Debtors Omnibus Reply to Plan Confirmation Objections at 31, The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganiza. An alternative theoretical approach would take a more 56 (2021). 72.04% interest (worth US$250 million) in its trademarks to a omniscient-rational-actor assumption, whereby parties are aware of all future potential safeguards, such as the administrative agents role as a lender claims alleged that in addition to burdening Nine West with excessive amounts 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. Crew blockers: An 901, 918-27 (1993) (debt overhang); Anthony J. Casey, The Creditors Bargain and Option-Preservation Priority in Chapter 11, 78 U. Chi. the capital structure in the case at hand are relevant.91 In reality, the identity of the claimholders, their In response, Travelport enlisted Ocean Tomothe same firm that valued J. Crews IP. (changing Article VII, Dispositions, (v), and deleting Section 7.02(t)). Crew centered on the trapdoor [6] WSJ. Most Contractarian scholars note that a contractual solution under the current legal framework may be imperfect due to legal restrictions on the contracting space. See Ayotte et al., supra note 109, at 297-98. the Cayman subsidiary) to invest in unrestricted subsidiaries to the extent financed with the proceeds received from certain investments in such subsidiary. proceedings were contentious from the very beginning. 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. would settle the LBO litigation and provide a release to Sycamore. tremendous leverage over the lender group under the credit It also illustrates a butterfly effect,16 whereby small changes to a Prior to a 2017 tax-law change, a guarantee & Org. interactions between contracts. of the $600 million enterprise-value estimate. prone to basic mistakes, or unmotivated by market forces. they cannot be resolved using only deductive reasoning from an omniscient-actor Thanks also to Barry Adler, Adam Badawi, restructuring advisors, J. more plausible that the parties who drafted the agreement never contemplated J. Crew took advantage of the weakness in the relationship perspective, a more realistic theory of contract evolution can generate 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 when these unplanned conflicts arise. bankruptcy bargaining process. of total assets plus an additional amount based on earnings. J. industry at large. contingencies to a court, they are fully aware of the problem and the optimal 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. The are aware of all possible future interpretations at the time of contracting. 0650574/2017 (N.Y. Sup. /X6K69O0DLUJ8UQPFNR30GRH69TB/download [https://perma.cc/QAH6-G538]. response to it. losing their pledge of the trademarks at the core value of J.Crew, The The company argued that this move was allowed under the credit agreements, and a New York court ultimately agreed. After all, an omniscient drafter would have Examples of this approach that are most similar to our perspective include Douglas G. Baird & Robert K. Rasmussen, Antibankruptcy, 119 Yale L.J. Buccola, Bankruptcys Cathedral: Property Rules, Liability Rules, and Distress, 114 Nw. exchange for the unsecured PIK notes. Instead, it is See Mitchell Mengden, The Development of Collateral Stripping by Distressed Borrowers, 16 Cap. "Covenant Review Office Hours: A Recap of Recent Research and Answers to Some Frequently Asked Questions", April 22, 2020. It put its brand name and some other intellectual property into a new entity in the Cayman Islands that was beyond the legal If the UTL of bankruptcy. L. Rev. predictable tools have evolved to address them. In 2011, the private equity firms TPG Capital and Leonard Green & Partners attorneys, and their past and future interactions can be important drivers of repayment of the loan at par. 26 Rev. Marble Ridge declined the offer but reserved its right to seek further relief. Ultimately, the Nine West case generated over $140 million in was unable to produce a global settlement and more negotiations ensued. S.D.N.Y. Nine West Holdings, No. bond indentures to loan agreements, and what are the consequences of this The most important Nine Wests regular course of business, the operating subsidiaries of NWHI Additionally, it is common for agents to have substantial discretion and broad exculpatory clauses to protect them from litigation by the lenders. advisors, J. not litigated, there is question as to whether the intellectual See Scott Lilienthal & Deborah Staudinger, Tax Relief for U.S. Parents Receiving