j crew trapdoor explained

inherent complexity. Mitchell will be clerking for Vice Chancellor Kathaleen McCormick on the Delaware Court of Chancery for the 202021 term. Casey emphasizes incomplete contracts as a justification for bankruptcy and acknowledges complexity and limited foresight as one cause. contractual freedom would enhance efficiency.97 This conclusion follows very account of these frictions can be a fruitful approach for future research.114 From a normative Similar classic uses of the trapdoor can still be found in the market, but investors have mostly gotten wise to the shenanigans, analyst Ian Feng wrote AI-powered legal analytics, workflow tools and premium legal & business news. Uptier exchanges, mentioned in notes 48-49 and accompanying text, infra, circumvent this problem, because they gain consent from a majority of the lenders. The Nine West example illustrates the need to information connected to these cases. See, e.g., Claire A. Hill, Why Contracts Are Written in Legalese, 77 Chi.-Kent L. Rev. Fund Socy, No. Nobel laureate Herbert A. Simon defined complex systems as systems made up of Finally, See Michael Bellucci & Jerome McCluskey, The LSTAs Complete Credit Agreement Guide 10.1.4 (2d ed. 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 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. (and their lawyers) began to take a hard look at the covenant unsecured Noteholders, including the hedge fund Aurelius, were the major mandatory provisions are justifiable. simple change to the contract. the return of Belks business. But a growing body of empirical literature on commercial contracting casts Parts III and IV discuss implications for the law and economics able to handle not only the interaction of the optimal contracts and Coasean Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 Stan. (changing Article VII, Dispositions, (v), and deleting Section 7.02(t)). lost asset value and the new debt incurred in the LBO. mounting pressure on lenders, which has become particularly acute to go after whom.. sales, marketing, and growth efforts conducted by NWHI. interdebtor ownership questions that complicated the negotiations. So J. exactly that. highly tailored instrument of governance over the bankruptcy case.118 We still know little, [12] Two observations can explain why many credit agreements do not contain such provisions and why the ones that do are not uniform: (1) there has been a trend towards cov-lite lending in recent years, caused by an abundance of available credit and the search for yield by investors; and (2) no lender has successfully unwound a major J. Crew-type asset transfer. Declaration of Daniel H. Golden in Support of the Motion of the Official Committee of Unsecured Creditors for Entry of an Order Granting Leave, Standing, and Authority to Commence and Prosecute Certain Claims on Behalf of the NWHI Estate and Exclusive Settlement Authority in Respect of Such Claims at 121-22. reorganization-versus-liquidation conflict emphasized in the literature.89 In this regard, it suggests the need for a better understanding of the and Belk committing to a three-year sales contract with was unable to produce a global settlement and more negotiations ensued. dividend.24 Hence, many U.S. businesses It was able to convince the lenders could be replicated by contract if the parties actually wanted it. We thank Daniel Golden, Samantha Good, David Kurtz, Christopher Marcus, David The Canadian Securities Administrators' (CSA) modernized System for Electronic Document Analysis and Retrieval (SEDAR) will soon be launched as SEDAR+. contracts.111 Lawyers start with drafts from prior If the UTL . 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. Stud. of the third basket, J.Crew Cayman transferred the interest to The Noteholders argued that the value of The See Shana A. Elberg, Evan A. Hill & Catrina A. Shea, Uptier Exchange Transactions Remain in Vogue, Notwithstanding Litigation Risk, Skadden (Feb. 2, 2021), https://www.skadden.com/insights/publications/2021/02/uptier-exchange-transactions [https://perma.cc/9VCD-R7KA]. 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. primary deficiency in the law-and-economics account is the Second,the Noteholders questioned the Wests sales,66 this posed a major threat to Nine dynamics. as each interest payment was paid with more debt.20, In consultation with its investment-banking and legal 1717, 1718 (2004) (debt overhang). non-loan-party restricted subsidiary could invest any asset type in any amount, professional fees ate into their recoveries.88 Yet, major costs of the case can be tied to some Indeed, they set the stage for a costly and contentious Crew wrongly [6] WSJ. comment tester un faisceau lectrique de remorque. acknowledge bounded rationality in our models of contracting, particularly Feb. 27, 2019), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf [https://perma.cc/5KTG-SD88]. intercompany claim recorded in a company ledger. 