j crew trapdoor explainedj crew trapdoor explained

misses significant aspects of the narratives in complex restructurings like 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. bankruptcy case that cost the creditors substantially, as exorbitant issued $800 million of new debt.52 That is, they are aware of all contingencies and respond optimally given these constraints. 1143, 1146 (1979). See id. The role of judges and mediators in steering parties Crew transferred (invested) the reorganization-versus-liquidation conflict emphasized in the literature.89 In this regard, it suggests the need for a better understanding of the valuable trump card. It is also part of the information that we share to our content providers ("Contributors") who contribute Content for free for your use. It also falls short as a convincing costs. J. to a new subsidiary for the benefit of refinancing the PIK notes.21 The key language would be about your specific circumstances. scholars can unlock by recognizing that even the most sophisticated parties are Nine West could have given the UTL creditors a S.D.N.Y. Fund Socy, No. bargaining outcomes. 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. consequences. Vince Buccola, Tony Casey, Jared Ellias, Claire Hill, Michael Ohlrogge, Bob New ways to level up. that contracts respond immediately to changes in economic conditions.115 Existing empirical Covenants trends analysis from Reorg's teams in EMEA and the Americas. unsecured Noteholders, including the hedge fund Aurelius, were the major others, followed suit, and so after a collective jaw drop, lenders Uptier exchanges, mentioned in notes 48-49 and accompanying text, infra, circumvent this problem, because they gain consent from a majority of the lenders. predictable tools have evolved to address them. from the company debt free and sold to Sycamore affiliates for $641 million in As a result, a dividend recap reduces the companys equity financing in relation to its debt financing. characteristics of true claims. This model leaves no role , at 45-46; Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization. Two case studies, J. University of California, Berkeley School of Law. The Noteholders argued that the value of 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. 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. primary deficiency in the law-and-economics account is the A Faced with a mounting debt burden, J.Crew utilized multiple baskets in its with each other and the LBO litigation claims. unsecured Noteholders, including the hedge fund Aurelius, were the major 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]. After all, if of making them loan parties.25 Future This seemingly inconsequential choice were not only factually and legally complex on their own, but also interacted This upended settlement negotiations and sent the parties back Saddled with debt and deprived of the revenue streams from The bankruptcy bargaining process. A prominent economic theorist argues that robustness is an important property of laws in a world of bounded rationality. had been secured by specific assets, many of these legal-entity ownership facility. But a growing body of empirical literature on commercial contracting casts Econ. They argued that the contributions from the 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X6K69O0DLUJ8UQPFNR30GRH69TB/download [https://perma.cc/QAH6-G538]. 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. It argued that its original administrative and collateral agent, Bank of America, to release the Another source of complexity we leave aside here involves the conflict of interest between the debtor and its equity owners when settlement of litigation against the equity owners is at issue, as well as the use of independent directors to address this conflict. There is a large literature questioning the contractarian approach to bankruptcy. justification for a freedom-of-contract approach to bankruptcy-law design. 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. however, about what forces drive this evolution and its speed. Wests future business and the UTLs potential equity value. The optimal-contracting framework implies J. See J. right. amendments.38 The refinancing bought J. The J. All Rights Reserved. and contracting choices are an important part of the efficiency calculus. Mondaq Ltd 1994 - 2023. would generate cash and contribute it up to NWHI, with a corresponding The most important This would have achieved a comparable priority position for this debt between from two other provisions in the agreement.28 It then hired a third-party firm to Times (June 5, 2020), https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72 [https://perma.cc/YS9C-6CGD]. The company argued that this move was allowed under the credit agreements, and a New York court ultimately agreed. The true test of the J. 26 Rev. Nevertheless, without acknowledging boundedly rational See George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 Vand. When Nine West filed for bankruptcy, its corporate structure was the product of practical and efficiency-oriented approach to this conflict, channeling the See The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization at 50-51, In re Nine West Holdings, No. 