busi ness reorga nizatio n & restructuring digest

November 2015

New York washiNgtoN houstoN Paris LoNdoN FraNkFurt BrusseLs MiLaN roMe

B u s i N e s s r e o r g a N i z at i o N & r e s t r u c t u r i N g d i g e s t

Business Reorganization & Restructuring Digest focuses on exploring recent legal developments, trends and emerging issues in notable North American, European and cross-border restructurings.

Business Reorganization & Restructuring Digest November 2015 2

Contents

Criminal Liability of UK Directors for Failures Relating to Collective Redundancy Consultation

11 europe

Latécoère: A Successful Lender-Led French Restructuring

3 europe

Structured Dismissals: Justified in “Rare” Circumstances or the Future New Normal?

14 North AmeriCA

France: New Creditor-Friendly Legislative Reforms

6 europe

Fisker and Free Lance-Star’s Fading Legacy: An investor’s right to Credit Bid remains Secure

17 North AmeriCA

UK Pre-Pack Reform Update — Revisions to SIP 16

9 europe


euroPe

Latécoère: A Successful Lender-Led French restructuringWillkie has acted on another successful French restructuring mandate in the form of the financial restructuring of Latécoère S.A., a Toulouse-based listed company operating globally in the aviation and aerospace sector.

Willkie acted for funds advised by Apollo Global Management and Monarch Alternative Capital, who led a lender working group comprising Apollo, Monarch, Davidson Kempner and Barclays. Upon completion of the restructuring, which comprised a partial debt-for-equity swap and new money injection, Apollo and Monarch (as “Anchor Investors”) became substantial shareholders in the company and assumed sponsor-style roles with significant board representation.

Latécoère operates out of sites in France, Czech Republic, Brazil, USA, Mexico, Germany, Tunisia and Spain. The company manufactures aircraft fuselage components and engineers aerospace wiring. Globally, the company employs c. 4,800 employees and is a key supplier to aircraft manufacturers such as Boeing, Airbus, Dassault and Embraer. The company is listed in France and has numerous retail shareholders.

The transaction follows Willkie’s earlier successful representation of (i) members of the ad hoc lender committee and anchor investors in the financial restructuring of the French fashion retailer Vivarte, which marked the largest-ever fully consensual French restructuring (involving a debt-for-equity swap/write-off of €2 billion and a €500 million infusion of new money), and (ii) Centerbridge and Angelo Gordon in their takeover of French pipe retailer Frans Bonhomme through a debt-for-equity swap.

Latécoère manufactures aircraft fuselage components and engineers aerospace wiring. Globally, the company employs c. 4,800 employees and is a key supplier to aircraft manufacturers such as Boeing, Airbus, Dassault and Embraer.


Latécoère: A Successful Lender-Led French Restructuring | euroPe

CoNCILIATIoN CIRI APPRoVALS

PUBLIC CoMPANy ISSUES AND MANAGING MANDAToRy TENDER oFFERS

GoVERNANCE

the Latécoère transaction was notable for a number of complicating factors that Willkie dealt with in its role as lead restructuring counsel to the Anchor investors:

The transaction was implemented using the French conciliation procedure whereby confidential court proceedings are opened to facilitate negotiation between a debtor and its major creditors under the supervision of a court appointed conciliateur. The conciliation process involves the negotiation, agreement and approval by the French commercial court of a binding restructuring conciliation protocol document pursuant to which the restructuring is implemented.

The negotiation phase of the transaction was also notable for the involvement of the French Interministerial Committee for Industrial Restructuring (otherwise known as the “CIRI”). The CIRI is a division of the French Ministry of Finance with powers to oversee the restructuring of large companies (those with over 400 employees). This political dimension of the restructuring made for added complexity.

Various state-level approvals were required to implement the transaction. Notably, these included the approval of the French Ministry of Economic Affairs with regard to the investment in the company by non-French foreign entities, principally due to the sector in which the company operates. In such circumstances, foreign investors can be required to give undertakings to the French state regarding the future conduct of a company’s business and other matters.

The fact that the company was listed caused a number of additional hurdles, notably including the need to obtain both: (i) shareholder approval to the transaction, and (ii) an exemption from the requirement for the Anchor Investors to launch a tender offer for the entire share capital on completion of the restructuring.

CoNCILIAtIoN AppRovALS

puBLIC CompANy ISSueS AND mANAgINg mANDAtoRy teNDeR oFFeRS

CIRI


Latécoère: A Successful Lender-Led French Restructuring | euroPe

Regarding the former, shareholders were required to formally approve the transaction to allow the equity restructuring elements of the transaction to proceed. The company’s shares were widely held by many small disparate retail shareholders, a situation that had arguably contributed to the company requiring strategic guidance through the entry into the capital structure of the Anchor Investors. Notwithstanding certain quorum issues stemming from disregarded/dissenting shareholders, the requisite shareholder consent was ultimately obtained. However, the approval process serves as a reminder that, whilst the “Macron Law” (for details, please see France: New Creditor-Friendly Legislative Reforms, page 6) may tilt the balance of power slightly in favour of lenders, shareholder support remains essential in the restructuring of any French company (and, in particular, a French public company).

Regarding the latter, in France, if parties (either acting alone or “in concert” with others) obtain certain holdings in the total share capital or voting rights of a company they are required to launch a mandatory tender offer to purchase the entire company. In the circumstances, it was crucial for the Anchor Investors to obtain a formal exemption from the AMF (the French market authority) based on the financial difficulties of the company justifying the relaxation of such mandatory tender offer rules. The process for obtaining such an exemption was complex and involved the provision of an expert’s fairness opinion regarding the price of the shares to be issued.

In addition, careful negotiation was required to manage risks posed by other stakeholders, including the company’s employee shareholders, warrantholders and dissenting activist minority shareholders.

The transaction involved a significant change of governance on closing. This required careful consideration of the different board structures permitted under French law and detailed advice to the incoming investor directors. In addition, compliance had to be ensured with new provisions of French law requiring a mandatory minimum number of female board members for French listed companies.

SUMMARy

The transaction serves as a useful reminder that French restructurings can be highly complex and nuanced, requiring a multi-disciplinary approach as well as a thorough understanding of the interests of various stakeholders, the political and commercial background, and the detailed legal requirements applicable to such deals, especially in a public company context.

However, the transaction also marks the successful completion of another debt-to-equity restructuring in the French market, all accomplished in an expedited time frame despite the complexity of the issues encountered. It also demonstrates that with experienced and expert counsel, it is possible to achieve a successful outcome for the company, employees, investors and other stakeholders in a jurisdiction that is often perceived as creditor-unfriendly.

AUTHoRS

graham R. LanePartner

Alexandra BigotPartner

Jason taylorAssociate

puBLIC CompANy ISSueS AND mANAgINg mANDAtoRy teNDeR oFFeRS CoNTINUED

goveRNANCe


euroPe

France: New Creditor-Friendly Legislative reformsoverview of the main amendments to French insolvency law introduced by the Macron Law

INTRoDUCTIoN

The so-called “Macron Law” (a new law named after the French Minister of Economy, Emmanuel Macron, and designed to promote economic growth, commerce and equality in economic opportunities), was finally adopted on 6 August 2015. It came into force on 8 August 2015.

This new law includes amendments to French insolvency law regarding both the stakeholders involved in the implementation of such law and the mechanisms allowed under French insolvency proceedings themselves.

Some amendments are minor and/or do not change the content of the insolvency proceedings themselves. Such is notably the case regarding the modification of the status of a court-appointed mandataire (mandataire de

justice) in terms of remuneration, access to the insolvency profession, exercise of powers, etc.

As regards creditors, the Macron Law provides that the government is authorised to make an order within six months to modify and clarify the legal regime applicable to pledges on tangible assets and pledges on inventories as part of Book VI of the French Commercial Code (which deals with insolvency law), in order to encourage the continued activity of the company as well as the payment of the company’s liabilities. The Macron Law has also made it impossible to transfer by way of security a building constituting the principal residence of an entrepreneur for the benefit of creditors whose rights arise in connection with the economic activity of such entrepreneur.

