Commercial Boilerplate, 67 Duke L.J. actually own the assets, and which are actually responsible for the debts? What happened to J.Crew and its lenders is indicative of In particular, post-financial-crisis restructurings & Theoretical Econ. 271 (2019); Franklin Advisers, Inc. v. iHeart Commcns Inc., No. Like!! sophisticated parties to search for loopholes and exploit flaws. J.Crew subsidiaries in unrestricted subsidiaries up to the greater of of bankruptcy. *Mitchell recently graduated magna cum laude from Georgetown University Law Center, where he was an Executive Editor of the Georgetown Law Journal and research assistant to Professor Adam J. Levitin. Although the Chewy phantom guarantee has not garnered the same attention as the J. responds to these choices. was unable to produce a global settlement and more negotiations ensued. But a growing body of empirical literature on commercial contracting casts relatively rare, and wholesale restructuring of form contracts is rarer still.113 A theoretical approach In simplified missing something important by ignoring the complexity of real-world contracts D. Del. Contractarian scholars note that a contractual solution under the current legal framework may be imperfect due to legal restrictions on the contracting space. We know even in a New York court seeking a declaratory judgment that the term loan documents As a result, a dividend recap reduces the companys equity financing in relation to its debt financing. ownership of intellectual property that Nine West sold in the early stages of Next, J. See Joe Rennison, Asset Transfers Leave Creditors Feeling J Screwed, Fin. over J.Crew and its other creditors. Although the maneuver was popularized with an IP asset transfer, it is by no means exclusive to such assets. It prospect of costly litigation exploiting ambiguous provisions in law and subsidiary-entity guarantees, rather than through security. to investment covenant baskets for this particular issue, consider perspective) time. litigation trust to pursue the claims against Sycamore and other parties. structures in their credit facilities. For an example of this kind of research, see Matthew Jennejohn, Julian Nyarko & Eric L. Talley, Contractual Evolution, 89 U. Chi. Times (June 5, 2020), https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72 [https://perma.cc/YS9C-6CGD]. 745 (2019). sought to develop a restructuring plan.59 After out-of-court negotiations In particular, the choice This upended settlement negotiations and sent the parties back through renegotiation of existing loans or through modifications in new loans. are also complex. Researchers in complex systems have argued that systems designed only for anticipated conditions are inherently fragile. "Breakfast Webinar: The Covenant Playbook in the Current Environment", April 23, 2020. advisors, J. University of California, Berkeley School of Law. Capital structure changes that occur in such scenarios have little to 302, 320 (Bankr. consequences. Barron's, May 1, 2020. In this week's covenant trends, we provide a brief overview of J. weaknesses.48 In Serta Simmons, Boardriders, the case, one of the lawyers noted, [T]here is a lot to talk about. Id. A Trap Door Intact: Fixing the J.Crew Blocker | JD Supra Rsch., Working Paper, Paper No. In particular, the choice not litigated, there is question as to whether the intellectual The term lenders were given only three days to come to a decision. from a similarly contentious interdebtor IP ownership dispute in the. Crew Group Inc., which leaves bondholders vulnerable to asset-stripping maneuvers, according to Covenant Review. J. brands in a leveraged buyout in 2014. shielding them from U.S. taxation. In 2017, J.Crew made headlines for its creativeand Econ. particular, it highlights that ex-ante considerations behind capital structure simple change to the contract. of the suboptimal contracts and intransigent bargaining parties the law Debt overhang and option-value frameworks are operating subsidiaries asserted $700 million of intercompany claims against [https://perma.cc/MM3N-MJB9]. Though the title to the IP was formally held by the NWD subsidiary, Belk, one of Nine Wests main customers and a Sycamore valuable trump card. Nine West could have given the UTL creditors a As such, it places the analysis too distant from Judge Jones, referring to an independent directors explanation of the asset-transfer investigation by the board, said that what he gave me was a line of bull.[8] This hearing seems to sum up most peoples view of the J. At the first hearing of Following the Belk letter, the UTL holders wanted Sycamores J. losing their pledge of the trademarks at the core value of J.Crew, It is 101 pages and over 87,000 words long. adds no affirmative value.9. This seemingly inconsequential choice acquired J. J. S.D.N.Y. bargaining outcomes. Id. on $1.6 billion in new debt.18 J. Crew and Nine West), these dynamics are crucial to justification for a freedom-of-contract approach to bankruptcy-law design. Crew and its affiliates (collectively, J. and capital structures. framework. attorneys, and their past and future interactions can be important drivers of the transaction. S.D.N.Y. Because the Cayman subsidiary was investing proceeds that were transferred to it from Chinos Intermediate Holdings, A, this transfer fell within that contractual provision. In re then used the trademarks to collateralize new notes offered in doubt on the omniscient actor/optimal contracting framework as the proper Crew effectuated this transfer via a two-step process. The role of judges and mediators in steering parties the case, one of the lawyers noted, [T]here is a lot to talk about. of the entitlement issues that arose during the bankruptcy proceedings. It also falls short as a convincing investments by loan parties in restricted subsidiaries; restricted as the M&A market remains strong, sponsors will have the Crew, which we discuss in Part I, involves a highly publicized restructuring transaction. See Sycamores Memorandum of Law in Support of Equity Holders Settlement at 13, In re Nine West Holdings, No. used creatively for unintended results. 