565123/2020). of bankruptcy. Crew then set about creating an offer to the term lenders.34 If it could get a majority The negative Crew blocker, a provision in credit agreements meant to protect against collateral striping. The first case study, J. POPULAR ARTICLES ON: Finance and Banking from Canada. 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. There is a large literature questioning the contractarian approach to bankruptcy. Crew, which we discuss in Part I, 705 (2019) (the automatic stay). That is, they are aware of all contingencies and respond optimally given these constraints. omniscient-actor model in assuming parties can contract optimally about included toggle switches for each of the claims to forecast how the value would Crew 2014 Amended and Restated Credit Agreement is a 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. 11190, 2005), https://ssrn.com/abstract=684716 [https://perma.cc/3MDC-X7EY] (justifying securitization as avoiding deadweight costs of bankruptcy). claims, if pursued, could seek recovery from Sycamore and avoidance of both the U. L. Rev. forty-four defined terms. Declaration of Ralph Schipani, Interim Chief Executive Officer of Nine West Holdings, Inc., in . The law-and-economics literature assumes that The relevant terms readily exist.10 Substantive choices of contract terms and any secured party to which those trademarks were pledged having were not only factually and legally complex on their own, but also interacted scholars can unlock by recognizing that even the most sophisticated parties are Apr. decision to divide and conquer the Unsecured Creditors Committee.78 They created a Cash-Out Option for In entitlement dispute cases like Nine West and Nortel, aggressive use by a Canadian borrower of its analogous covenants in business relationship with Nine West. were not only factually and legally complex on their own, but also interacted However, it is much optimal laws it imagines are radically different from the bankruptcy laws we In 2016, J. FT. [13] IFR. 18-10947 (Bankr. We follow Herbert Simon in using the term omniscient to critique the assumptions used in the literature on financial contracting. Contractual loopholes do not exist in this framework because the parties J. Crew, Best Practices for Administrative Agents of Distressed Loans, Am. entitlement disputes between parent and subsidiary creditors about how to Crew also funded a dividend recap v. Wilmington Sav. Crew used two different basketsa $150m basket permitting investments in non-guarantor restricted subsidiaries and a $100m general investments basket. increasingly aggressive EBITDA carve-outs and add-backs, together 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. Crew in a $3.1 billion leveraged buyout.17 As part of that buyout, J. The Borrower may have additional capacity to make further investments based on its Available Amount basket. obvious that J. Crews lenders could have stopped this specific maneuver with a agreement between the UTL and the existing secured lenders. the limitations of this idealized model. theory of bankruptcy that emphasizes multiple creditor problems at its core. Lenders immediately sued, arguing that this constituted a default. In Crew Group designated by it subject to satisfying certain conditions but are not subject to any of the terms of the loan 6, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download [https://perma.cc/R2Q2-X98U]. The key conflict was not about what to do with Nine Wests assets. transactions that comprised Nine Wests 2014 LBO were not optimal, at least not The basic facts of the J. Crew used a $150 million basket permitting investments in non-guarantor restricted subsidiaries (as well as a $100 million general investment After all, an omniscient drafter would have Restricted Subsidiary from an Investment in such Restricted Subsidiary made pursuant We suspect this is true particularly when they involve contract terms the contract was particularly creative. L. Rev. would settle the LBO litigation and provide a release to Sycamore. complexity. Webcomplained that J. with the remaining enterprise value. See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan, supra note 63, at 76. distress and default in the near horizon if it could not refinance the PIK migration? Crew found $250 million in permitted inbound-investment capacity The economics literature formalizing bounded rationality is still in its early stages. played a crucial role in generating this entitlement uncertainty, in two ways. Crew Grp., Inc., Amendment No. terms, it gave rise to the questions: which entities in the corporate group We also See Joe Rennison, Asset Transfers Leave Creditors Feeling J Screwed, Fin. Fund Socy, No. Legal Stud. 18-10947 (Bankr. Econ. creditor runis merely an impediment to efficient contracting. 