However, the principal reforms of the Macron Law that are addressed below result in: (i) the introduction of specific rules permitting the disenfranchisement of shareholders within the framework of reorganization proceedings

The “Loi Macron” (a new piece of legislation named after the French Minister of Economy, Emmanuel Macron, and designed to promote economic growth, commerce and equality in economic opportunities), was adopted on 6 August 2015

Photo: Frederic Legrand - CoMEo / Shutterstock.com


France: New Creditor-Friendly Legislative Reforms | euroPe

(redressement judiciaire) and (ii) the modification of insolvency courts’ jurisdiction in order to provide for a more efficient treatment of large cases and cases involving companies within the same group.

Implementation of new mechanisms to disenfranchise shareholders in reorganization proceedings

In recent years, many French restructuring cases resulted in a take-over of a distressed company by creditors through a debt-for-equity swap mechanism. However, such restructuring solutions were possible to implement only because the shareholders agreed not to exercise veto rights that would prevent such shareholders from being diluted. Indeed, a restructuring plan involving the restructuring of the share capital required a positive vote by shareholders, the Court being authorised to confirm the plan only after such vote.

The Macron Law has introduced a new article into the French Commercial Code that provides for the ability to push through a debt-for-equity swap in circumstances where shareholders refuse to vote on share capital restructuring proposals contained in the restructuring plan, therefore granting French courts the power to dilute or compel divestiture of shareholder interests as part of reorganization proceedings1.

There are numerous conditions that have to be met first before these mechanisms can be used:

• these mechanisms are only capable of being used in the framework of reorganization proceedings (redressement judiciaire). They cannot be used in safeguard proceedings. Accordingly, in safeguard proceedings, if shareholders do not accept the proposed restructuring, the procedure has to be converted into reorganization proceedings. This also means that it is impossible to provide for a debt-for-equity swap within the framework of accelerated safeguard and accelerated financial safeguard proceedings, without obtaining the consent of shareholders;

1 This new article was challenged before the Constitutional Court, however, the Constitutional Court decided on 5 August 2015 that the new provision was not inconsistent with the French Constitution.

• only the judicial administrator or the public prosecutor may request the implementation of these mechanisms;

• the Court can only authorize the implementation of these mechanisms at least three months after the opening of proceedings; and

• the Court can only authorize the implementation of these mechanisms if:

• the company has at least 150 employees (or the company is an entreprise dominante in respect of one or several other companies (pursuant to the French Labour Code), whose global headcount amounts to at least 150 employees);

• the cessation of the business will trigger serious damage (trouble grave) for the national or regional economy and for the employment in that area;

• the proposed share capital restructuring appears (after first having considered solutions resulting in the partial or total transfer of the company) to be the only solution to avoid such damage and to enable the continuation of the business; and

• shareholders have refused to vote in favor of the share capital modification provided as part of the restructuring plan, or voted against it during the shareholders’ meeting duly convened for such vote.

If the above conditions for implementation are met, the Court has the option to use one of the following two mechanisms:

• First option: the Court is entitled to appoint a mandataire in order to convene a shareholders’ meeting and to vote in lieu of the shareholders who refused to vote or who voted against the plan; or

• Second option: the Court may order that the dissenting shareholders sell their shares to persons who have undertaken to comply with the proposed restructuring plan. If the parties do not agree on the value of the sale, an expert is appointed.


France: New Creditor-Friendly Legislative Reforms | euroPe

The mechanisms are therefore extremely complex and, in practice, we anticipate will largely be relied upon as a threat against dissenting shareholders rather than as a genuine implementation alternative. However, the new law should still encourage creditors to propose restructuring plans involving debt-for-equity swaps as it partially modifies, at least theoretically, the current balance of power between creditors and shareholders.

modification of the jurisdiction of insolvency courts to deal with large cases and cases involving companies within the same group

Previously, a French commercial court had jurisdiction to handle cases involving only those debtors whose corporate headquarters or centre of main interests (“CoMI”) is located in that commercial court’s geographical zone.

Such territorial jurisdiction raises two notable issues:

• not all commercial courts are equally equipped in terms of human and financial resources. For example, a small commercial court may not be able to handle large cases despite the geographical jurisdiction it has over the case; and

• companies belonging to the same group but with de-centralised management/headquarters may be subject to the jurisdiction of several different commercial courts.

Creation of specialized insolvency courts for large companies

The Macron Law will allow the creation of a limited number (to be determined pursuant to a future decree, but we anticipate approximately 13) specialized insolvency courts.2

These specialized insolvency courts will have jurisdiction to handle a debtor’s safeguard, reorganization or liquidation proceedings (but also conciliation proceedings under specific circumstances) where one of the following criteria is met:

• the debtor has 250 or more employees and a turnover of at least €20 million; or

2 These provisions will come into force as regards proceedings opened after 1 March 2016.

• the debtor has a turnover of at least €40 million; or

• the debtor is a holding company that, together with its operating subsidiaries, employs more than 250 employees and has a turnover in excess of €20 million; or

• the debtor is a holding company that, together with its operating subsidiaries, has a turnover in excess of €40 million.

Regrouping insolvency proceedings opened in respect of several companies of the same group before the same court

New article L662-8 of the French Commercial Code provides that a commercial court has jurisdiction over any proceedings to be opened in respect of a company that (i) owns or controls or (ii) is owned or controlled by, a company in respect of which a proceeding is pending before it.

In short, a single commercial court will now have jurisdiction over all companies within an affiliated group. Such expanded jurisdiction should prevent conflicts in court rulings and facilitate the implementation of a restructuring solution for large cases involving groups of companies.3

AUTHoRS

vincent pellierSpecial European Counsel

thomas DoyenAssociate

3 These provisions will come into force as regards proceedings opened after 1 March 2016.


euroPe

uK pre-pack reform update — revisions to Sip 16

oVERVIEW

We reported in our December 2014 Digest regarding the “Graham Review” on UK pre-packs and proposals for reform. As a reminder, a “pre-packaged” sale in UK insolvency proceedings involves the sale of the business and/or assets of a debtor on “day 1” of the administration process with the marketing and valuation process front-loaded to minimise insolvency stigma and thus maximise value.

Pre-packs are controversial because of a perceived lack of transparency, particularly when the purchaser is connected to the seller.

Revisions to Statement of Insolvency Practice 16 (“SIP 16”), one of the key recommendations of the Graham Review, came into effect on 1 November 2015. SIP 16 forms part of the professional guidelines that UK insolvency practitioners should follow when carrying out their duties.

In brief, some of the key changes to SIP 16 are:

pre-pack pool and viability statement

The revised SIP 16 refers to the well publiscised ability of connected party purchasers to: (i) approach the panel of experts known as the “Pre-Pack Pool” to obtain their blessing for the transaction, and (ii) prepare and provide to the Pre-Pack Pool a viability statement stating how the purchasing entity will survive for at least 12 months from the transaction date.

valuations

Valuations should be carried out by independent valuers or advisors with sufficient professional indemnity cover. Any departure from this principle will need to be disclosed and justified by the insolvency practitioner.

Pre-packs are controversial because of a perceived lack of transparency, particularly when the purchaser is connected to the seller.


uK pre-pack Reform update — Revisions to SIp 16 | euroPe

marketing

The new SIP 16 includes enhanced marketing guidelines with a view to providing reassurance to creditors that the consideration achieved for the sale is the best available for creditors. There is an emphasis on the insolvency practitioner explaining the particular marketing strategy to creditors and, again, justifying why it (or any departure from the guidelines) was appropriate.

enhanced disclosure

SIP 16 has always required that insolvency practitioners disclose details of the sale to creditors reasonably promptly after completion. However, the information required to be disclosed has been enhanced with a view to ensuring that creditors are better informed.