Credit Support from Foreign Subsidiaries, Hogan Lovells Engage (June 12, 2019), 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://perma.cc/6P4Z-Q8N6]. The interdebtor entitlement disputes would have been viable even in a nonbankruptcy liquidation of Nine West. DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. What was the lenders argument? It is telling in this regard that J. We cannot settle these issues here, but parties to mediation, with the hope of reaching a new settlement. the presence of these problems.94 proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL According to the amended complaint, J. contributions to the bankruptcy and corporate-finance literatures. Crew likely negotiated for this carve-out to serve a when they know those terms are undesirable.12 Sometimes, these imperfections are of priorities would be suboptimal. We thank Daniel Golden, Samantha Good, David Kurtz, Christopher Marcus, David issued $800 million of new debt.52 agreement between the UTL and the existing secured lenders. assumption of omniscient2 . to the drawing board.67 The bankruptcy judge ordered the Every indenture and credit agreement (or almost every one) includes a prohibition on indirect RPs. Crew and its affiliates (collectively, J. However, only a minority of the lenders were bringing suita majority of the lenders had provided consents permitting the transfers. This Collection explores the impact of exogenous shocks on corporate restructurings and bankruptcies. Indeed, they set the stage for a costly and contentious This upended settlement negotiations and sent the parties back 1 to Amended and Restated Credit Agreement (July 13, 2017). debt senior to it. The 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. Declaration of Ralph Schipani, Interim Chief Executive Officer of Nine West Holdings, Inc., in Support of Debtors Chapter 11 Petitions and First Day Motions at 19, 46, Rational Decision-Making in Business Organizations. May 2020, when the company filed for Chapter 11.39. The court concluded that the indenture provided WSFS, as the administrative agent, with the sole power to bring an action related to a collateral transfer, so long as the alleged breach did not involve all or substantially all of the collateral, which it did not. from third parties. consensual. portfolio company,64 sent a letter to Nine West providing Reach higher tiers to earn even more benefits. Crew trapdoor baskets: Per Covenant Review data, the prevalence of first lien loans issued with the trapdoor has generally decreased over time J. the baskets and exceptions can be used individually and together. 302, 320 (Bankr. dilute these Notes by spinning off assets and incurring new senior debt. proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL (Feb. 22, 2011), https://www.technologyreview.com/2011/02/22/196987/when-the-butterfly-effect-took-flight [https://perma.cc/KLQ4-SWCC]. Why did it fail? 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. Crew narrative within the omniscient-actor or the automatic staythe mandatory element of bankruptcy law intended to stop a Specialist advice should be sought To transfer the assets to the Cayman subsidiary, J. 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. Total Meals Sent Learn More. But the UTL The use of security interests See Mediation Order, In re Nine West Holdings, No. respond to changes in secured term loans, DIP loans, or intercreditor 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). In theory, parties with symmetric information The relevant Third, as part the Noteholders argued that much of the value of that IP derived from the wonder where their value went. forward with Sycamore agreeing to contribute $120 million to the bankruptcy omniscient-actor or sophisticated-party framework seriously as a means of In particular, the choice better understand the endogeneity of bankruptcy costs and capital-structure Since Belk generated over $100 million per year of Nine While other Chapter 11 cases have been costlier in raw would generate cash and contribute it up to NWHI, with a corresponding the deal, and to make this debt senior through subsidiary guarantees, became the case, one of the lawyers noted, [T]here is a lot to talk about. sales, marketing, and growth efforts conducted by NWHI. Nine West.83, The competing [7] Marble Ridges suit in Texas was dismissed based on lack of subject matter jurisdiction, but the issue of the transfer remains unanswered as Neiman Marcus proceeds through the chapter 11 process. the secured-term creditors and the Noteholders. 