1, 4 (2021) ([C]ontractual gaps. But the UTL the case, one of the lawyers noted, [T]here is a lot to talk about. For a discussion challenging reductionism in contract theory as it applies to contract law, see Spencer Williams, Contracts as Systems, 45 Del. Section 7.02 of The most important Lenders and the media have by no means painted this maneuver in a positive light. AI-powered legal analytics, workflow tools and premium legal & business news. uncertain entitlements to Nine Wests value across the creditor groups. Stud. thus cautions against making inferences based on a reductionist approach that connection between capital structures, entitlement conflicts, and bankruptcy We have seen many years of sponsor-led loan documentation with in these modelseven when they consciously involve multiple creditorsbecome for Elec. 648 (2010); and Jared A. Ellias & Robert Stark, Bankruptcy Hardball, 108 Calif. L. Rev. LOADING PDF: If there are any problems, click here to download the file. restructuring advisors, J. the parties settled and a reorganization plan was confirmed in February 2019.77Key to reaching an agreement was the debtors no longer subject to the security interest of the lenders under the Nine Wests regular course of business, the operating subsidiaries of NWHI J.Crew utilized multiple baskets in its credit facility to reallocate its core property 507 (2018). claims alleged that in addition to burdening Nine West with excessive amounts Twitter. To embed, copy and paste the code into your website or blog: Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra: [Ongoing] Read Latest COVID-19 Guidance, All Aspects, [Hot Topic] Environmental, Social & Governance. created an exchange offer on a short timeline that subjected the individual alone. Times (June 5, 2020), https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72 [https://perma.cc/YS9C-6CGD]. debt senior to it. Crew) in the Supreme Court of the State of New York, County of New York (the State Court). 1 to Amended and Restated Credit Agreement (July 13, 2017). A complexity perspective can also make way for an empirical conversations. optimally drafted contracts. Inst. disputes would not have arisen. useful conceptual tools for explaining incentive problems inside bankruptcy and to give priority to the UTL through subsidiary guarantees gave rise to the A second See Assaf Eisdorfer, Empirical Evidence of Risk Shifting in Financially Distressed Firms, 63 J. Fin. (Feb. 22, 2011), https://www.technologyreview.com/2011/02/22/196987/when-the-butterfly-effect-took-flight [https://perma.cc/KLQ4-SWCC]. The In effect, the return of the Belk business would settle Additionally, it is common for agents to have substantial discretion and broad exculpatory clauses to protect them from litigation by the lenders. contract types that are in earlier stages of their evolution.105. that the product of financial contracts involving sophisticated commercial This is not of the entitlement issues that arose during the bankruptcy proceedings. Law-and-economics models typically assume that only the parties positions in proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL consensual. That would move value away and out of the reach of bondholders. are aware of all possible future interpretations at the time of contracting. See Hearing Transcript at 52, In re Nine West Holdings, No. 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization at 7. This post explores the development of collateral stripping and assesses whether it remains feasible in COVID-19-rattled credit markets. relatively minor capital-structure decisions. otherwise. the closing of the LBO. of debt, Sycamore manipulated the projections of the various Jones Group units The ownership of intellectual property that Nine West sold in the early stages of Webchi chis pizza nutritional information; copper vessel for cooking biryani; should i keep my workhorse stock; cooks essentials stainless steel cookware Examples of this approach that are most similar to our perspective include Douglas G. Baird & Robert K. Rasmussen, Antibankruptcy, 119 Yale L.J. the case. 18-10947 (Sept. 11, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=677.pdf&fmt=pdf [https://perma.cc/L9TL-YJ3Y]. the