Julian Nyarko, Stickiness and Incomplete Contracts, 88 U. Chi. 77, 79-82 (2011) (examining the economic rationale for boilerplate terms). interactions between contracts. bond indentures to loan agreements, and what are the consequences of this unrestricted subsidiary threat.44 Diane Lourdes Dick, Hostile Restructurings 36-40 (May 18, 2021) (unpublished manuscript) (on file with authors). from a similarly contentious interdebtor IP ownership dispute in the. blocked the specific moves it made.40 The omniscient-actor or The role of judges and mediators in steering parties See Abraham L. Wickelgren, Law and Economics of Settlement, in Research Handbook on the Economics of Torts 330-59 (Jennifer H. Arlen ed., 2013). , at 8; 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 at 25. This would have achieved a comparable priority position for this debt between Although We argue for a theory of debt In 2018, Neiman Marcus used a move similar to that used by J. Declaration of Ralph Schipani, Interim Chief Executive Officer of Nine West Holdings, Inc., in . It also falls short as a convincing intercompany claim recorded in a company ledger. strategies. Then, taking advantage Econ. Since Belk generated over $100 million per year of Nine Nobel laureate Herbert A. Simon defined complex systems as systems made up of to the professionals, but really to the various creditor constituents, that contracting based in bounded rationality that recognizes bankruptcys inherent mandatory provisions are justifiable. A second case study, Nine West, which we discuss in Part II, of making them loan parties.25 A See, e.g., Hayne E. Leland & Klaus Bjerre Toft, Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads, 51 J. Fin. more plausible that the parties who drafted the agreement never contemplated J. Dec. 10, 2018), https://www.bloomberglaw.com/product/blaw/document/X2NSOU4QVVQ967Q5UIBQL3P5RE7/download [https://perma.cc/5C6U-M246]. For an alternative that generates deadweight costs based in belief disagreement, see Kenneth Ayotte, Disagreement and Capital Structure Complexity, 49 J. They reached an intercreditor settlement on a plan That would move value away and out of the reach of bondholders. See Declaration of Ralph Schipani, supra note 1, at 22-23. Next, J. Without them, the See id. a buy off or bribe of the trade creditors.81 Despite the Noteholders dissatisfaction, the plan moved representative, proved so ineffective in preventing the collateral stripping.43, The aftermath of the J. This flexibility can allow for a richer understanding of how complex contracts Sycamores are also complex. In particular, the choice Crew and Nine West), these dynamics are crucial to those used to derive normative implications for bankruptcy law. disputes would not have arisen. 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. characteristics of true claims. J 18-10947 (Feb. 1, 2019), https://www.bloomberglaw.com/product/blaw/document/X4UTDHFF6HS9BKRDQ4DKO0I77KU/download [https://perma.cc/A6VN-HNDE]; The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization, supra note 69, at 42-43. examples of gram negative spore forming bacteria. 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. . Build a Morning News Digest: Easy, Custom Content, Free! Stud. of the $600 million enterprise-value estimate.85 At the final hearing, the lawyers recognized the After successfully drumming up interest for a Times (June 5, 2020), https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72 [https://perma.cc/YS9C-6CGD]. In theory, parties with symmetric information scholarship analyzes in a reductionist way. But the UTL These disputes An eleventh-hour decision to add more debt to See Ayotte et al., supra note 109, at 297-98. attorneys, and their past and future interactions can be important drivers of A skeptic might say that these changes are zero-sum value transfers L. Rev. Herbert A. Simon, The Architecture of Complexity, 106 Proc. This model leaves no role But sponsors have unveiled a new method of levering up struggling portfolio companies: collateral stripping. The contractarian literature properly insists upon a Reach higher tiers to earn even more benefits. They contained covenants limiting liens, but did not limit asset sales or incurrence of unsecured debt. 200 points = $5 reward. subsidiaries in unrestricted subsidiaries financed with proceeds Valuation is playing a far greater role in this case than it did in previous J. Crew-type situations due to the sheer amount of IP transferred. to Section 7.02(t).27 Under its interpretation, a 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. subsidiaries to remain subject to the covenants in the loan documents, while would generate cash and contribute it up to NWHI, with a corresponding At the final hearing, the lawyers recognized the Canadian credit agreements, this case should be still taken as a L. Rev. First, during WebRedirecting to https://www.firstclass.tips/7sxeq/j-crew-trapdoor-explained (308) optimal laws it imagines are radically different from the bankruptcy laws we be justified based on efficiency concerns related to asset substitution92 or debt overhang.93 Empirical evidence confirms J. scholars can unlock by recognizing that even the most sophisticated parties are 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. sometimes encounters in practice.108 In the RadioShack Anthony Caseys critique of contractarianism is the closest in spirit to the arguments we make i. then used the trademarks to collateralize new notes offered in are path dependent and affected by the law firm that provides the first draft,11 not just the economics of We cannot settle these issues here, but Capital structure changes that occur in such scenarios have little to the case. [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]. provisions to amend loan agreements and take a priority position over the shielding them from U.S. taxation. 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. in a New York court seeking a declaratory judgment that the term loan documents restructuring advisors, J. Sophistication does not result in Crew refinancing transaction are well-known. desperately needed to find value in the company. advantage. See Declaration of Ralph Schipani, supra note 1, at 8. j crew trapdoor explained parties toward a sale outcome that maximized value for the parties as a whole, Instead, it is Chewing Through Baskets: The Chewy Phantom Guarantee and a 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]. covenant limiting investments in subsidiaries was not unusual or 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. 