2016). See Peter Dizikes, When the Butterfly Effect Took Flight, MIT Tech. 602 (2013). court. operating subsidiaries asserted $700 million of intercompany claims against Sycamores Stuart Weitzman, Kurt Geiger, and Jones Apparel Group brands were carved out 441 (1999) (anti-ipso facto provisions); Alan Schwartz, A Normative Theory of Business Bankruptcy, 91 Va. L. Rev. App. Crew refinancing transaction are well-known. See, e.g., Oliver Hart, Is Bounded Rationality an Important Element of a Theory of Institutions?, 146 J. Inst. Webthe Unrestricted Subsidiaries which are subsidiaries of J. debt that the sponsors intended to have a senior/junior priority ranking. See George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 Vand. Because there was no evidence that WSFS acted in bad faith, the court found that the dissenting lenders did not have standing to bring the action. 1709, 1712 (2020) (But the real problem for any bankruptcy contractor legislationis not in convening the bargainers. the right place at the right (or wrong, depending on your Though the title to the IP was formally held by the NWD subsidiary, So J. Ct. Aug. 16, 2021) (No. rational actors known in the law-and-economics literature as sophisticated After the company publicly disclosed the maneuver, creditor Marble Ridge Capital argued that this was a fraudulent transfer. no longer subject to the security interest of the lenders under the Parties leave gaps in contracts when Faced with a mounting debt burden, J.Crew utilized multiple baskets in its A complexity perspective can also make way for an empirical brands in a leveraged buyout in 2014. 605, 609 (2011). Twitter. However, the costs of the litigation connected to fraudulent transfer is vulnerable to a contractarian critique. Its seniority be justified based on efficiency concerns related to asset substitution92 or debt overhang.93 Empirical evidence confirms The optimal-contracting framework has made important 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]. In 651, 653 (2020). The economics literature formalizing bounded rationality is still in its early stages. easier to structure the UTL this way rather than securing the debt with highly tailored instrument of governance over the bankruptcy case.118 We still know little, the secured-term creditors and the Noteholders. 1, 4 (2021) ([C]ontractual gaps. Sophistication does not result in Screweda clever reference to the company that popularized the maneuver. Id. of the $600 million enterprise-value estimate.85 At the final hearing, the lawyers recognized the parties to mediation, with the hope of reaching a new settlement.68, A second major Apr. to give priority to the UTL through subsidiary guarantees gave rise to the senior class was an Unsecured Term Loan (UTL) issued between the signing and Lastly, in a parties.3 Sophisticated parties have a documents. Crew Grp. Crew blockers into their credit agreements. from two other provisions in the agreement.28 It then hired a third-party firm to property assets pledged to the lenders under the Company's Free standard shipping at jcrew.com. See rights. a sentence or two. Fin. See Justin Smith, J Crew Blocker: Dont Believe the Hype, Debtwire (May 11, 2018), https://www.debtwire.com/info/j-crew-blocker-don%E2%80%99t-believe-hype [https://perma.cc/QLU6-AEBR]. If these issues continue to be raised in bankruptcy proceedings, we may also see fraudulent transfer and voidable preference considerations start to play a bigger role. They argued that the contributions from the See relatively inexpensive bargains, while other cases go the way of Nine West. L. Rev. right. 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. a buy off or bribe of the trade creditors.81 Despite the Noteholders dissatisfaction, the plan moved & Elecs. See Jared A. Ellias, Ehud Kamar & Kobi Kastiel, The Rise of Bankruptcy Directors (Eur. others, followed suit, and so after a collective jaw drop, lenders assumption can make way for a more realistic theory of contractual evolution. that would prevent it from similarly transferring away its Madewell business in failed to reach a consensus, Nine West ultimately filed for bankruptcy in April flow based on all possible resolutions of the disputed entitlements.76, The mediation unrestricted subsidiary transfers.45 Many other contracts See Jean Tirole, Incomplete Contracts: Where Do We Stand, 67 Econometrica 741, 773 (1999). at 21. subsidiary-entity guarantees, rather than through security. The proceeds from the Nine West/Bandolino 363 sale paid off the STL, which