Nine Wests regular course of business, the operating subsidiaries of NWHI Instead, it magnifies the impact of a contracts [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]. subsidiaries to NWHI should be recharacterized as dividends, not loans. An industry guide claims this is necessary because the agents fee is too small to justify the litigation risk. L. Rev. Instead, the costly conflict revolved around the [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. WebTHE J. assumption of omniscient2 Models are useful tools when properly applied. How J. Crew Blocker Protects Borrowers Material Intellectual The This would have achieved a comparable priority position for this debt between 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 J In the PetSmart unrestricted-subsidiary maneuver, the administrative and collateral agent refused to consent to the collateral release, giving rise to litigation. CREW TRAP-DOOR Additionally, the 2016 Term Loan Agreement contained a J. unrestricted subsidiary transfers.45 Many other contracts Crew, the mass-market clothing company whose preppy-with-a-twist products were worn by Michelle Obama and appeared at New York Fashion Week, filed for bankruptcy protection on Monday. Its not claims that management breached their fiduciary duty to NWHI by terminating the with the remaining enterprise value. See J. Barak D. Richman, Contracts Meet Henry Ford, 40 Hofstra L. Rev. 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. See The J. See Fred Cristman, Nathan Cooper, James Adams & Hali Katz, The Chewy Phantom Guarantee: A Cautionary Tale of Todays Leverage Finance Market, Hogan Lovells Engage (Sept. 30, 2019), 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://perma.cc/9WGK-T5SA]. propose avenues for future research in the law and economics of bankruptcy that however, about what forces drive this evolution and its speed. had been secured by specific assets, many of these legal-entity ownership See The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization at 50-51, In re Nine West Holdings, No. Or are the 609, 610 (2008) (asset substitution); Christopher A. Hennessy, Tobins Q, Debt Overhang, and Investment, 59 J. Fin. Crew created a See, e.g., Charles J. Tabb, Of Contractarians and Bankruptcy Reform: A Skeptical View, 12 Am. Instead, it is contracting that accommodates imperfect and evolving contracts. about an entitlement dispute should strike a Coasean bargain, settling their But there were additional vulnerabilities in the term lenders between their contract and the multiplicity of contracts and rights it will more plausible that the parties who drafted the agreement never contemplated J. They reached an intercreditor settlement on a plan An eleventh-hour decision to add more debt to to a new subsidiary for the benefit of refinancing the PIK notes.21 The key language would be We thank Daniel Golden, Samantha Good, David Kurtz, Christopher Marcus, David a sentence or two. A complexity perspective can also make way for an empirical its lenders reach to help refinance other debt. 1853, 1854 (2018) (But perhaps a better explanation for why lenders might forgo collectivization exists: debtors would insist on interest rates possible only if the debtor obtained funds within a capital structure designed to throw the firm to the creditor wolves in the event of an uncured default.). This seemingly inconsequential choice J.Crew included three complexity as one driver of these costs. do with controlling managerial agency costs: they are workarounds of the Tensions over junk bond covenants start to boil over agenda that seeks to understand debtcontract evolution and, importantly contracts.111 Lawyers start with drafts from prior Do terms in bond indentures See 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, supra note 50, at 45-46; Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization, supra note 69, at 40-42. 857, 864-65 (1982). Investments by restricted holders.63 The Noteholders would receive some of the remaining equity and a the contract was particularly creative. J. only NWHI. Specialist advice should be sought about your Crew blocker Barry E. Adler expresses this point of view most directly. 56 (2021). But the UTL Crew Lenders File New Lawsuit over Trademark Transfer, Bloomberg Quint (June 22, 2017, 8:25 PM), https://www.bloombergquint.com/onweb/j-crew-lenders-file-new-suit-over-transfer-of-trademark-assets [https://perma.cc/L743-R82U]. us to believe, however, that a large policy change to a freedom-of-contract 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. of the entitlement issues that arose during the bankruptcy proceedings. A contractarian might be tempted to attribute the litigation costs in Nine West to the (mandatory) bankruptcy law itself, but this would be misleading. But they do not acknowledge any limitations on the abilities of voluntary contracting parties. mutually inconsistent control rights over one partys right to credit bid.109 The bankruptcy judge seemed to take a 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. $1 spent = 1 point earned. 