CoMMENT

Details of how the Pre-Pack Pool will operate in practice are starting to be made available and it is clear that secured creditors are not “connected parties” for the purposes of SIP 16. Importantly, this means that financial restructurings that are implemented via a pre-pack sale to a secured-creditor owned newco will continue to be outside the scope of oversight by the Pre-Pack Pool or the preparation of a viability statement.

However, for other restructurings that involve the accelerated disposal of assets to connected purchasers, it will be interesting to observe whether the Pre-Pack Pool will operate in an efficient manner and in particular what level of creditor and user confidence will be generated in the “experienced business people” who will opine on connected party pre-packs.

Notable potential issues regarding the Pre-Pack Pool include:

• the fact that no reasons will be given for issued opinions, there will be no appeal process and there are no guidelines as to what constitutes a reasonable pre-pack;

• there is a two business day turnaround time. This appears swift, but as many will know, pre-packs are often negotiated right up to completion against the backdrop of a business in free-fall and with directors concerned about their personal liability for continuing to trade pending a sale. As such, timing concerns will likely arise, particularly as to at what point it is appropriate for a purchaser to make the application; and

• the Pool is not a judicial body and its opinion is not binding. Will we start to see sales being made conditional upon the issuance of a favourable opinion? If so, we must query whether the risk of a “no sale” scenario as a result of the Pre-Pack Pool’s existence will be more detrimental to creditors than a sale which has not been independently evaluated.

In addition, whilst enhanced information reporting to creditors should not be surprising given the current apparent public mistrust of certain aspects of the UK insolvency process, there may be reluctance by some sellers, purchasers and insolvency practitioners regarding the disclosure of sensitive details regarding pre-planned restructurings. There could accordingly be some discussions around whether the benefit gained from a pre-pack justifies the enhanced disclosure requirements. Another interesting point will be to see what certain organised unsecured creditor groups (e.g., Her Majesty’s Revenue and Customs for tax liabilities and the Pensions Regulator / the Pension Protection Fund for defined benefit pension scheme liabilities) do with such information and whether the new SIP 16 will, as probably intended, prompt more active scrutiny of, and potentially litigation against, insolvency practitioners arising out of pre-pack sales.

AUTHoRS

graham R. LanePartner

Jason taylorAssociate


euroPe

Criminal Liability of uK Directors for Failures relating to Collective redundancy Consultation

The snappily named Trade Union and Labour Relations (Consolidation) Act 1992 (“TULRCA”) is beginning to cause directors and insolvency practitioners of distressed UK companies serious concern, more than 20 years after it came into force.

TULRCA governs situations in which an employer proposes to make large-scale redundancies, of 20 or more employees, within a 90-day period. The employer must consult on its redundancy proposal with representatives of the affected employees and also notify the Secretary of State for Business, Innovation and Skills (“BIS”). The collective redundancy consultation requirements of TULRCA are relatively complex (the headline rule is that the consultation must take place at least 30 days before

the first dismissal, or at least 45 days in advance where 100 or more redundancies are proposed), and failure to comply can have significant consequences. Notably, if the consultation obligations are breached, a “protective award” of up to 90 days’ gross actual pay may be ordered for each employee. In addition, failure to comply with the requirements is a criminal offence on the part of the employer, which now attracts an unlimited fine (it was capped at £5,000 prior to 12 March 2015). A director of the employer will also be criminally liable, if it is found that the offence was committed with his or her consent, connivance or due to his or her neglect.

“A director cannot be expected to put a crystal ball on his or her desk at a time of huge shock and turmoil, and predict the likely consequences of an action, unless a consequence is either the only foreseeable one or is the only consequence that can be reasonably envisaged.” — District Judge Goodman


Criminal Liability of uK Directors for Failures Relating to Collective Redundancy Consultation | euroPe

The first directors of any UK company to be charged with a criminal offence under TULRCA were the former managing director, finance director and a sponsor-appointed non-executive director of City Link. The parcel delivery firm collapsed in December 2014 with more than 2,700 job losses. Administrators were appointed on Christmas Eve, and an initial round of 2,356 job losses were announced on New year’s Eve, with 230 further redundancies announced the following week. The former City Link directors were charged in June 2015, for failing to notify BIS of plans to make staff redundant.

The Redundancy Payments Service (“RPS”), which is part of the UK Government’s Insolvency Service, is reported to have paid out around £5 million to former employees of City Link in statutory redundancy pay. Furthermore, it is understood that more than 250 former employees are seeking protective awards under TULRCA, for City Link’s failure to properly consult on their redundancies. Again, it is the RPS (and ultimately the UK tax payer) that will cover the cost of any compensation.

In october 2015, the former chief executive and an insolvency practitioner involved in the administration of USC (a fashion division of Sports Direct) were also charged with the criminal offence of failing to notify BIS of plans to make staff redundant as required pursuant to TULRCA. Around 200 of USC’s Scottish warehouse staff were given just 15 minutes’ notice of their dismissal due to redundancy, following USC’s collapse and the appointment of administrators in January this year.

Although it has been reluctant to comment, the new focus of BIS on bringing criminal prosecutions against directors and insolvency practitioners most likely results from a desire on the part of the RPS to seek reimbursement, as it is being required to pick up the tab for not only statutory redundancy payments of insolvent UK companies, but also the claims of former employees in circumstances where the statutory requirements of TULRCA have not been met.

This is understandable from a taxpayers’ perspective. However, it exposes a considerable gap between business rescue culture and how employment interests are protected. In a well-planned solvent business reorganisation involving a reduction in headcount, complying with the statutory consultation and notification requirements of TULRCA will not be too difficult.

However, in distressed situations, there is no leeway or latitude in the TULRCA requirements. This is unrealistic in situations which are often unplanned and unexpected, and may lead directors to be caught uncomfortably between facing the risk of wrongful trading if they carry on the business in order to complete the statutory redundancy consultation and notification requirements, and facing criminal liability for failure to comply with TULRCA if they file for administration prior to completing the lengthy TULRCA process. Alternatively, it may lead to the need for UK company administrators to be funded in respect of the full notice and consultation period, which will not be realistic in many situations. And in situations where an administration pre-pack is being planned, undertaking a

City Link’s– former managing director– finance director– sponsor-appointed

non-executive director

It is the RPS (and ultimately the UK tax payer) that will cover the cost of any compensation for employees of an insolvent company such as City Link

City Link collapsed in December 2014 with more than 2,700 job losses

2,700+JoB LoSSES

£5MILLIoN

The RPS is reported to have paid out around £5 million to former employees of City Link in statutory redundancy pay

First directors of any UK company to be charged with a criminal offence under TULRCA


consultation in advance could cause a leak of information to the market, generating insolvency stigma and undermining the intention of preserving as much value as possible for creditors.

on 13 November 2015, the City Link directors were acquitted of the criminal offences they had been charged with under TULRCA. District Judge Goodman held that it was not sufficiently clear that there was a ‘proposal’ to make redundancies at City Link, prior to the company entering administration. In addition, he found that the directors genuinely believed that a sale of the business (thereby avoiding mass redundancies) was not only possible but quite probable. BIS’s lawyers had argued that the managing director would have seen that City Link’s collapse was inevitable if he had looked into a crystal ball. Helpfully, the Judge commented: “A director cannot be expected to put a crystal ball on his or her desk at a time of huge shock and turmoil, and predict the likely consequences of an action, unless a consequence is either the only foreseeable one or is the only consequence that can be reasonably envisaged.”

However, District Judge Goodman was at pains to emphasis the fact-specific nature of his findings in the City Link case: “no employer should take that finding to be a precedent that an employer can avoid its responsibility [to inform over mass redundancies] simply by going into administration.”

The market now awaits the court’s decision in the USC case with bated breath.

BIS itself issued a call for evidence on collective redundancy consultation for employers facing insolvency, earlier this year. A report is due before the end of 2015. It is to be hoped that, in future, a balance can be struck between employment interests and the realities of distressed and insolvent businesses.

