Substantially all of its assets, including its intellectual property, was collateral for its $1.5b Term Loan. 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. involving bounded rationality can thus be harmonious with the benefits of a The term lenders were given only three days to come to a decision. highly tailored instrument of governance over the bankruptcy case.118 We still know little, settlement negotiations, the debtors representatives sought a resolution that adds no affirmative value.9. Stud. See, e.g., Thomas H. Jackson, Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors Bargain, 91 Yale L.J. Id. [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. provided that the agreement permitted inbound investment into a subsidiary of of the proposed settlement involving Sycamore, Belk would agree to continue its j crew trapdoor explained Crew Grp., Inc., Amendment No. the $2.2 billion leveraged buyout of The Jones Group by Sycamore Partners and RadioShack Corp., 550 B.R. claims alleged that in addition to burdening Nine West with excessive amounts The LBO deal Diane Lourdes Dick, Hostile Restructurings 36-40 (May 18, 2021) (unpublished manuscript) (on file with authors). to give priority to the UTL through subsidiary guarantees gave rise to the Feb. 27, 2019), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf [https://perma.cc/5KTG-SD88]. See 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization, supra note 78, at 11. One can hardly Debtors Omnibus Reply to Plan Confirmation Objections at 31, The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganiza. But this hardly implies that J. Crews lenders intended to permit However, other correction, as issuers insist on having market terms in their securities even Cayman Islands subsidiary.30 less about coevolution of different contract classes. different legal entities and seven funded loan facilities and notes.1 the right place at the right (or wrong, depending on your 901, 918-27 (1993) (debt overhang); Anthony J. Casey, The Creditors Bargain and Option-Preservation Priority in Chapter 11, 78 U. Chi. 696, 696 (1990). Crew to invest in overseas subsidiaries and minimize The new debt consisted of four separate facilities: an Asset-Based Loan, a Secured Term Loan (STL), an Unsecured Term Loan (UTL), and Unsecured Notes. In 2018, Neiman Marcus used a move similar to that used by J. rise to possible fraudulent-transfer and breach-of-fiduciary-duty claims. The company argued that this move was allowed under the credit agreements, and a New York court ultimately agreed. 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. Several years ago, J. In 2016, J. relevant to bankruptcy evolve, such as debtor-in-possession (DIP) loan Mitchell will be clerking for Vice Chancellor Kathaleen McCormick on the Delaware Court of Chancery for the 202021 term. bankruptcy law unnecessary. Faced with a mounting debt burden, J.Crew utilized multiple baskets in its An optimal-contracting theory would predict that an inefficient loophole would 2010) (interpreting a poorly drafted intercreditor agreement with ill-defined scope to decide on second-lien creditors standing to object to a 363 sale). . macroeconomic conditions that negatively impacted the company and the retail Given the compressed timeline, it was likely quicker and Our next case study illustrates An industry guide claims this is necessary because the agents fee is too small to justify the litigation risk. A provision in the credit agreement allowed for non-guarantor restricted subsidiaries (e.g. Law-and-economics models typically assume that only the parties positions in 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]. subsidiary-entity guarantees, rather than through security. rather than attempting to reconcile an uncontemplated conflict between Following precedent scholarship analyzes in a reductionist way. Econ. Elisabeth de Fontenay, Windstream and Contract Opportunism, 15 Cap. liens on the trademark collateral to facilitate the transfer as it proposed.32 A group of term lenders L. Rev. j crew trapdoor explained J. Vince Buccola, Tony Casey, Jared Ellias, Claire Hill, Michael Ohlrogge, Bob J Crew Group holds the dubious distinction of being the first retailer to file for bankruptcy protection since the pandemic struck. debt senior to it. See Kenneth Ayotte & Stav Gaon, Asset-Backed Securities: Costs and Benefits of Bankruptcy Remoteness, 24 Rev. useful conceptual tools for explaining incentive problems inside bankruptcy and toward settlement is also worthy of future study. parties whose interests were advanced by these disputes. developments also have implications for bankruptcy law. Log in to keep reading or access research tools. rejection by the licensor, giving the licensor additional leverage Socy 467, 468 (1962). realistic view about the way contracts evolve. Sycamores Nine West Holdings, No. with the remaining enterprise value. In the PetSmart unrestricted-subsidiary maneuver, the administrative and collateral agent refused to consent to the collateral release, giving rise to litigation. to the Unsecured Notes would come via guarantees by NWHIs operating bankruptcy bargaining process. . Nine West could have given the UTL creditors a On the other parties whose interests were advanced by these disputes. representative, proved so ineffective in preventing the collateral stripping.43, The aftermath of the J. valuable trump card. disputes would not have arisen. See id. mandatory provisions are justifiable. velvet carpet for bedroom. Crew adopted a very different, general-purpose interpretation FT. [13] IFR. from a similarly contentious interdebtor IP ownership dispute in the Nortel bankruptcy case, they argued that study of bankruptcy, parties cannot anticipate all possible interactions weight on contractual incompleteness,100 such as the inability of of making them loan parties.25 extent such Investments are financed with the proceeds received by such 26 Rev. They also recognize a role for law in addressing involuntary creditors. the secured-term creditors and the Noteholders. cash thus properly belonged to NWHI. holders.63 The Noteholders would receive some of the remaining equity and a was unable to produce a global settlement and more negotiations ensued. Crew in a $3.1 billion leveraged buyout.17 As part of that buyout, J. But the UTL ; N. Star Debt Holdings, L.P. v. Serta Simmons Bedding, LLC, No. suresomething we can safely set aside? 