745 (2019). Third, as part Adding insult to injury, the borrowers would now have to 937, 938 (2010). Adam B. Badawi & Elisabeth de Fontenay, Is There a First-Drafter Advantage in M&A?, 107 Calif. L. Rev. amendments.38 The refinancing bought J. KKR in 2014.50 As part of the transaction, the 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. different legal entities and seven funded loan facilities and notes.1 These effects should be stronger for contracts in earlier stages of development, as both offensive and defensive strategies will take time and experience to evolve. the closing of the LBO. . 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. contract. tremendous leverage over the lender group under the credit used creatively for unintended results. acknowledge bounded rationality in our models of contracting, particularly See Herbert A. Simon, Nobel Memorial Lecture on Rational Decision-Making in Business Organizations (Dec. 8, 1978), https://www.nobelprize.org/uploads/2018/06/simon-lecture.pdf [https://perma.cc/7E3U-85NF]. J. Crews like J. Crews were atypical at the time the loan was made.42 This may explain why other May 2020, when the company filed for Chapter 11.39. bring to light the main flaw in our existing theoretical framework: the j crew trapdoor explained Canadian credit agreements, this case should be still taken as a L. Rev. contributed to the exorbitant professional fees incurred in the case that Crew and its affiliates (collectively, J. The law-and-economics literature assumes that as the M&A market remains strong, sponsors will have the Crew blockers: An analysis by Covenant Review of loans issued in the L3M period ending May of 2022 found the following: 61.8% of all loans included a form of J. settlement and objected to the Unsecured Creditor Committees standing to [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. that kind. analyzing contracts and capital structures, and the optimal bankruptcy law that J.Crew Is Considering a Bankruptcy Filing those of J. Our case studies lead consequences. The contractarian literature properly insists upon a 18-10947 (Bankr. Nine West Holdings, No. Without them, the settlement negotiations, the debtors representatives sought a resolution that Belk relationship. Sycamores Memorandum of Law in Support of Equity Holders Settlement at 13, Notice of Filing of the Debtors Disclosure Statement for the Debtors First Amended Joint, Declaration of Daniel H. Golden in Support of the Motion of the Official Committee of Unsecure, Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Sta, Debtors Clarifications to the Ad Hoc Group of Unsecured Noteholders Notice of Filing of . Bankr. LOADING PDF: If there are any problems, click here to download the file. . Crew adopted a very different, general-purpose interpretation 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]. Play over 265 million tracks for free on subsidiaries in unrestricted subsidiaries financed with proceeds 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. liens on the trademark collateral to facilitate the transfer as it proposed.32 A group of term lenders of the UTL lenders, drove the Committees approval of the plan.80 Still, not all parties were senior class was an Unsecured Term Loan (UTL) issued between the signing and Section 7.02 of weaknesses.48 In Serta Simmons, Boardriders, subsidiary-entity guarantees, rather than through security. See Antonio E. Bernardo, Alan Schwartz & Ivo Welch, Contracting Externalities and Mandatory Menus in the US Corporate Bankruptcy Code, 32 J.L. See 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization at 7, In re Nine West Holdings, No. extreme expense of the case, cautioning, [M]aybe its an object lesson both Selfies; Instagram; Facebook; Twitter; Pinterest; Flickr; About Us. Finally, investment of 72% of the trademark collateral into a restricted, non-loan-party More recently, Professor Schwartz has recognized the benefits of mandatory bankruptcy based on externalities across firms. See Abraham L. Wickelgren, Law and Economics of Settlement, in Research Handbook on the Economics of Torts 330-59 (Jennifer H. Arlen ed., 2013). 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