AUTHoR

Iben madsenAssociate

Criminal Liability of uK Directors for Failures Relating to Collective Redundancy Consultation | euroPe


North aMerica

Structured Dismissals: Justified in “rare” Circumstances or the Future New Normal?

The Third Circuit recently became the first of the circuit courts to approve the use of structured dismissals in Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc.

Traditionally, the chapter 11 process worked towards the paramount goal of plan confirmation, with two alternatives: a conversion to chapter 7, and a dismissal, returning parties to the status quo ante. The limited and often suboptimal universe of alternative case resolution options has historically served as a powerful deterrent that kept parties focused on the goal of plan confirmation. However, a new third alternative to plan confirmation has become an increasingly attractive one in which the court enters an order enforcing certain actions taken during the case (e.g., asset sales and intercreditor settlements). Such orders do not (as is typically required under section 349 of the Bankruptcy Code) return all parties to the status quo ante and, in virtually all instances, sanction a value distribution scheme in conflict with the relative rights of economic parties-in-interest. These types of dismissals, called “structured dismissals,” grant additional flexibility to all parties but have received criticism for contributing to the avoidance of the plan process or to the use of chapter 7 at the inception of the bankruptcy proceeding.

The Third Circuit recently became the first of the circuit courts to approve the use of structured dismissals in Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.).1 While the Third Circuit stressed that such a disposition was justified only in “rare” circumstances, it nonetheless found that the circumstances at issue justified a departure from the typical bankruptcy process and, interestingly, approved a structured dismissal that departed from the standard priority scheme of section 507. Subsequently, in In re ICL Holding Co.,2 the Third Circuit similarly approved a 363 sale of substantially all of a debtors’ assets that distributed the proceeds in a manner at odds with section 507 — in advance of what all parties assumed would similarly be a structured dismissal — by finding that the proceeds were no longer assets of the estate and could be distributed by the purchaser as it pleased.

1 787 F.3d 173 (3d Cir. 2015).2 No. 14-2709, 2015 BL 295784 (3d Cir. Sept. 14, 2015).


Structured Dismissals: Justified in “Rare” Circumstances or the Future New Normal? | North aMerica

In just the first few months following the decisions in Jevic and ICL Holding, Willkie has guided the debtors in In re WP Steel Venture LLC (the “RG Steel Debtors”) through the process of taking advantage of this increased flexibility and has received approval of a fully consensual settlement that, after implementation, will ultimately result in a structured dismissal of the debtors’ cases.3

In re Jevic Holding Corp.

This case concerned a settlement between the debtors and their secured lenders. Under the terms of the proposed settlement: (a) the parties would execute mutual releases; (b) fraudulent conveyance and preference actions against the secured lenders would be dismissed; (c) those same lenders would contribute $2 million to an account to pay legal fees and certain administrative expenses; (d) the only remaining assets would be transferred to a trust set up to first pay administrative and tax creditors, followed by unsecured creditors on a pro rata basis; and (e) then the entire bankruptcy case would be dismissed. This settlement would in effect be a classic example of a “structured dismissal.” However, the settlement left out a priority wage claim by the debtors’ former truck drivers (the “Drivers”) at the insistence of the debtors’ secured creditor who was being sued by the Drivers on a related but distinct claim.

The Drivers and the U.S. Trustee objected to the proposed settlement, and the case eventually made its way to the Third Circuit. The Third Circuit acknowledged a lack of specific statutory authorization for structured dismissals in the Bankruptcy Code, but also noted that the Bankruptcy Code allows a bankruptcy judge to modify the typical return to the prepetition status quo provisions of a dismissal for “cause.” The majority stressed that the Drivers themselves had admitted that no plan could be confirmed, and that a conversion to chapter 7 would benefit no one. The court thus held that “absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion

3 No. 12-11661 (Bankr. D. Del. oct. 15, 2015) [Docket No. 4464]. These efforts were led by Willkie attorneys Matthew A. Feldman and Shaunna D. Jones.

processes, a bankruptcy court has discretion to order such a disposition.”4

The majority then addressed the Drivers’ argument that even if a structured dismissal is allowed under the Bankruptcy Code, such a dismissal must respect the standard priority scheme of section 507. The Third Circuit held that bankruptcy courts could approve settlements that deviate from the standard priority scheme only when they have “specific and credible grounds to justify the deviation.”5 The majority then found that the bankruptcy court had sufficiently justified the deviation (providing for the payment of certain administrative and unsecured creditors while not providing for any distribution to the Drivers on account of their priority wage claim) from the standard priority scheme in approving the settlement — the bankruptcy court was in a situation where there was no alternative that would have provided some recovery to any creditors other than the debtors’ secured creditors. Thus, while “a close call,” the majority found that the bankruptcy court was correct to approve the settlement and structured dismissal.

In re ICL Holding Co.

This case concerns a challenge to a sale order and settlement for all of the debtors’ assets to their secured creditor. The sale order and settlement included a $3.5 million cash payment by the purchaser to the official committee of unsecured creditors, which had agreed to withdraw all objections to the perfection of the secured creditor’s liens and the proposed sale. Some proceeds of the sale were also set aside to pay the professionals of the debtors and the committee. The U.S. Trustee, however, objected to the sale, noting that the sale and settlement structure would bypass the I.R.S.’s administrative tax claim. As in Jevic, all parties agreed that a resolution of the case through a plan was unlikely.

Ultimately, the Third Circuit reached a decision approving the sale and settlement. Both the $3.5 million dollar payment to the unsecured creditors, and the escrow set-aside for the payment of professionals and wind down costs were not,

4 787 F.3d at 182.5 Id. at 184 (citing In re Iridium Operating LLC, 478 F.3d 452, 466 (2d Cir. 2007)).


Structured Dismissals: Justified in “Rare” Circumstances or the Future New Normal? | North aMerica

ultimately, property of the bankruptcy estate and thus did not implicate any distribution requirements of the Bankruptcy Code. The Department of Justice (on behalf of the U.S. Trustee and the I.R.S.) contended that the $3.5 million dollar payment to unsecured creditors represented an increased bid for government assets, and thus should constitute estate property. The Third Circuit was not convinced, and held that because the cash never entered the estate, and the payment was not made at the debtors’ direction, the payment could not be considered property of the estate. Similarly, while the escrowed funds set aside for the payment of professional and wind-down fees were in fact explicitly listed as consideration for the sale, and arguably were thus estate assets, the economic reality of the sale transaction, and the structure of the escrow (unused funds would be returned to the secured creditors), led the Third Circuit to conclude that the escrowed funds were not estate property.

The Third Circuit did not fully address what it considered to be the second key question: if the sale and settlement had involved estate property, would the sale and settlement have to comply with the ordinary priority scheme, specifically the absolute priority and unfair discrimination rules? However, in even phrasing this question, the Third Circuit may have signaled its view, by noting that most of the distribution requirements of the Bankruptcy Code (except for section 507) textually applied only in a chapter 11 plan context.6

WP Steel Venture LLC

Taking immediate advantage7 of the added clarity provided by Jevic and ICL Holding, the RG Steel Debtors obtained approval of a settlement that will ultimately result in a structured dismissal, following the claims reconciliation process. The RG Steel Debtors were facing a situation similar to Jevic, namely that the remaining estate assets were worth dramatically less than the outstanding secured claims. Realistically, no plan was confirmable, and a chapter 7 conversion would result

6 ICL Holding, 2015 BL 295784 at *5.7 Another structured dismissal was approved one day after the settlement order was

approved in WP Steel Venture. In re Endeavour Operation Co., No 14-12308 (Bankr. D. Del. oct. 16, 2015) [Docket No. 987]. The Endeavour structured dismissal was ultimately approved on a fully consensual basis, and has not been appealed.

in additional costs and a recovery for secured creditors only. Following over a year of mediation, the RG Steel Debtors and other major stakeholders (including the secured creditors, the unsecured creditors’ committee, unions and representatives of pension beneficiaries) reached a global settlement providing for a claims settlement process resulting in limited payments to administrative, priority and unsecured creditors. While a few minor objections to the proposed global settlement were initially raised, all were resolved consensually prior to the hearing approving the settlement, and no parties have appealed the settlement order. After the conclusion of the claims allowance process, the chapter 11 cases will be dismissed.

oBSERVATIoNS

Both Jevic and ICL Holding show a new willingness (at least in the Third Circuit) for innovative workarounds to the traditional plan process, and a willingness, when confronted with dire circumstances, to allow a bending of an otherwise vigorously enforced traditional bankruptcy distribution scheme. Just how far the Third Circuit will be willing to go in tolerating these practices, and whether other circuits will follow its lead, remains to be seen. Nonetheless, pending broader judicial experience with structured dismissals, professionals negotiating value realization settlements should not feel precluded from departing from the ordinary priority scheme of the Bankruptcy Code, particularly when the passed-over creditors are unlikely to have received anything in a chapter 7 liquidation. WP Steel Venture already stands as an example of how structured dismissals can be used to effectuate a consensual global settlement for the benefit of all parties and bring cases to a final resolution where there are insufficient assets to follow the rigid priority schemes dictated in plans.