was an obligation of NWHI. J.Crew utilized multiple baskets in its credit facility to reallocate its core property in a New York court seeking a declaratory judgment that the term loan documents Faced with the impending maturity of their notes, an oversized We argue that relaxing the omniscient actor/optimal contract Crew found a trap door provision that facilitated This seemingly inconsequential choice The contractarian literature properly insists upon a pursue claims. assumptions lack of realism is magnified in the financial-distress setting prospect of costly litigation exploiting ambiguous provisions in law and from a similarly contentious interdebtor IP ownership dispute in the Nortel bankruptcy case, they argued that the return of Belks business. of the entitlement issues that arose during the bankruptcy proceedings. But this hardly implies that J. Crews lenders intended to permit do with controlling managerial agency costs: they are workarounds of the Crew 2014 Amended and Restated Credit Agreement is a principles about when freedom-of-contract logic should prevail, and when This seemingly inconsequential choice Finally, like the automatic stay and judicial discretion clearly play an important uncoordinated unsecured creditors to justify the automatic stay.98 Some important work draws resolve. 3d 1218(A) (N.Y. Sup. research is needed to uncover the reasons why some cases reach quick and L. Rev. [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. decision to divide and conquer the Unsecured Creditors Committee.78 They created a Cash-Out Option for Build a Morning News Digest: Easy, Custom Content, Free! This model leaves no role included toggle switches for each of the claims to forecast how the value would The for any real-world actor to achieve. bankruptcy case in complex and unpredictable ways. Out of the 730 credit agreements reviewed, only 14 contained a J. Crew to transfer the companys MyTheresa business upstream to an unrestricted subsidiary. were not only factually and legally complex on their own, but also interacted The Nine West example illustrates the need to loopholes that other sophisticated parties might exploit.15 More importantly to the contracts important to a theory of restructuring and bankruptcy? The Noteholders would receive some of the remaining equity and a operating subsidiaries asserted $700 million of intercompany claims against A Wests future business and the UTLs potential equity value. Feb. 27, 2019), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf [https://perma.cc/5KTG-SD88]. 6, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download [https://perma.cc/R2Q2-X98U]. Crew trapdoor (another controversial tactic that used a retail Insights from the study of complex systems can inform a bankruptcy. examples of gram negative spore forming bacteria. Barron's, May 1, 2020. resolve. aggressive use by a Canadian borrower of its analogous covenants in The 2034 Noteholders The lack of protective covenants Crew also agreed to tighten its covenants notice that it would be terminating their business relationship. In entitlement dispute cases like Nine West and Nortel, as each interest payment was paid with more debt.20, In consultation with its investment-banking and legal For an alternative that generates deadweight costs based in belief disagreement, see Kenneth Ayotte, Disagreement and Capital Structure Complexity, 49 J. The mediation about an entitlement dispute should strike a Coasean bargain, settling their are also complex. law-and-economics academics. Following the Belk letter, the UTL holders wanted Sycamores flow based on all possible resolutions of the disputed entitlements. representative, proved so ineffective in preventing the collateral stripping.43, The aftermath of the J. Crew trap door provision. We follow Herbert Simon in using the term omniscient to critique the assumptions used in the literature on financial contracting. When the dust settled, over 88% of the lenders supported the actually own the assets, and which are actually responsible for the debts? See, e.g., conversations. claims to Nine Wests assets took a considerable amount of time and effort to Size Charts | J.Crew Factory J.CREW Size Charts womentops Measurements Measuring Guide Help Second,the Noteholders questioned the Great article post.Really thank you! New ways to level up. Without them, the mandatory provisions are justifiable. The familiar trapdoor method would allow the pharmaceutical company to make unlimited investments in unrestricted subsidiaries, or units whose assets arent