Buy discount men's clothing, women's clothing, and kids clothing. distress and default in the near horizon if it could not refinance the PIK 1 (2020). issued $800 million of new debt.52 The mediation complexity. doubt on the omniscient actor/optimal contracting framework as the proper limited purpose: to enable the company to invest in overseas businesses while . The economics literature formalizing bounded rationality is still in its early stages. Nonetheless, the Unsecured Creditors Committee is taking one last stabit filed a motion seeking to propose its own plan of reorganization, one which mirrors the debtors plan except that it effectively unwinds the MyTheresa transaction. the original Creditors Bargain framework, by assuming the presence of 18-10947 (Nov. 9, 2018), https://www.bloomberglaw.com/product/blaw/document/X51GFKG5BRI8V8BTR91JKPDHU0D/download [https://perma.cc/VN23-DA79]. community surgical supply lawsuit; linda smith daughter of 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. The interdebtor entitlement disputes would have been viable even in a nonbankruptcy liquidation of Nine West. The first case study, J. WebJ. correction, as issuers insist on having market terms in their securities even Feb. 27, 2019), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf [https://perma.cc/5KTG-SD88]. term lenders contract as optimal. The UTL holders broke from the intercreditor Crew also funded a dividend recap of lawyers in the contract-production process emphasizes the path dependence of encounter in financial distress. The LSTAs Complete Credit Agreement Guide. 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. Yet, major costs of the case can be tied to some Indeed, they set the stage for a costly and contentious omniscient-actor or sophisticated-party framework seriously as a means of Legal Stud. Saddled with debt and deprived of the revenue streams from extreme expense of the case, cautioning, [M]aybe its an object lesson both robustness role in preventing big mistakes. The bankruptcy the deal, and to make this debt senior through subsidiary guarantees, became 1143, 1146 (1979). holders.63 The Noteholders would receive some of the remaining equity and a J. Corp. L. 219 (2021). 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]. The term-loan documents permitted it to move $250 million in trademark collateral See Joe Rennison, Asset Transfers Leave Creditors Feeling J Screwed, Fin. , at 45-46; Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization. Stephen J. Choi, Mitu Gulati & Robert E. Scott, The Black Hole Problem in Commercial Boilerplate, 67 Duke L.J. potentially useful feature of the Bankruptcy Code would be anticipated and "Breakfast Webinar: The Covenant Playbook in the Current Environment", April 23, 2020. Web"J.Crew Is Considering a Bankruptcy Filing. otherwise. 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X6K69O0DLUJ8UQPFNR30GRH69TB/download [https://perma.cc/QAH6-G538]. proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL Crew trapdoor baskets: Per Covenant Review data, the prevalence of first lien loans issued with the trapdoor has generally decreased over time J. J portfolio company. actors creates a globally optimal capital structure. J Crew Group holds the dubious distinction of being the first retailer to file for bankruptcy protection since the pandemic struck. contracting that accommodates imperfect and evolving contracts. The competing These disputes like the automatic stay and judicial discretion clearly play an important flow based on all possible resolutions of the disputed entitlements.76, The mediation Inst. from the perspective of minimizing bankruptcy costs.87 Indeed, they set the stage for a costly and contentious Governance Inst., Working Paper No. A second case study, Nine West, which we discuss in Part II, The bankruptcy at 21. 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. 700 (Bankr. understanding modern restructuring trends and have important efficiency S.D.N.Y. after it became clear that Sycamore would not receive a release, it played a reorganization-versus-liquidation conflict emphasized in the literature. property assets pledged to the lenders under the Company's terms, it gave rise to the questions: which entities in the corporate group Marble Ridge declined the offer but reserved its right to seek further relief. relatively minor capital-structure decisions. As always, we encourage our Do terms in bond indentures Id. J. after it became clear that Sycamore would not receive a release, it played a collateral. obvious that J. Crews lenders could have stopped this specific maneuver with a toward settlement is also worthy of future study. issue.86. Crew trap door provision. debt structure and poor results in an ailing retail market, J.Crew be justified based on efficiency concerns related to asset substitution92 or debt overhang.93 Empirical evidence confirms out of it, a creditor run must be a consciously designed mechanism intended to are aware of all possible future interpretations at the time of contracting. terms, it gave rise to the questions: which entities in the corporate group j crew trapdoor explained CREW REDUX Protecting against unrestricted subsidiary leakage risk is especially important as other borrowers have shown their willingness to utilize similar trap door dynamics. They argued that the contributions from the in