AUTHoRS

marc AbramsPartner

gabriel BrunswickAssociate


North aMerica

Fisker and Free Lance-Star’s Fading Legacy: An investor’s right to Credit Bid remains Secure

In the first half of 2014, two bankruptcy judges in separate jurisdictions limited the credit bidding rights of secured creditors that acquired their claims as part of apparent loan-to-own strategies. At the time, there was some concern that those cases signaled a shifting tide against strategic investments in distressed assets facilitated by policy conscious judicial intervention. Fortunately for the distressed investing community, the facts of the two 2014 cases are distinguishable from most cases, and no seismic shift in credit bidding policy has occurred to date. This article highlights the unique circumstances that led to the Fisker and Free Lance-Star decisions so that strategic investors can avoid similar pitfalls and continue to bank on their right to credit bid acquired claims against distressed collateral.

In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (KG) (Bankr. D. Del. 2014)

on February 19, 2014, the United States Bankruptcy Court for the District of Delaware approved the sale of Fisker Automotive to Wanxiang America Corporation (“Wanxiang”) for approximately $149.2 million. However, Wanxiang’s bid may never have been considered were it not for Judge Kevin Gross’s earlier decision to cap the credit bid of Hybrid Tech Holdings, LLC (“Hybrid”), being the holder of an asserted $168.5 million secured claim, at $25 million — the amount paid to purchase the claim approximately one month prior to filing.

This article highlights the unique circumstances that led to the Fisker and Free Lance-Star decisions so that strategic investors can avoid similar pitfalls and continue to bank on their right to credit bid acquired claims against distressed collateral.


Fisker and Free Lance-Star’s Fading Legacy: An Investor’s Right to Credit Bid Remains Secure | North aMerica

Fisker Automotive Holdings, Inc. and Fisker Automotive, Inc. (together, “Fisker”) were founded in 2007 to design, assemble and manufacture premium plug-in hybrid electric vehicles in the United States. The Department of Energy funded Fisker’s initiatives through a senior secured loan that was acquired by Hybrid in october 2013. Hybrid paid $25 million for the outstanding senior loan of $168.5 million. Prior to filing voluntary bankruptcy petitions on November 22, 2013, Fisker and Hybrid negotiated an acquisition of Fisker’s assets through a $75 million credit bid of Hybrid’s holdings in the senior loan. on the first day of the cases, Fisker filed a motion to approve an expedited private sale asserting that the cost and delay arising from a competitive auction process or pursuing a potential transaction with anyone other than Hybrid would not likely increase value for the estates. Hybrid initially required that the sale be approved by January 6, 2014, or just 45 days from the bankruptcy filing.

The official committee of unsecured creditors (the “Committee”) appointed in the case opposed the sale motion and filed a separate motion proposing a competitive auction in which Wanxiang would participate and bid against Hybrid’s offer. The Committee disputed Hybrid’s right to credit bid on the alternative bases that: (i) a material portion of the assets to be sold either were not subject to a properly perfected lien in favor of Hybrid, or were subject to a lien in favor of Hybrid that was in bona fide dispute; (ii) cause existed to limit Hybrid’s right to credit bid because doing so would facilitate a competitive auction; or (iii) cause existed because the assets to be sold included both encumbered and unencumbered assets.

At the hearing to consider the sale motion and the Committee’s motion for a competitive auction, Fisker and the Committee agreed, among other things, to limit the areas of dispute by stipulating that if Hybrid’s right to credit bid remained uncapped there was no realistic possibility of a competitive auction. The parties also agreed that a

sale of substantially all of Fisker’s assets was necessary to realize the highest and best value for the estate and that only a subset of the assets to be sold constituted properly perfected Hybrid collateral, while some material assets were unencumbered.

Section 363(k) of the Bankruptcy Code provides that if property subject to a lien that secures an allowed claim is proposed to be sold, the holder of such claim may credit bid the claim “unless the court for cause orders otherwise.” Judge Gross observed that failure to limit Hybrid’s bid would preclude any auction, since no party was willing to bid more than the value of Hybrid’s asserted secured claims, but that Wanxiang would otherwise be a motivated competing bidder in the right circumstances (notably, Wanxiang had recently purchased, through a separate bankruptcy auction, the lithium ion battery used in Fisker electric cars, which demonstrated Wanxiang’s vested interest in purchasing Fisker’s assets). Therefore, Judge Gross decided to limit Hybrid’s credit bid to $25 million “for cause,” on the basis that if he did not do so, bidding would not only be chilled, but frozen.

Judge Gross also determined that Fisker did not justify the expedited, private sale process required by Hybrid to the court’s satisfaction. Fisker filed for bankruptcy on November 22, 2013 and proposed to conduct the sale hearing no later than January 3, 2014, which left the parties only 24 business days to challenge the sale motion and even less time for the Committee, which was not appointed until December 5, 2013. The expedited nature of the private sale was inconsistent with the court’s notion of fairness, and Judge Gross would not permit Hybrid to “short-circuit the bankruptcy process.”

After Hybrid’s emergency appeals were denied, Wanxiang won the auction for Fisker’s assets with a bid of approximately $149.2 million — a significant increase in value over Hybrid’s initial $75 million credit bid.



In re The Free Lance-Star Publishing Co. of Fredericksburg, Va., Case No. 14-30315 (KRH) (Bankr. E.D. Va. 2014)

In Free Lance-Star, Judge Kevin Huennekens of the United States Bankruptcy Court for the Eastern District of Virginia limited an investor’s right to credit bid its asserted approximately $45 million secured principal claim to $13.9 million for reasons similar to those Judge Gross relied upon in Fisker.

The Free Lance-Star is a publishing, newspaper, radio and communications company located in Fredericksburg, Virginia. In 2006, The Free Lance-Star borrowed approximately $50.8 million from Branch Banking and Trust (“BB&T”) secured by certain of the company’s real and personal property, but excluding its radio towers. In late June 2013, BB&T sold this non-performing loan to an affiliate of DSP Acquisition, LLC (“DSP”). Purchasing the loan was the first step in DSP’s strategy to acquire all of The Free Lance-Star’s assets, including its radio towers.

In early July 2013, DSP informed The Free Lance-Star that it wanted the company to file for bankruptcy so that DSP could credit bid for the assets. Upon realizing it did not hold a valid perfected lien on the radio towers, DSP asked The Free Lance-Star to execute deeds of trust in late July 2013, but such deeds of trust were never actually executed. In mid-August, and without informing The Free Lance-Star, DSP subsequently filed UCC fixture financing statements in the counties where the radio towers were located. Ninety days after the filing of the UCC statements, DSP renewed its pressure on the company to file for bankruptcy to facilitate the section 363 sale.