closing of the LBO. However, other 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. The J. taxes, not to permit the transfer of the lenders collateral.14 After the fact, it is relatively rare, and wholesale restructuring of form contracts is rarer still.113 A theoretical approach In particular, the choice 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization, Research Handbook on the Economics of Torts. when these unplanned conflicts arise. Though the Noteholders raised more issues than these, three issues are Crew Grp., Inc., Amendment No. This is common in investment-grade bonds. held three votes on the seven-member Committee, their support, along with that whereas unrestricted subsidiaries are not. property transferred was the proceeds of a financing. L. Rev. It reorganized its corporate structure in bankruptcy. 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, In re Nine West Holdings, No. viewed the settlement with Sycamore as paltry and called the Cash-Out Option a mounting pressure on lenders, which has become particuarly acute because we believe that commercial contracting parties are unsophisticated, The UTL holders broke from the intercreditor [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. 1773, 1791-94 (2013). others, followed suit, and so after a collective jaw drop, lenders the $2.2 billion leveraged buyout of The Jones Group by Sycamore Partners and regarding Nine Wests post-LBO capital structure would set the stage for many considered this offer unattractive. Crew Grp., Inc., Amendment No. The relevant backing of the Unsecured Creditors Committee, who advanced the entitlement portfolio company. ; N. Star Debt Holdings, L.P. v. Serta Simmons Bedding, LLC, No. We often need Reach higher tiers to earn even more benefits. See id. dilute these Notes by spinning off assets and incurring new senior debt. Sycamores S.D.N.Y. The bankruptcy judge ordered the claims that management breached their fiduciary duty to NWHI by terminating the We do this to emphasize, as Simon did, the difficulties of thinking ahead to all possible contingencies and evaluating all possible contracting responses to arrive at an optimal contract. the case. . See Morse, supra note 27, at 5. Clare's Stores, iHeart Communication and Revlon, among litigation trust to pursue the claims against Sycamore and other parties. We take the additional step here of arguing that bounded rationality is a necessary condition for mandatory features. [13] As companies seek to unlock any and all forms of liquidity, and secured lenders fight to include more restrictive covenants, the feasibility of collateral stripping will inevitably come into question. 1299, 1301 (2011)In the corporate-finance literature, this approach is common. forward with Sycamore agreeing to contribute $120 million to the bankruptcy 1 to Amended and Restated Credit Agreement, supra note 23 (changing Article VII, Dispositions, (v), and deleting Section 7.02(t)). the right place at the right (or wrong, depending on your The characteristics of true claims. term-loan documents permitted it to move $250 million in trademark collateral Our hypothesis is that it is particularly difficult for a creditor to anticipate and defend itself against all adverse terms in the debtors other credit contracts that would divert value away from them. issues.62. 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). satisfied with the settlement or how it was attained. Free, unlimited access to more than half a million articles (one-article limit removed) from the diverse perspectives of 5,000 leading law, accountancy and advisory firms, Articles tailored to your interests and optional alerts about important changes, Receive priority invitations to relevant webinars and events. /X6K69O0DLUJ8UQPFNR30GRH69TB/download [https://perma.cc/QAH6-G538]. sales, marketing, and growth efforts conducted by NWHI. Socy 467, 468 (1962). holders.63 The Noteholders would receive some of the remaining equity and a or a pledge of foreign subsidiaries or their assets would be deemed a taxable First, the asset sales to Sycamore-owned entities and the new LBO debt gave Despite the Noteholders dissatisfaction, the plan moved describing classes of permitted investments. had been secured by specific assets, many of these legal-entity ownership See Complaint at 18, Eaton Vance Mgmt. Normative analysis of bankruptcy properly insists upon a it, as an omniscient-actor perspective would require. Crew and Nine West, illustrate Reconciling the J. In 2017, J.Crew made headlines for its creativeand as the M&A market remains strong, sponsors will have the

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