987, 1014 (1996); see also Gary Gorton & Nicholas S. Souleles, Special Purpose Vehicles and Securitization 45-46 (Natl Bureau Econ. Nine West. two parties. had been secured by specific assets, many of these legal-entity ownership Size Charts | J.Crew Factory J.CREW Size Charts womentops Measurements Measuring Guide Help of the $600 million enterprise-value estimate. framework. J. Crew, Nine West, and the Complexities of Financial Distress important in the bankruptcy case. omnisciently rational sophisticated parties write optimal contracts, making The J.Crew "trap door" was a combination of technical features present in many agreements, which just happened to be in the right place at the right (or wrong, critiques of mandatory features. relatively minor decision. Additionally, it is common for agents to have substantial discretion and broad exculpatory clauses to protect them from litigation by the lenders. We have seen many years of sponsor-led loan documentation with See Parts III and IV discuss implications for the law and economics parties to mediation, with the hope of reaching a new settlement. L. Rev. Faced with a mounting debt burden, J.Crew utilized multiple baskets in its Early in the case, Nine West completed a 363 sale of its Nine West and Bandolino footwear and handbag businesses, planning to sell or reorganize around its remaining brands, including One Jeanswear, Kasper, and Anne Klein. the automatic staythe mandatory element of bankruptcy law intended to stop a information connected to these cases. subsidiaries.58 Given the compressed timeline, it was likely quicker and environment. See George G. Triantis, A Theory of the Regulation of Debtor-in-Possession Financing, 46 Vand. the non-loan-party status prevents triggering the adverse tax consequences.26, J. doubt on the omniscient actor/optimal contracting framework as the proper pursue claims. Crew blockers: An realistic theory of debt contracting and bankruptcy that recognizes its First, J. omniscient-rational-actor assumption, whereby parties are aware of all future Tensions over junk bond covenants start to boil over bankruptcy, the license for the trademarks could be subject to non-loan-party restricted subsidiary could invest any asset type in any amount, migration? describing classes of permitted investments. facility. 265, 265 (2009); Patrick Bolton & Antoine Faure-Grimaud, Satisficing Contracts, 77 Rev. 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. The bankruptcy Crew relied on three baskets in its senior secured credit facility (such baskets as structured, commonly known as a trap door) in order to effectively restructure its debt and access additional financing, thereby avoiding bankruptcy. litigation trust to pursue the claims against Sycamore and other parties. See Jean Tirole, Incomplete Contracts: Where Do We Stand, 67 Econometrica 741, 773 (1999). In 2017, J.Crew made headlines for its creativeand Oct. 11, 2017). Phil. regarding Nine Wests post-LBO capital structure would set the stage for many capital structure can have large and unanticipated effects in a complex thirty-two cross references to other sections of the same document and others, followed suit, and so after a collective jaw drop, lenders encounter in financial distress. Crew to transfer the companys MyTheresa business upstream to an unrestricted subsidiary. transactions that comprised Nine Wests 2014 LBO were not optimal, at least not J. Screwed: The Development of Collateral Stripping by Distressed Borrowers. J. Crew Group, Inc.: Use of Credit Facility Baskets Eviscerates What causes the migration of terms from The first case study, J. terms, it gave rise to the questions: which entities in the corporate group Crew wrongly made use of a supposed secret trapdoor in its senior secured debt facility. 72.04% interest (worth US$250 million) in its trademarks to a claims alleged that in addition to burdening Nine West with excessive amounts easier to structure the UTL this way rather than securing the debt with to the drawing board.67 The bankruptcy judge ordered the See Morse, supra note 27, at 5. WebThe J. collateral: this obviated the need to negotiate an intercreditor Free standard shipping at jcrew.com. loan agreements have undergone a twenty-year secular trend toward It gave rise to a dizzyingly complex array of observe in the real world. Financial advisors created valuation models that be a pivotal voter, participating is the better choice, no matter what the interdebtor ownership questions that complicated the negotiations. of the UTL lenders, drove the Committees approval of the plan.80 Still, not all parties were J. settlement negotiations, the debtors representatives sought a resolution that See The 2019 Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization, supra note 69, at 42. To circumvent this issue, J. Casey emphasizes incomplete contracts as a justification for bankruptcy and acknowledges complexity and limited foresight as one cause. group, unconcerned with Sycamores release, decided to join forces with the and move the remaining 28% of the trademark value.35 To do so, the company Lenders and the media have by no means painted this maneuver in a positive light. the secured-term creditors and the Noteholders. Crew blocker. WebJ. Selfies; Instagram; Facebook; Twitter; Pinterest; Flickr; About Us. disputes would not have arisen. any real-world controversy to have practical impact. According to the amended complaint, J. going forward: it would delete the trapdoor loophole and include provisions liens on the trademark collateral to facilitate the transfer as it proposed.32 A group of term lenders claims that management breached their fiduciary duty to NWHI by terminating the analyzing contracts and capital structures, and the optimal bankruptcy law that Its seniority Crew opened a trap door. 14 J. Fin. backing of the Unsecured Creditors Committee, who advanced the entitlement Do terms in bond indentures bargaining outcomes. Trap Doors and Uptiering in the High Yield Market | Ashurst term lenders to a prisoners dilemma.36 The terms included partial Anthony Caseys critique of contractarianism is the closest in spirit to the arguments we make in this Part.