During the negotiations leading up to filing, DSP aggressively tried to limit the company’s ability to sell to a third party. DSP urged The Free Lance-Star not to market its assets, insisted on a bankruptcy timeline of no more than six weeks between filing and closing, objected to the company hiring financial consultant Protiviti, and, after Protiviti was nevertheless hired, insisted that Protiviti’s marketing materials contain a statement on the front page, in bold font, that DSP had a right to a $39 million

credit bid. When Protiviti decided that the company did not need debtor-in-possession financing to bridge to a sale, DSP questioned the validity of Protiviti’s projections, and insisted that the company borrow a new post-petition facility provided by DSP. Through a DIP facility, DSP hoped to acquire valid liens on the radio towers. When the company refused to take on DSP’s DIP facility, all negotiations between The Free Lance-Star and DSP ceased.

on January 23, 2014, The Free Lance-Star commenced its bankruptcy cases by filing voluntary petitions, a motion to use cash collateral, and two sale motions, one to sell its newspaper and printing business assets, and another to sell its radio towers. DSP opposed the cash collateral motion, and asked for new liens on the radio towers as adequate protection, but did not disclose to the court that it had unilaterally recorded financing statements against the towers in August 2013. The court denied DSP’s request for supplemental liens, finding that DSP’s interest in the company’s cash collateral was adequately protected by replacement liens (on other assets) and adequate protection payments offered by The Free Lance-Star.

on March 10, 2014, the court entered orders approving the bidding procedures for the two related sales, including the right of DSP to credit bid its claim against the assets on which it had valid liens or security interests. Also on March 10, DSP initiated an adversary proceeding seeking a declaratory judgment that it held valid and perfected liens on substantially all of The Free Lance-Star’s assets, including the radio towers.

After conducting a three-day evidentiary hearing in late March, the court concluded that: (i) DSP did not have a valid lien on the radio towers and therefore could not credit bid on them; and (ii) DSP’s inequitable conduct required the court to limit DSP’s right to credit bid “in order to foster a robust auction.” Relying on Judge Gross’s opinion in Fisker, Judge Huennekens held that DSP’s conduct provided sufficient cause to limit DSP’s credit bid. Not only did DSP conceal its UCC filings at the cash collateral hearing where it asked the court for replacement liens on the same assets, but DSP also tried to chill



bidding by pressuring The Free Lance-Star to forego, or at least shorten, the marketing period and to include a conspicuous advertisement of DSP’s credit bid rights in the sale materials. The court found that DSP created genuine confusion in the marketplace regarding the extent of DSP’s secured interest and DSP’s role in the auction process, which influenced many interested parties to wait for the outcome of the court’s credit bid ruling before committing to conduct comprehensive due diligence. Ultimately, relying on The Free Lance-Star’s financial advisor’s market-analysis to determine “an appropriate cap for a credit bid that would foster a competitive auction process,” the court limited DSP’s credit bid to $13.9 million.

Precedential Value of the Fisker and Free Lance-Star Decisions

observers have noted that the Fisker and Free Lance-Star decisions diverged from the holding of the U.S. Supreme Court in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, in which the Supreme Court affirmed the policy supporting a creditor’s right to credit bid by denying the debtors’ attempt to confirm a plan that did not provide a secured creditor the right to credit bid its claim and observing that “the ability to credit-bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price.”

In contrast, the Fisker and Free Lance-Star decisions seemed to revive the Third Circuit’s older decision in In re Philadelphia Newspapers, LLC, wherein the court permitted the debtor to proceed with a plan that facilitated the sale of collateral secured by a lien without providing the secured creditor its right to credit bid. In support of its holding in Philadelphia Newspapers, the Third Circuit recognized the ability of a court to limit the right to credit bid “for cause” codified in section 363(k). The Third Circuit relied on precedent where the “for cause” standard was invoked to promote a competitive auction or when the classification and priority of a secured lender’s claim was in dispute — situations arguably analogous to the facts in the Fisker and

Free Lance-Star cases. The Philadelphia Newspapers decision concluded its discussion of section 363(k) by noting that “a court may deny a lender the right to credit bid in the interest of any policy advanced by the Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment.”

RadLAX ensured that secured creditors’ ability to credit bid under section 363(k) could not be circumvented through the use of a plan process. However, the Fisker and Free Lance-Star decisions were reminders that RadLAX did not address the ability of the court to restrict the right to credit bid “for cause.” The 2014 decisions thus rekindled the concern that bankruptcy courts might resume the limiting of credit bidding to promote competitive auctions. However, thus far, those fears have not come to pass and the precedential value of the Fisker and Free Lance-Star decisions has been limited by the unique facts of those cases — i.e., situations where the secured creditor actively tried to chill bidding via an expedited sale or by meddling in the sales process, and other interested parties disputed the legitimacy (and extent) of the creditors’ security interests.

The absence of subsequent case law invoking Fisker and Free Lance-Star, and a recent recommendation from the American Bankruptcy Institute (“ABI”), caution against interpreting the court’s power to limit credit bidding “for cause” too broadly based on the two 2014 opinions. only two reported cases thus far have cited directly to Fisker and Free Lance-Star. In one, In re Charles St. African Methodist Episcopal Church, the debtor expressly disavowed reliance on Fisker and its rationale, and argued solely that the secured lender’s credit bid should be limited by the value of the debtor’s counterclaims against the lender. The court held that the existence of counterclaims against the lender does not constitute “cause” under section 363(k) to limit a credit bid. In the other, the court in In re RML Development, Inc. cited Fisker and Free Lance-Star for the proposition that the right to credit bid is not absolute, but only granted narrow relief by prohibiting a credit bid of the disputed portion of a secured claim. In 2014, the ABI


published its final report and recommendations from its Commission to Study the Reform of Chapter 11. The ABI report recognized that Fisker and Free Lance-Star “arguably expanded application of the cause standard for limiting credit bids,” but recognized that “credit bidding is an integral part of the secured creditors’ rights package” and recommended that “the chilling effect of a credit bid not be deemed sufficient cause to limit a credit bid.”

Though Fisker and Free Lance-Star have not led to a noticeable shift in bankruptcy courts’ willingness to limit the rights of secured creditors, strategic investors should be aware of the circumstances of those two decisions and mindful not to repeat the mistakes made by the secured creditors in those cases. The two 2014 decisions serve as reminders that the right to credit bid is not inalienable: it belongs to the secured lender who holds valid liens and does not interfere with an open sales process.

AUTHoRS

paul ShalhoubPartner

Daniel FormanAssociate

Jason D. St. JohnLaw Clerk


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B U s i N e s s r e o r g a N i z at i o N & r e s t r U c t U r i N g d i g e s t

deceMBer 2014 | VoL. 1 No. 1

coNteNts

North America 1

Europe 4

Cross-Border 11

North aMerica

Confirmation of Momentive Performance Materials’ Chapter 11 Plan Reveals Potential Cramdown Pitfalls for Secured Lenders

With declining liquidity and an unsustainable 17-times levered capital structure, Momentive Performance Materials, Inc., a maker of silicones and quartz products, and certain of its affiliates (collectively, the “Company” or “Debtors”) hired Willkie in early 2014 to assist in the restructuring of Momentive’s $4.4 billion in debt. Willkie and the Company’s financial advisors successfully navigated Momentive through a complex chapter 11 process, achieving confirmation of their chapter 11 plan within five months of their initial bankruptcy filing. The confirmation process included disputes with senior secured lenders regarding the validity of a make-whole premium and the ability to “cramdown” senior creditors with below-market replacement notes.

BACkgrouND

After intensive first quarter negotiations, Momentive and the vast majority of holders of the Company’s second lien notes agreed to the terms of a prenegotiated chapter 11 bankruptcy. The prenegotiated deal would reduce the Company’s net leverage to less than five times EBITDA.

The Debtors filed for bankruptcy in April 2014 with a pre-negotiated plan of reorganization (the “Plan”) proposing that: (a) holders of second lien notes would exchange their notes for equity in the reorganized company and have the opportunity to participate in a $600 million rights offering to purchase additional equity at a 15% discount, (b) holders of first lien notes and 1.5 lien notes would receive replacement notes in the full amount of their claims if they voted against the Plan (but could receive payment in full in cash if they agreed to vote in favor of the Plan and not litigate the validity of their make-whole claims), (c) general unsecured creditors would have their claims fully satisfied, and (d) the holders of senior subordinated notes would receive nothing on account of their notes.