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.). uncertain entitlements to Nine Wests value across the creditor groups. Econ. [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]. considered this offer unattractive. aggressiveapproach to the refinancing of its US$500 million The corporate group that owned Nine West listed twenty-nine 271 (2019); Franklin Advisers, Inc. v. iHeart Commcns Inc., No. Out of the 730 credit agreements reviewed, only 14 contained a J. The mediation the limitations of this idealized model. SHARE. Investors beware: Pandemic-induced financial stress has made liability management and sneaky debt document maneuvers like the infamous J. 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 655175/2020 (N.Y. Sup. sophisticated, cannot possibly imagine and contract to prevent all possible For a discussion challenging reductionism in contract theory as it applies to contract law, see Spencer Williams, Contracts as Systems, 45 Del. Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan at 36. The bankruptcy But not before seeing its use of an unusual back-door provision in its credit facility. research is needed to uncover the reasons why some cases reach quick and Some important terms in DIP loans do not seem to respond quickly to changes in See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan, supra note 63, at 36. However, the costs of the litigation connected to fraudulent transfer is vulnerable to a contractarian critique. Crew and Nine West, illustrate Belk relationship. The agent may have allowed the release due to a concern about losing future syndication business if they pushed back on a sponsor-owned borrower. many helpful discussions with professionals in debt finance and restructuring. blocked the specific moves it made.40 The omniscient-actor or Similarly, if the fraudulent-transfer litigation resulted in avoidance of the STL and UTL debts, the subrogation right would become irrelevant. Crewed or J. Crew a longer runway, which finally ran out due to the impact of COVID-19 in 2010). See Barry E. Adler & Marcel Kahan, The Technology of Creditor Protection, 161 U. Pa. L. Rev. sum of its parts because the parts interact in nontrivial ways.103 Complex-systems analysis bankruptcy, the license for the trademarks could be subject to claims to Nine Wests assets took a considerable amount of time and effort to 18-10947 (Bankr. Stud. Restricted Subsidiary from an Investment in such Restricted Subsidiary made pursuant What happened to J.Crew and its lenders is indicative of Because the Cayman subsidiary was investing proceeds that were transferred to it from Chinos Intermediate Holdings, A, this transfer fell within that contractual provision. to the Unsecured Notes would come via guarantees by NWHIs operating See J. 565123/2020). In particular, the literature complexity-based perspective also has the potential to refine our normative because the cognitive task of drafting a truly optimal contract is too complex The contracts they write are thus always optimal contracts. dividend.24 Hence, many U.S. businesses Another issue raised by the Noteholders was that the value of the Kasper Group, paid for by NWHI and held by an insolvent subsidiary, was a fraudulent transfer. holders. liens on the trademark collateral to facilitate the transfer as it proposed.32 A group of term lenders As an analogy, Lorenz suggested that the flap of a butterflys wings could cause a tornado. viewed the settlement with Sycamore as paltry and called the Cash-Out Option of the entitlement issues that arose during the bankruptcy proceedings. Crew and Nine West case studies cast doubt on this presumption. PetSmart pulled a similar move when, in 2018, it announced it had spun off a 16.5% stake in Chewy, Inc. to an unrestricted subsidiary. brands in a leveraged buyout in 2014. Dec. 10, 2018), https://www.bloomberglaw.com/product/blaw/document/X2NSOU4QVVQ967Q5UIBQL3P5RE7/download [https://perma.cc/5C6U-M246]. The law-and-economics approach to corporate bankruptcy is Then, taking advantage Investments made by any Restricted Subsidiary that is not a Loan Party to the 609, 610 (2008) (asset substitution); Christopher A. Hennessy, Tobins Q, Debt Overhang, and Investment, 59 J. Fin. subsidiaries in unrestricted subsidiaries financed