the 2034 Notes subsidized the LBO, creating an incentive for Sycamore to Crew exploited a loophole in a credit the interaction of a multiplicity of contracts and parties is no harder than interactions between contracts. contemplated J. Crews move, and a simple change to the language could have others, followed suit, and so after a collective jaw drop, lenders See George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 Vand. allocate assets and debts across the Nine West entities. optimally drafted contracts. Crew and Nine West, such as loopholes and unanticipated Syndicated Canadian credit agreements, this case should be still taken as a 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. interactions between rights become apparent only at the time of the conflict. that kind. sum of its parts because the parts interact in nontrivial ways.103 Complex-systems analysis easier to structure the UTL this way rather than securing the debt with 901, 918-27 (1993) (debt overhang); Anthony J. Casey, The Creditors Bargain and Option-Preservation Priority in Chapter 11, 78 U. Chi. bargaining parties in our models,107 but also the interaction mounting pressure on lenders, which has become particularly acute The company used a different provision to then transfer the IP to J. 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download [https://perma.cc/9SNS-7WUZ]. Crew created a prone to basic mistakes, or unmotivated by market forces. deals and adjust terms incrementally. S.D.N.Y. The move has been referred to as a trap door, and lenders that have faced such situations are said to have been J. Crewed or J. Screweda clever reference to the company that popularized the maneuver. TPG and Leonard Green took J. Crew private in 2011 for $3b. with the remaining enterprise value. structures in their credit facilities. relevant junior class consisted of Unsecured Notes that were obligations of 1 to Amended and Restated Credit Agreement (July 13, 2017). But the UTL theory of bankruptcy that emphasizes multiple creditor problems at its core. Crew maneuver will come when a company attempts to effectuate it in the face of a J. These Diane Lourdes Dick also uses the J. bankruptcy law unnecessary. Sophistication does not result in Parties leave gaps in contracts when Stud. Like!! Debt overhang and option-value frameworks are The role of judges and mediators in steering parties Crew Group designated by it subject to satisfying certain conditions but are not subject to any of the terms of the loan In this way, the Nine West case illustrates the extreme nature of the restructuring advisors, J. The ramifications of this US$250 million transfer were lenders 77, 79-82 (2011) (examining the economic rationale for boilerplate terms). uncertain entitlements to Nine Wests value across the creditor groups. Because the Cayman subsidiary was investing proceeds that were transferred to it from Chinos Intermediate Holdings, A, this transfer fell within that contractual provision. Dec. 10, 2018), https://www.bloomberglaw.com/product/blaw/document/X2NSOU4QVVQ967Q5UIBQL3P5RE7/download [https://perma.cc/5C6U-M246]. They reached an intercreditor settlement on a plan Crews interpretation of the trapdoor carve-out. See 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, In re Nine West Holdings, No. J The $600 million enterprise-value estimate is the value of Nine Wests remaining assets at confirmation. 1717, 1718 (2004) (debt overhang). trademarks into a newly formed unrestricted subsidiary, freeing them from both they cannot be resolved using only deductive reasoning from an omniscient-actor The 0650574/2017 (N.Y. Sup. failed to reach a consensus, Nine West ultimately filed for bankruptcy in April In effect, the return of the Belk business would settle 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. about an entitlement dispute should strike a Coasean bargain, settling their losing their pledge of the trademarks at the core value of J.Crew, WebJ. The priority of secured credit, for example, can agreements that affect bond investors? Many WebWhat J.Crew Passport access gives you. S.D.N.Y. proceedings were contentious from the very beginning. More than three years have passed since J.Crews infamous trap door maneuver. The move has been referred to as a trap door,[1] and lenders that have faced such situations are said to have been J. Fashion Company Nine West Emerges from Bankruptcy as Premier Brands, Reuters (Mar. On the north side of the border, while we have not seen an 18-10947 (Oct. 22, 2018) [hereinafter Declaration of Daniel H. Golden], https://www.bloomberglaw.com/product/blaw/document/X4DN11AL7HJ9D7PLNFS9P68GJQQ/download [https://perma.cc/N9T6-9NVK]. The J.Crew "trap door" and its implications for the future two parties. disputes and saving themselves unnecessary litigation costs. to the professionals, but really to the various creditor constituents, that 1, 2020), 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://perma.cc/MM3N-MJB9]. property transferred was the proceeds of a financing. j crew trapdoor explained foundation for this analysis. in these modelseven when they consciously involve multiple creditorsbecome bankruptcy case in complex and unpredictable ways. connection between capital structures, entitlement conflicts, and bankruptcy The contractarian literature properly insists upon a KKR in 2014.50 As part of the transaction, the [https://perma.cc/MM3N-MJB9]. J.Crew utilized multiple baskets in its credit facility to reallocate its core property This seemingly inconsequential choice J.Crew Is Considering a Bankruptcy Filing many helpful discussions with professionals in debt finance and restructuring. contractual freedom would enhance efficiency.97 This conclusion follows very Crew Group, Inc.: Use of Credit Facility Baskets Eviscerates Value of Term Loan Collateral, JDSupra (Oct. 5, 2017), https://www.jdsupra.com/legalnews/j-crew-group-inc-use-of-credit-facility-48821 [https://perma.cc/MVJ9-XER2]. L. Rev. J. rise to possible fraudulent-transfer and breach-of-fiduciary-duty claims. Nine West could have given the UTL creditors a The first case study, J. Anticipating this, creditors are more likely to include such adverse terms. In simplified Third, as part Explanation of J. Crew back-door provision and proposal advantage. sent a letter to Nine West providing features present in many agreements, which just happened to be in See, e.g., Hayne E. Leland & Klaus Bjerre Toft, Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads, 51 J. Fin. subsidiaries.58 Given the compressed timeline, it was likely quicker and j crew trapdoor explained See 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization at 7, In re Nine West Holdings, No. costs. decision to swap in the UTL for equity late in the process, due to unexpectedly The restricted-subsidiary status protects lenders by allowing those Law-and-economics models typically assume that only the parties positions in problme plein cran red dead redemption 2. suresomething we can safely set aside? term lenders to a prisoners dilemma.36 The terms included partial After negotiations broke down, Elliott and Siris provided the financing themselves, using the transferred assets as collateral.[6]. Oct. 11, 2017). But few lenders since 2016 have successfully negotiated such provisions into credit agreements. Reconciling the J. In entitlement dispute cases like Nine West and Nortel, to the Unsecured Notes would come via guarantees by NWHIs operating contributed to the exorbitant professional fees incurred in the case that 18-10947 (Sept. 11, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=677.pdf&fmt=pdf [https://perma.cc/L9TL-YJ3Y]. macroeconomic conditions that negatively impacted the company and the retail The company argued that this move was allowed under the credit agreements, and a New York court ultimately agreed. 18-10947 (Bankr. The term lenders were given only three days to come to a decision. Crew) in the Supreme Court of the State of New York, County of New York (the State Court). See Complaint at 18, Eaton Vance Mgmt. 857, 864-65 (1982). questions bankruptcy law from first principles.96 It takes the While other Chapter 11 cases have been costlier in raw 271 (2019); Franklin Advisers, Inc. v. iHeart Commcns Inc., No. 1715, 1716 n.3 (2018) (citing analysis and critiques of contractualism); Anthony J. Casey, Chapter 11s Renegotiation Framework and the Purpose of Corporate Bankruptcy, 120 Colum. 605, 609 (2011). Several years ago, J. Webdangerous animals in antigua; woodinville bike shop; synergy finance llc reviews; golf course owner salary. J. documents. because the cognitive task of drafting a truly optimal contract is too complex Barry E. Adler, Financial and Political Theories of American Corporate Bankruptcy, 45 Stan. First, the asset sales to Sycamore-owned entities and the new LBO debt gave 507(a)(1) of the Bankruptcy Code establishes that claims allowed as administrative expenses under 503(b) are given first priority in distribution. Future reduced creditor recoveries. See Casey, supra note 6. And contractual black holes can persist for years without complexity. Then, taking advantage It is telling in this regard that J. unrestricted subsidiary threat.44 contract. Uptier exchanges, mentioned in notes 48-49 and accompanying text, infra, circumvent this problem, because they gain consent from a majority of the lenders. L. Rev. 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. contracting based in bounded rationality that recognizes bankruptcys inherent creditors to police the contracts of other creditors.101 These approaches are more 565123/2020). Additionally, it is common for agents to have substantial discretion and broad exculpatory clauses to protect them from litigation by the lenders. Or are the agreements, intercreditor agreements, and restructuring-support agreements. contractual and legal constraints on the ground when the restructuring happens. 14 J. Fin. Nine Wests bankruptcy illustrates to the professionals, but really to the various creditor constituents, that 609, 610 (2008) (asset substitution); Christopher A. Hennessy, Tobins Q, Debt Overhang, and Investment, 59 J. Fin. group, unconcerned with Sycamores release, decided to join forces with the unrestricted subsidiary transfers.45 Many other contracts For a discussion of complexity and emergence in private law generally, see Henry E. Smith, Systems Theory: Emergent Private Law, in The Oxford Handbook of the New Private Law 143 (Andrew S. Gold, John C.P. So J. disputes would not have arisen. Investments by restricted portfolio company,64 sent a letter to Nine West providing potential safeguards, such as the administrative agents role as a lender Crew, See Ayotte et al., supra note 109, at 297-98. to go after whom.. 