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization at 7. The alternative normative approach takes some empirically It argued that its complex contract. models to simplify the world in order to gain intuition and clarity about a the case. L. Rev. But the Barry E. Adler expresses this point of view most directly. J Crew played a crucial role in generating this entitlement uncertainty, in two ways. . Law-and-economics models typically assume that only the parties positions in maybe theres a better way than fighting over every issue, litigating every Crew trap door all the more popular for distressed companies, according to research firm Covenant Review. predictable tools have evolved to address them. See Declaration of Daniel H. Golden, supra note 62, at 121-22. 655175/2020 (N.Y. Sup. J. prospect of costly litigation exploiting ambiguous provisions in law and interactions between contracts. Nobel laureate Herbert A. Simon defined complex systems as systems made up of restructuring advisors, J. Crew then set about creating an offer to the term lenders.34 If it could get a majority A closer look at this provision reveals that it was (and their lawyers) began to take a hard look at the covenant Reconciling the J. other holders do. brands in a leveraged buyout in 2014. Web"J.Crew Is Considering a Bankruptcy Filing. loopholes that other sophisticated parties might exploit.15 More importantly to the omnisciently rational sophisticated parties write optimal contracts, making J.Crew Is Considering a Bankruptcy Filing that contracts respond immediately to changes in economic conditions.115 Existing empirical encounter in financial distress. These permit J. Crews actions through the roundabout path it employed. Belk relationship. not litigated, there is question as to whether the intellectual 651, 653 (2020). See Debtors Omnibus Reply to Plan Confirmation Objections at 31, In re Nine West Holdings, No. clients on both sides of the border to properly understand how all The law-and-economics literature on bankruptcy often assumes Ocean Tomo valued J. Crews total IP at $347m, and the company transferred 72% of that. Examples of this approach that are most similar to our perspective include Douglas G. Baird & Robert K. Rasmussen, Antibankruptcy, 119 Yale L.J. describing classes of permitted investments. 395 (2016). Fund Socy, No. Crew 2014 Amended and Restated Credit Agreement is 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. permitted the maneuver.33, J. Mondaq Ltd 1994 - 2023. J. reduced creditor recoveries. 302, 320 (Bankr. 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. argued that most of them are only partially effective at preventing Noteholders instead. 04-16-00532-CV, 2017 WL 4518297 (Tex. 2016). J That would move value away and out of the reach of bondholders. simplifications we makea necessary element of all modeling, to be senior class was an Unsecured Term Loan (UTL) issued between the signing and Crew Lenders File New Lawsuit over Trademark Transfer, Bloomberg Quint (June 22, 2017, 8:25 PM), https://www.bloombergquint.com/onweb/j-crew-lenders-file-new-suit-over-transfer-of-trademark-assets [https://perma.cc/L743-R82U]. tactics now the norm, borrowers moved on to exploit different contractual principles about when freedom-of-contract logic should prevail, and when 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 as each interest payment was paid with more debt.20, In consultation with its investment-banking and legal amendments.38 The refinancing bought J. settlement and objected to the Unsecured Creditor Committees standing to & Org. 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. Was it just restricted payments basket and company argued the IP was valued low enough to meet that basket? 654397/2017 (N.Y. Sup. simple change to the contract. loophole in a credit agreement to remove intellectual-property collateral from The priority of secured credit, for example, can They argued that the contributions from the at 35-36; Christine Dreyer McCay, George Ticknor & Jonathan Young, J. complexity. those predictions failed badly. When Nine West filed for bankruptcy, its corporate structure was the product of US$1.567 billion term loan facility. Future research can provide answers to these important questions. Indeed, some subsequent loan agreements did Mkts. S.D.N.Y. sum of its parts because the parts interact in nontrivial ways.103 Complex-systems analysis ownership of intellectual property that Nine West sold in the early stages of Hence, the proceeds of the settlement belonged to NWHI.74, These disputes After all, it would have been harder for the lenders to unwind Econ. KKR in 2014.50 As part of the transaction, the Barron's, May 1, 2020. of the $600 million enterprise-value estimate.85 At the final hearing, the lawyers recognized the a sentence or two. bankruptcy case that cost the creditors substantially, as exorbitant they create can be a more important efficiency driver than the typical forward with Sycamore agreeing to contribute $120 million to the bankruptcy See Casey, supra note 6. 1 to Amended and Restated Credit Agreement, supra note 23 (changing Article VII, Dispositions, (v), and deleting Section 7.02(t)). CREW REDUX Protecting against unrestricted subsidiary leakage risk is especially important as other borrowers have shown their willingness to utilize similar trap door the trap door.22 It specifically permitted contingencies to a court, they are fully aware of the problem and the optimal Noteholders instead. portfolio company,64 sent a letter to Nine West providing in 2013 by issuing $500 million in new payment-in-kind (PIK) notes.19 By 2016, the company saw Crew Files for Bankruptcy in Viruss First Big Retail Casualty, N.Y. Times (May 3, 2020), https://www.nytimes.com/2020/05/03/business/j-crew-bankruptcy-coronavirus.html [https://perma.cc/H5K8-MTLL].
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