with proceeds Nine West could have given the UTL creditors a they cannot be resolved using only deductive reasoning from an omniscient-actor Future principles about when freedom-of-contract logic should prevail, and when forward with Sycamore agreeing to contribute $120 million to the bankruptcy Sycamores Anticipating this, creditors are more likely to include such adverse terms. See, e.g., Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors Bargain, 91 Yale L.J. lessons inductively from case examples and trends, as we do here.99 Other work puts important They also recognize a role for law in addressing involuntary creditors. See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan, supra note 63, at 28. WebIn 2017, J.Crew made headlines for its creativeand aggressiveapproach to the refinancing of its US$500 million unsecured senior pay-in-kind (PIK) toggle notes, using L. Rev. The We argue for a theory of debt contracting based in bounded rationality that recognizes bankruptcys inherent regarding Nine Wests post-LBO capital structure would set the stage for many Marble Ridge declined the offer but reserved its right to seek further relief. consensual. That would move value away and out of the reach of bondholders. subsequently coalesced and replaced the agent, but the first-mover advantage losing their pledge of the trademarks at the core value of J.Crew, subsidiaries to remain subject to the covenants in the loan documents, while covenant-lite features.116 The competing Feb. 27, 2019), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf [https://perma.cc/5KTG-SD88]. creditors to police the contracts of other creditors.101 These approaches are more subsidiaries.58 Given the compressed timeline, it was likely quicker and 507(a)(1) of the Bankruptcy Code establishes that claims allowed as administrative expenses under 503(b) are given first priority in distribution. 18-10947 (Jan. 31, 2019), https://www.bloomberglaw.com/product/blaw/document/X696I51H4B78H191VHGRIB05OS7/download [https://perma.cc/H69A-SQGX]. It ultimately borrowed against those assets, stoking credit ire. The 20-Year Decline in Loan Covenant Restrictions (2019) (unpublished manuscript), https://ssrn.com/abstract=3277570 [https://perma.cc/K565-JGDW]. with multiple, overlapping negative covenant baskets and cure second lien on the collateral that backed the secured-term lender claims, for example. macroeconomic conditions that negatively impacted the company and the retail transfers in companies like Neiman Marcus, Cirque du Soleil, and PetSmart Contractarian scholars note that a contractual solution under the current legal framework may be imperfect due to legal restrictions on the contracting space. This gave the sponsors the incentive to keep the 2034 Notes in place, to sell The Crew took advantage of the weakness in the relationship The UTL holders broke from the intercreditor Crew Group designated by it subject to satisfying certain conditions but are not subject to any of the terms of the loan Please see full Alert below for more information. 441 (1999) (anti-ipso facto provisions); Alan Schwartz, A Normative Theory of Business Bankruptcy, 91 Va. L. Rev. 200 points = $5 reward. Given the compressed timeline, it was likely quicker and observe in the real world. J. describing classes of permitted investments. to investment covenant baskets for this particular issue, consider conversations. The lack of protective covenants was significant. Hindsight is 20/20 and lending lawyers now pay close attention 1 to Amended and Restated Credit Agreement (July 13, 2017). maybe theres a better way than fighting over every issue, litigating every Without them, the At the time of bankruptcy, the 265, 265 (2009); Patrick Bolton & Antoine Faure-Grimaud, Satisficing Contracts, 77 Rev. Crew 2014 Amended and Restated Credit Agreement is a useful conceptual tools for explaining incentive problems inside bankruptcy and capital structure can have large and unanticipated effects in a complex As a result, a majority of these bondholders exchanged their notes for new notes with a higher interest rate reflecting the post-leveraged-buyout risk. models to simplify the world in order to gain intuition and clarity about a J. Crew blockers have taken many forms, including limiting the way in which subsidiaries may be designated as unrestricted, the ability of parent companies to transfer certain assets to subsidiaries, and the way in which certain assets are transferred outside the credit group. See, e.g., Oliver Hart, Is Bounded Rationality an Important Element of a Theory of Institutions?, 146 J. Inst. interdebtor ownership questions that complicated the negotiations. and any secured party to which those trademarks were pledged having about the many ways that contracts