Business Reorganization & Restructuring Digest focuses on exploring recent legal developments, trends and emerging issues in notable North American, European and cross-border restructurings.

2

on August 26, 2014, Judge Drain of the Bankruptcy Court for the Southern District of New York confirmed the Plan over the objection of the trustees for the first lien notes, the 1.5 lien notes, and the senior subordinated notes. Judge Drain ruled in favor of the Debtors on several disputes, including (a) whether a make-whole premium was due to holders of first lien notes and 1.5 lien notes; (b) the appropriate rate of interest for the replacement notes under the Bankruptcy Code and the Supreme Court’s landmark decision in Till v. SCS Credit Corp., 541 u.S. 465 (2004); and (c) whether the Debtors’ senior subordinated notes were in fact subordinated to the Debtors’ second lien notes under the terms of the subordinated notes indenture.

ThE MAkE-WholE PrEMIuM DISPuTE

Courts in a variety of jurisdictions, including the Second Circuit, have developed case law in recent years holding that lender claims for make-whole premiums in a bankruptcy will typically be disallowed unless the debt documents state explicitly that the premiums are payable after a bankruptcy acceleration. The rationale is that the debt accelerates upon a bankruptcy filing, typically under the explicit terms of the documents, and therefore the “prepayment” terms of the debt are not triggered because any post-acceleration payments are payments made after maturity (which has been moved up to the acceleration date), not prepayments. lenders can contract around this issue by making sure the debt documents state explicitly that the make-whole is payable in connection with an acceleration. however, the Momentive indentures did not include such a provision.

Despite this, the trustees for the first lien notes and 1.5 lien notes insisted that a “make-whole” premium was due and payable by Momentive under the first and 1.5 lien indentures. The bankruptcy court disagreed, finding that the maturity dates of the notes were automatically accelerated upon the Debtors’ filing, and that there was not otherwise a clear and unambiguous clause in the indentures requiring payment of the make-whole in bankruptcy. This decision was in line with the growing body of case law that makes clear that courts will only uphold make-wholes in bankruptcy if such payment was specifically contracted for in a bankruptcy scenario.

More and more, since this line of cases has developed, indentures specifically speak to whether a “make-whole” premium will be due in bankruptcy. however, the Momentive indentures did not do so.

ThE CrAMDoWN DISPuTE

Because of the weakness of the indentures’ make-whole provisions, as an incentive to avoid litigation, the Company proposed a chapter 11 plan that offered payment in cash to holders of first and 1.5 lien notes if they declined to pursue make-whole litigation and accepted the Plan as a class. on the flip side, if they voted against the Plan as a class, holders would instead receive cramdown replacement notes at the treasury rate + 1.50% for the first liens and the treasury rate + 2.00% for the 1.5 liens. The first and 1.5 lien holders chose to roll the dice, rejected the Plan, and then litigated the terms of the replacement notes themselves in addition to the make-whole.

The first and 1.5 lien trustees asserted that the Plan’s interest rates on the replacement notes were too low, and that the “cramdown” provisions of the Bankruptcy Code required that a debtor provide a “market” rate of interest on any replacement notes given to secured lenders —particularly in a case, as in Momentive, where there was clear evidence of the market rate, as The Debtors had already received commitments for third-party financing to cash out the noteholders in the event that they had accepted the cash option under the Plan.

The Bankruptcy Court disagreed that a market rate was required, explaining that the Plan’s proposed rates of interest largely complied with the requirements laid down by the Supreme Court in the landmark case on cramdown interest rates (albeit in the chapter 13 context), Till v. SCS Credit Corp. The Bankruptcy Court extensively analyzed Till and explained that Till did not require that a bankruptcy court look to the market to help it determine what the rate of interest would be on a similar loan. Judge Drain explained that looking to the market is not part of the analysis, because the market rate of interest necessarily includes an element of profit to lenders, which is inappropriate under section 1129(b).

In Till, the Supreme Court calculated the cramdown rate of interest by starting with a risk-free rate (in Till, the

33deceMBer 2014 | BuSINESS rEorgANIZATIoN & rESTruCTurINg DIgEST

prime rate was used) and suggested that an additional spread of 1-3%, depending on the risk of payment default for the replacement debt, would be an appropriate interest rate on “cramdown” replacement notes. unlike Till, Momentive proposed using the treasury rate, rather than the prime rate, as a starting point due to the fact that the replacement notes under the Plan were seven-year securities. While the court found that the treasury rate of interest was an appropriate risk-free rate due to the long-term nature of the replacement notes (explaining that prime rate was typically only used for short-term lending), it did rule that starting from the treasury rate meant that the 1-3% spread suggested by Till would have to be adjusted slightly upwards. To that end, the court required the Debtors to adjust the rate of interest on the replacement first lien notes and the replacement 1.5 lien notes by 0.50% and 0.75%, respectively, in order for the Plan to be confirmed. Subsequent to such adjustment, the court entered an order confirming the Plan.

NoTEholDErS’ rEquEST for A “Do-ovEr”

After they lost on both the make-whole and the cramdown issues, holders of first and 1.5 lien notes asked the Bankruptcy Court for a “do-over” by filing a motion seeking to change their Plan votes from “rejecting” to “accepting,” to belatedly select the cash-out option under the Plan. The Debtors objected on the basis that the holders already forced the Company to incur significant legal costs, and now that everyone knew the outcome of the litigation, the cash deal was no longer on the table. The Bankruptcy Court agreed. various appeals of the order confirming the Plan are currently pending in the Southern District of New York.

oBSErvATIoNS

The make-whole portion of Judge Drain’s decision simply adds on to the many cases requiring debt documents to be explicit if a make-whole is due in bankruptcy, and does not break new ground.

however, the cramdown portion of the decision unsurprisingly has become a focus for many investors, who may not have previously considered a debtor’s ability to rewrite their senior secured debt on below-market terms under section 1129(b) of the Bankruptcy Code, when “in-the-money” senior secured lenders had otherwise considered themselves in a solid position for a par recovery. future debtors may well consider this cramdown replacement note approach, since not only could they issue replacement debt potentially at a rate lower than what they would receive from exit lenders, but they would also entirely eliminate the significant upfront fees charged by exit lenders. In the future, senior secured creditors should consider this possibility in debt pricing, and should also consider organizing and ensuring that they have an open dialogue with the debtors during the restructuring so that they can negotiate the terms of their recovery rather than assuming they will be taken out at par in cash. Death-trap voting options, like the one evident in Momentive’s plan, should also be carefully considered by investors prior to voting, as a bankruptcy court may not be inclined to allow investors to later backtrack on their votes absent an agreement with the debtor.

AuThorS

Matthew a. FeldmanJennifer J. hardy


http://www.willkie.com/professionals/h/hardy-jennifer

4

eUroPe

The Graham Review on UK Pre-Packs

A pre-packaged sale (or “pre-pack”) in uk insolvency proceedings is an “arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on, or shortly after, his appointment” (Statement of Insolvency Practice 16, issued by the Insolvency Practitioners’ Association on November 1, 2013) (“siP 16”).

A pre-pack is frequently used by senior secured creditors. It is similar in concept to a section 363 sale under chapter 11 of the u.S. Bankruptcy Code, although a uk pre-pack is not specifically legislated for under the Insolvency Act 1986. A uk pre-pack is usually not approved or supervised by the court; instead it is carried out by the court-appointed administrators of the company, who are themselves officers of the court and who must act in the best interests of all of the company’s creditors.