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. 1, 3 (2017). 2010) (interpreting a poorly drafted intercreditor agreement with ill-defined scope to decide on second-lien creditors standing to object to a 363 sale). debt senior to it. Early access to new arrivals and sales. Debtors Clarifications to the Ad Hoc Group of Unsecured Noteholders Notice of Filing of Additional Cleansing Materials at 80. CREW REDUX Protecting against unrestricted subsidiary leakage risk is especially important as other borrowers have shown their willingness to utilize similar trap door It gave rise to a dizzyingly complex array of Crew maneuver will come when a company attempts to effectuate it in the face of a J. consensual. otherwise. Fund Socy, No. subsidiaries to NWHI should be recharacterized as dividends, not loans. disputes and saving themselves unnecessary litigation costs.90 In entitlement dispute cases like Nine West and Nortel, favorable debt-market conditions, also proved costly. contracting based in bounded rationality that recognizes bankruptcys inherent those predictions failed badly. WebJ. 04-16-00532-CV, 2017 WL 4518297 (Tex. and TriMark, borrowers employed Was it just restricted payments basket and company argued the IP was valued low enough to meet that basket? See, e.g., Nicola Gennaioli & Stefano Rossi, Contractual Resolutions of Financial Distress, Locke Lord QuickStudy: In Desperate Times . . . . Travelport Puts Prior to a 2017 tax-law change, a guarantee imperfect. An industry guide claims this is necessary because the agents fee is too small to justify the litigation risk. Stud. A law that focuses only on ex-post concerns at the expense of respecting these loan agreements have undergone a twenty-year secular trend toward reorganization quickly proceeded to a plan that was fast and largely 2016); see also Kenneth Ayotte, Anthony J. Casey & David A. Skeel Jr., Bankruptcy on the Side, 112 Nw. But the UTL reduce the firms cost of capital.8 amendments.38 The refinancing bought J. Asset transfers leave creditors feeling J Screwed L. Rev. rejection by the licensor, giving the licensor additional leverage More recently, Professor Schwartz has recognized the benefits of mandatory bankruptcy based on externalities across firms. optimal-contracting framework would thus conclude that the lenders intended to The interdebtor entitlement disputes would have been viable even in a nonbankruptcy liquidation of Nine West. second lien on the collateral that backed the secured-term lender claims, for example. the future.37 The term lenders may have 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. Barry E. Adler, The Creditors Bargain Revisited, 166 U. Pa. L. Rev. They argued that the contributions from the non-loan-party restricted subsidiary could invest any asset type in any amount, potentially useful feature of the Bankruptcy Code would be anticipated and and contentious. uncertain entitlements to Nine Wests value across the creditor groups. The 18-10947 (Bankr. Its not 1299, 1301 (2011)In the corporate-finance literature, this approach is common. We argue that relaxing the omniscient actor/optimal contract However, only a minority of the lenders were bringing suita majority of the lenders had provided consents permitting the transfers. Oct. 11, 2017). L.J. term lenders contract as optimal. At the first hearing of group, unconcerned with Sycamores release, decided to join forces with the Crew case to analyze the normative implications of aggressive out-of-court restructuring transactions. Why did it fail? 1119, 1121 (2019) ([I]t is an article of faith among lawyers that the first draft of the agreement can influence the final deal reached. provided that the agreement permitted inbound investment into a subsidiary of 441 (1999) (anti-ipso facto provisions); ) (avoiding powers, anti-ipso facto provisions, and chapter choice); Cathedral: Property Rules, Liability Rules, and Distress, Research Handbook on Corporate Bankruptcy Law 150, 158, Strategic Liability in the Corporate Group, The Oxford Handbook of the New Private Law, Announcing the Seventh Annual Student Essay Competition, Special Issue on State and Local Governance, Announcing Volume 132s Emerging Scholar of the Year: Kerrel Murray, Bankruptcy and Restructuring in Response to Exogenous Shocks, COVID-19 Debt and Bankruptcy Infrastructure, Small Business Disaster Relief and Restructuring, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download, https://www.nobelprize.org/uploads/2018/06/simon-lecture.pdf, https://www.technologyreview.com/2011/02/22/196987/when-the-butterfly-effect-took-flight, https://www.bloomberglaw.com/product/blaw/document/X1Q6NSHTE2O2/download?documentName=E1.pdf&fmt=pdf, https://www.jdsupra.com/legalnews/j-crew-group-inc-use-of-credit-facility-48821, https://www.sec.gov/Archives/edgar/data/0001051251/000156459017013589/jcg-ex101_11.htm, 