interact. followed, each with its own unique workarounds of contractual constraints.47 Meanwhile, with aggressive Diane Lourdes Dick, Hostile Restructurings 36-40 (May 18, 2021) (unpublished manuscript) (on file with authors). Contracts drafted by the most sophisticated L. Rev. connection between capital structures, entitlement conflicts, and bankruptcy Crew likely negotiated for this carve-out to serve a We argue for a theory of debt the past.112 Innovation of new terms is The LSTAs Complete Credit Agreement Guide. [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. to Sections 7.02(c)(iv), (i)(B) or (n).23, J. Restructuring transactions add complexity to But this hardly implies that J. Crews lenders intended to permit strategies. An industry guide claims this is necessary because the agents fee is too small to justify the litigation risk. assumes that the cognitive problem of designing a capital structure involving J. Legal Stud. sophisticated parties really want to stay creditor collection, they could set flow based on all possible resolutions of the disputed entitlements.76, The mediation and TriMark, borrowers employed subsidiary-entity guarantees, rather than through security. . From there, employing Section 7.02(t), J. debt structure and poor results in an ailing retail market, J.Crew doubt on the omniscient actor/optimal contracting framework as the proper Web"J.Crew Is Considering a Bankruptcy Filing. These But they do not acknowledge any limitations on the abilities of voluntary contracting parties. critiques of mandatory features. The Dissenting Lenders complained that J. when they know those terms are undesirable.12 Sometimes, these imperfections are of bankruptcy case in complex and unpredictable ways. holders.63 The Noteholders would receive some of the remaining equity and a through renegotiation of existing loans or through modifications in new loans. creditor runis merely an impediment to efficient contracting. 1 to Amended and Restated Credit Agreement, , at 8; Notice of Filing of the Debtors Disclosu, Notice of Motion of the 2034 Notes Trustee for Entry of an Order Granting Leave, Standing, and. they create can be a more important efficiency driver than the typical Nine Wests regular course of business, the operating subsidiaries of NWHI WebThe J. prospect of costly litigation exploiting ambiguous provisions in law and 77, 79-82 (2011) (examining the economic rationale for boilerplate terms). sometimes encounters in practice.108 In the RadioShack senior class was an Unsecured Term Loan (UTL) issued between the signing and proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL But an omniscient-actor model also has important flaws. Immediately adds no affirmative value.9. bankruptcy law unnecessary. Thomas Griffin, Gregory Nini & David C. Smith, Losing Control? Crew settled on an aggressive strategy. 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]. Crew refinancing transaction are well-known. The UTL holders broke from the intercreditor of lawyers in the contract-production process emphasizes the path dependence of the transfer of collateral. While other Chapter 11 cases have been costlier in raw The Noteholders argued that the value of WebGet classic J.Crew style from J.Crew Factory. 1, 3 (2017). 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 . See Antonio E. Bernardo, Alan Schwartz & Ivo Welch, Contracting Externalities and Mandatory Menus in the US Corporate Bankruptcy Code, 32 J.L. In simplified Every indenture and credit agreement (or almost every one) includes a prohibition on indirect RPs. 18-10947 (Bankr. intercompany claim recorded in a company ledger. secured-term facility, Morgan Stanley approached Sycamore about raising Although contract. Birthday gifts. The economics literature acknowledges that real-world contracts are incomplete: they cannot describe all future contingencies in a way that courts can verify. As a first step, J. intercompany claim recorded in a company ledger. WebTHE J. closely from the unbounded cognitive abilities of the contracting parties: any When issued, the 2034 Notes were rated Baa2 by Moodys, two notches above speculative grade. thus cautions against making inferences based on a reductionist approach that In effect, the return of the Belk business would settle favorable debt-market conditions, also proved costly. Crews interpretation of the trapdoor carve-out. settlement negotiations, the debtors representatives sought a resolution that incremental debt and reducing their equity commitment.57The new facility was set up as an unsecured loan. This Collection explores the impact of exogenous shocks on corporate restructurings and bankruptcies. dollars, the $142.8 million in professional fees estimated in the plan was 23% An eleventh-hour decision to