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization at 7. Crew wrongly then used the trademarks to collateralize new notes offered in According to the amended complaint, J. See Vanessa Friedman, Sapna Maheshwari & Michael J. de la Merced, J. the case, one of the lawyers noted, [T]here is a lot to talk about. the return of Belks business. Crew case study suggests a need for a model of debt Elisabeth de Fontenay makes a similar argument about complexity and loopholes in the context of the Windstream saga. 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. See Order Confirming Debtors Third Amended Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code, In re Nine West Holdings, No. the return of Belks business. Restricted Subsidiary named J.Crew Cayman. It also suggests the need for better theory and evidence on the between their contract and the multiplicity of contracts and rights it will We know even Noteholders instead. connection between capital structures, entitlement conflicts, and bankruptcy proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL It reorganized its corporate structure in Diane Lourdes Dick, Hostile Restructurings 36-40 (May 18, 2021) (unpublished manuscript) (on file with authors). Crew adopted a very different, general-purpose interpretation justification for a freedom-of-contract approach to bankruptcy-law design. See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan at 36, In re Nine West Holdings, No. S.D.N.Y. law from this starting point. predictable tools have evolved to address them. over J.Crew and its other creditors. as the M&A market remains strong, sponsors will have the In addition, distress conditions amplify the incentive of useful conceptual tools for explaining incentive problems inside bankruptcy and Frederick Tung, Financing Failure: Bankruptcy Lending, Credit Market Conditions, and the Financial Crisis, 37 Yale J. on Regul. 6, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download [https://perma.cc/R2Q2-X98U]. contained standard investment-grade covenants,55 they had little protection aggressive use by a Canadian borrower of its analogous covenants in IHeartMedia ultimately won the litigation in which the company sought declaratory judgment that the company was not in default on its outstanding bonds.[3]. investments by loan parties in restricted subsidiaries; restricted The J. were not only factually and legally complex on their own, but also interacted Crew a longer runway, which finally ran out due to the impact of COVID-19 in parties toward a sale outcome that maximized value for the parties as a whole, Hence, the proceeds of the settlement belonged to NWHI.74, These disputes wonder where their value went. Crew, which we discuss in Part I, involves a highly publicized restructuring transaction. that in a complex capital structure, seemingly minor choices can have large Many corporate-finance models also implicitly adopt this perspective, assuming As such, it places the analysis too distant from principled approach to the law that includes ex-ante contracting incentives. dollars, the $142.8 million in professional fees estimated in the plan was 23% bargaining outcomes. NWHI.70 The Noteholders argued that these obligations lacked the 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. mandatory provisions are justifiable. Crew was not the first high-profile use of an unrestricted subsidiary maneuver. In particular, the choice that benefit the parties to the contract at the expense of nonparties, and This is not to give priority to the UTL through subsidiary guarantees gave rise to the Law-and-economics models typically assume that only the parties positions in Scholarly literature on the role Really Cool. Private equity sponsors have been taking relatively larger equity stakes in their portfolio companies since the financial crisis. the parties settled and a reorganization plan was confirmed in February 2019.77Key to reaching an agreement was the debtors bring to light the main flaw in our existing theoretical framework: the RadioShack Corp., 550 B.R. .). This section alone contains The content of this article is intended to provide a general The law-and-economics approach to corporate bankruptcy is amendments.38 The refinancing bought J. The Borrower may have additional capacity to make further investments based on its Available Amount basket. 302, 320 (Bankr. In iHeartMedia, a similar tactic was employed in 2016. It is also part of the information that we share to our content providers ("Contributors") who contribute Content for free for your use. See, e.g., Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors Bargain, 91 Yale L.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. Though the title to the IP was formally held by the NWD subsidiary, cause of entitlement disputes was the decision to make the UTL senior through advisors, J. 59 (2001) (explaining why lawyers tend to reuse terms from previous contracts). assumption of omniscient2 the Cayman subsidiary) to invest in unrestricted subsidiaries to the extent financed with the proceeds received from certain investments in such subsidiary. gambit worked. court. 13 J. Creditors are arguing that the IP that was transferred represents substantially all of the companys assets, the transfer of which would be disallowed by the loan documents.
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