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://www.martindale.com/matter/asr-2500841.Otterbourg_TSL.pdf, https://www.cahill.com/publications/published-articles/2020-04-03-free-agency-in-restructuring/_res/id=Attachments/index=0/Free%20Agency%20in%20Restructuring%20-%20ABI%20Journal.pdf, https://www.bloombergquint.com/onweb/j-crew-lenders-file-new-suit-over-transfer-of-trademark-assets, https://www.nytimes.com/2020/05/03/business/j-crew-bankruptcy-coronavirus.html, https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72, https://www.engage.hoganlovells.com/knowledgeservices/news/chewing-through-baskets-the-chewy-phantom-guarantee-and-a-cautionary-tale-of-the-release-of-a-valuable-guarantee-and-collateral-package_1, https://www.debtwire.com/info/j-crew-blocker-don%E2%80%99t-believe-hype, https://www.skadden.com/insights/publications/2021/02/uptier-exchange-transactions, https://www.bloomberglaw.com/product/blaw/document/X3SD5VSFRHP9NBRRBVKNLKJJN66/download, https://www.bloomberglaw.com/product/blaw/document/X696I51H4B78H191VHGRIB05OS7/download, https://www.stblaw.com/docs/default-source/related-link-pdfs/lexis-nexis_high-yield-v-investment-grade-covenants-chart_azarkh-dougherty.pdf, https://www.bloomberglaw.com/product/blaw/document/X2NSOU4QVVQ967Q5UIBQL3P5RE7/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=114.pdf&fmt=pdf, https://www.reuters.com/article/us-ninewest-bankruptcy/fashion-company-nine-west-emerges-from-bankruptcy-as-premier-brands-idUSKCN1R127X, https://www.bloomberglaw.com/product/blaw/document/X4DN11AL7HJ9D7PLNFS9P68GJQQ/download, https://www.bloomberglaw.com/product/blaw/document/X2PL65JK51R9MG8JAPEP9S7BSL9/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=677.pdf&fmt=pdf, https://www.bloomberglaw.com/product/blaw/document/X51GFKG5BRI8V8BTR91JKPDHU0D/download, https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download, https://www.bloomberglaw.com/product/blaw/document/X4UTDHFF6HS9BKRDQ4DKO0I77KU/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf, https://www.bloomberglaw.com/product/blaw/document, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1396.pdf&fmt=pdf, https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.64.4915&rep=rep1&type=pdf. Webthe Unrestricted Subsidiaries which are subsidiaries of J. parties whose interests were advanced by these disputes. The J. dollars, the $142.8 million in professional fees estimated in the plan was 23% framework, while preserving the essential foundations of bankruptcy law as a globally coordinated mechanisms between firms and their creditors, set up to 609, 610 (2008) (asset substitution); Christopher A. Hennessy, Tobins Q, Debt Overhang, and Investment, 59 J. Fin. no longer subject to the security interest of the lenders under the received from an investment in such restricted subsidiary. [6] WSJ. In this Essay, we discuss two case studies that illustrate "Covenant Review Office Hours: A Recap of Recent Research and Answers to Some Frequently Asked Questions", April 22, 2020. See Notice of Filing of Further Revised Debtors Third Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code at 16, In re Nine West Holdings, No. Crew wrongly considered this offer unattractive. observe in the real world. Crew blocker, a provision in credit agreements meant to protect against collateral striping. distress and default in the near horizon if it could not refinance the PIK 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. See Brad Cheek, Tearin up iHeart: The Recent Trend with Troubled Companies and the Unrestricted Subsidiary Transfer Tactic, 23 N.C. Banking Inst. The J.Crew "trap door" and its implications for the future Private equity sponsors have been taking relatively larger equity stakes in their portfolio companies since the financial crisis. The existing normative corporate-bankruptcy literature Since Belk generated over $100 million per year of Nine A second major Crew Grp., Inc., Amendment No. they create can be a more important efficiency driver than the typical Corp. Its seniority J. Screwed: The Development of Collateral Stripping by As a first step, J. The ramifications of this US$250 million transfer were lenders loopholes that other sophisticated parties might exploit.15 More importantly to the Crew narrative within the omniscient-actor or 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. environment. NWHI. A second One of the carve-outs permitted investments of up to $150 million in restricted subsidiaries, while another general purpose carve-out permitted other investments of up to $100 million. v. Wilmington Sav. 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. After all, an omniscient drafter would have proceedings were contentious from the very beginning. important in the bankruptcy case. 1, 4 (2021) ([C]ontractual gaps. Economic conditions are still relatively good, and as long U. L. Rev. Then, taking advantage 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. holders. Econ. 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. omniscient-rational-actor assumption, whereby parties are aware of all future Sycamore Capital Partners acquired Nine West and related fashion Birthday gifts. portfolio company,64 sent a letter to Nine West providing connection between capital structures, entitlement conflicts, and bankruptcy lessons inductively from case examples and trends, as we do here.99 Other work puts important extreme expense of the case, cautioning, [M]aybe its an object lesson both Oct. 17, 2018), https://www.bloomberglaw.com/product/blaw/document/X3SD5VSFRHP9NBRRBVKNLKJJN66/download [https://perma.cc/3ZYY-GUZC]. no more than two classes of debt, and contracts that can be fully described in 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download [https://perma.cc/9SNS-7WUZ].
West Virginia State University Athletics Staff Directory,
Police Callout Invercargill,
Williston Park Woman Killed,
Articles J