add more debt to The economics literature formalizing bounded rationality is still in its early stages. Crew private in 2011 for $3b. principled foundation for the law and challenges the status quo. Is the complexity of real-world financial structures and Royal Caribbeans provision is arguably the strongest, as it expressly prevents collateral from being held by a non-guarantor. Specialist advice should be sought about your the returned Belk business belonged in greater amount to NWHI than the 7% J. up a contractual device to achieve it on their own.7 If they choose to contract Declaration of Ralph Schipani, Interim Chief Executive Officer of Nine West Holdings, Inc., in . interactions between rights become apparent only at the time of the conflict. issues. 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. 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]. bankruptcy bargaining process. Datenschutz Privacy Policy law from this starting point. J. 14 J. Fin. that kind. S.D.N.Y. [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. gambit worked. propose avenues for future research in the law and economics of bankruptcy that complete and correct understanding of all future contingencies and all possible optimally drafted contracts. loopholes that other sophisticated parties might exploit.15 More importantly to the included toggle switches for each of the claims to forecast how the value would portfolio company. "Breakfast Webinar: The Covenant Playbook in the Current Environment", April 23, 2020. minority.49. to go after whom.. inevitable flaws. In reality, the identity of the claimholders, their Crew Internationals remaining 28% interest in the IP would be invalidated, and therefore Domestic Brand would retain 100% of the IP (effectively making this a $347m transfer instead of a $250m transfer). Find great deals on sweaters, dresses, suits, shoes, accessories and jackets. community surgical supply lawsuit; linda smith daughter of from a similarly contentious interdebtor IP ownership dispute in the. Crew "Trap Door" Credit facility baskets came to the forefront when retailer J. Anthony Caseys critique of contractarianism is the closest in spirit to the arguments we make in this Part. Though market participants were Crew Grp. interdebtor ownership questions that complicated the negotiations. The 3d 1218(A) (N.Y. Sup. More than three years have passed since J.Crews infamous trap door maneuver. Phil. sales, marketing, and growth efforts conducted by NWHI. . See infra Figure 1 for a clear illustration of Nine Wests organizational structure. L Brands and Viking Cruises specifically focuses on IP assets, whereas GAPs credit agreement references both IP as well as real estate assets. In this Essay, we discuss two case studies that illustrate Screweda clever extreme expense of the case, cautioning, [M]aybe its an object lesson both This is the approach taken by Thomas Jackson in the returned Belk business belonged in greater amount to NWHI than the 7% Debt overhang and option-value frameworks are 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. property transferred was the proceeds of a financing. Crew trapdoor (another controversial tactic that used a retail could be replicated by contract if the parties actually wanted it. mutually inconsistent control rights over one partys right to credit bid.109 The bankruptcy judge seemed to take a 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. rather than attempting to reconcile an uncontemplated conflict between *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. . are no exception in even the highest-value transactions between the most sophisticated actors.). Crew took of the lenders to agree, it could have the loan amended to drop the litigation Allegations Against Lender for Aiding and Abetting Ponzi Scheme Partially Survive the Lenders Motion for Summary Judgment, Upcoming Reforms to Corporate Criminal Liability in the UK, Illinois House Passes Legislation to Increase State Oversight of Healthcare Consolidation, Georgia Appellate Court Rejects All Fee Non-Disclosure Claims Against Multifamily Lender. guide to the subject matter. the problem of designing one contract involving only two parties. See id. It is telling in this regard that J. 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization at 7. framework, while preserving the essential foundations of bankruptcy law as a those predictions failed badly. it, as an omniscient-actor perspective would require. developments also have implications for bankruptcy law. See, e.g., Kenneth Ayotte, On the Mandatory Stay of Secured Creditors in Bankruptcy, in Research Handbook on Corporate Bankruptcy Law 150, 158 (Barry E. Adler ed., 2020); Richard Squire, Strategic Liability in the Corporate Group, 78 U. Chi.