In addition, although administrators are required by SIP 16 (which forms part of their professional guidelines) to disclose certain information about a pre-pack to creditors in a subsequent communication, there is no opportunity for creditors to obtain such information and/or object to the pre-pack before it is carried out. The perceived absence of court involvement and lack of transparency has given the process a bad reputation in the uk, despite the undeniable usefulness of pre-packs as restructuring mechanisms that can be implemented relatively quickly and efficiently, minimize insolvency stigma and value-loss to the business, save jobs and leave behind creditors who are clearly underwater. Some of the creditors who have been left behind — notably landlords (represented by the British Property federation), the Pensions regulator and the uk tax authorities — have led the calls for reform. recent newsworthy failures such as the collapse of the electrical retailer Comet in 2012, whose purchasers left behind £26 million in unpaid taxes and also left the taxpayer with a bill of £23 million to compensate employees for a defective employee redundancy consultation, have exacerbated the criticism of pre-packs.

There has also been increased scrutiny of how banks treat companies that they characterize as distressed or underperforming, with allegations made that frequently the banks are too eager to engineer a default and take control of the assets or business themselves (commonly via a pre-pack) in order to make a profit. Most recently, this led rBS to announce the closure of its global restructuring group this year, following a critical report by lawrence Tomlinson and the initiation of a separate investigation by its regulator, the financial Conduct Authority.

In light of the above controversies, in 2013 the Department of Business, Innovation and Skills commissioned financial and accounting expert Teresa graham CBE (who is an experienced accountant and served on the government’s Deregulation Advisory Panel for two decades) to undertake an independent review of pre-packs. graham reported back in June 2014, with a number of recommendations for reform. Although graham does not advocate banning pre-packs outright (stating that “there is a place for pre-packs in the uk’s insolvency landscape”), she makes six specific recommendations, which she suggests should be adopted voluntarily by the industry.

Two of the graham recommendations focus specifically on pre-packs involving “connected” parties, because these have been empirically shown to be less likely to deliver a return to creditors and more likely to fail within the first three years. “Connected” is given a wide meaning, but notably does not extend to capture a sale to a secured lender who holds, as security for the granting of the loan (with related voting rights) and as part of its normal business activities, one-third or more of the shares in both the insolvent company and the new company, i.e., a share charge or “stock pledge.” Such a connection will not be a pre-pack involving “connected” parties for the purpose of the recommendations. graham notes that this is to avoid causing unnecessary damage to the restructuring of larger companies and groups of companies.

The six graham recommendations are as follows:

1. Pre-pack pool. on a voluntary basis, connected parties should approach a “pre-pack pool” before the sale and disclose details of the deal, for a pool member to opine on. There is no prescription as to what material the pool member will require in order to comment on the


deal – that will be for the party approaching them to decide. The aim is to create independent scrutiny while retaining overall secrecy. It is anticipated that pool members (independent experienced businesspeople) will spend no more than half a day reviewing the documents they are provided with, and will then issue a statement on the reasonableness of the proposed sale. If the statement is negative, the deal can still proceed, although the fact that it was negative will have to be disclosed in the administrators’ SIP 16 statement.

2. Viability review. on a voluntary basis, connected parties should complete a “viability review” on the new company, stating how it will survive for at least the next 12 months and what it will do differently from the old company so the business does not fail again. The outcome of the review will be included in the administrators’ SIP 16 statement.

3. revised siP 16. SIP 16 should be redrafted as annexed to graham’s report, to incorporate her recommendations.

4. Marketing. Although it is accepted that marketing cannot be carried out in some circumstances, in such cases, the reasons must be clearly explained in the administrators’ SIP 16 statement. All marketing of

businesses that are pre-packed should comply with key principles of good marketing, and any deviation from those principles must also be brought to creditors’ attention.

5. Valuations. valuations must be carried out by a valuer who holds professional indemnity insurance.

6. Monitoring. Monitoring of SIP 16 compliance should be taken up by the “recognised Professional Bodies” (these include the various accountants’ and insolvency practitioners’ associations, as well as the law Society), instead of the Insolvency Service.

on balance, we are of the view that the recommendations put forward by graham are a measured response to some of the concerns raised in respect of pre-packs. however, it remains to be seen how well certain of the recommendations (and in particular the pre-pack pool) will operate in practice. There will no doubt be a few teething issues in the initial stages as the industry begins to implement graham’s recommendations.

AuThorS

graham r. Laneiben Madsen


http://www.willkie.com/professionals/m/madsen-iben

6

Evolution Rather Than Revolution: Reform of French Insolvency Proceedings

A reform of french insolvency proceedings was introduced on March 12, 2014 affecting all insolvency proceedings commencing after July 1, 2014 and delivering an overall positive effect for both creditors/third parties and debtors.

IMProvEMENT of CrEDITorS’ AND ThIrD PArTIES’ PoSITIoNS

Introduction of a pre-packaged asset sale plan (plan de cession)

Prior to the reform, an asset sale plan could only be implemented during recovery or liquidation proceedings (with continuation of business activity). however, the benefit to a third party of presenting an asset sale plan (in order to purchase the assets of the debtor along with some employees, typically leaving behind most liabilities) was typically outweighed by the damage that the debtor’s business suffered as a result of spending a number of months in formal insolvency proceedings. To combat this, the reform provides that within the framework of confidential conciliation proceedings the debtor may request the President of the court (after hearing the opinion of participating creditors) to entrust the conciliator with the task of preparing an asset sale plan. The preparation of the asset sale plan can then be “front-loaded” by being conducted in the context of the conciliation proceedings with implementation then taking place within the context of recovery or liquidation proceedings. It offers a new tool for debtors and practitioners to prepare, in the context of confidential proceedings (which is less harmful to the business), not only a future safeguard or recovery plan but also the ability to sell the business as a going concern to a third party by limiting the time spent under public recovery or liquidation proceedings.

The ability for creditors to present their own safeguard or recovery plan when creditors’ committees are formed

To date, the creditors’ ability to take control of a debtor in safeguard or recovery proceedings has been limited by the fact that the debtor benefits from the exclusive right to prepare a draft safeguard plan, which is then submitted to a vote of the creditors through the creditors’ committees

(and the general meeting of all noteholders, if applicable). In practice, the creditors’ ability to take control of a debtor was, therefore, possible only after long negotiations during conciliation or safeguard proceedings (as notably happened in the SAur and CPI matters). The reform now provides that, in addition to the draft safeguard or recovery plan prepared by the debtor, creditors may also prepare their own safeguard or recovery plan. The creditors’ committees (and, if applicable, the general meeting of all noteholders) then vote on each draft safeguard plan and the court makes its decision after the vote.

In the event that the creditors’ recovery plan envisions a change of shareholders, getting shareholder approval will remain essential because the shareholders remain able to refrain from voting in favor of the sale of their shares or any capital increase required by the proposed transaction. During the preparatory work on the reform provisions, there was some discussion as to whether an “expropriation” of the former shareholders’ shares should be included, but this idea was ultimately dropped. however, this new power for creditors to present their own safeguard or recovery plan will certainly lessen the power of the threat that debtors have used for many years in pre-insolvency amicable proceedings (mandat ad hoc/conciliation) that if a deal is not done consensually, the court will implement a 10-year rescheduling plan. As a result of the reform, creditors are now empowered to draw up their own “Plan B.”

New-money priority is strengthened

New money priority granted in the framework of conciliation proceedings is strengthened in the event of subsequent safeguard or recovery proceedings. until now, a priority ranking has been granted to new money creditors with respect to the proceeds of a subsequent sale of assets completed pursuant to recovery proceedings. The reform provisions provide that, in addition, within the framework of a safeguard or recovery plan, a creditor benefiting from new-money priority must be paid the entire amount of its secured claim on the date of implementation of such safeguard or recovery plan. In other words, it is not possible for the company to reschedule the repayment of the new money over a number of years, as is potentially the case for amounts owed to other creditors.


Filing a proof of claim is facilitated

The deadline for filing a proof of claim remains the same (i.e., two months from the publication of the opening judgment, four months if the creditor is located outside france) but there will no longer be any uncertainty as to the identity and the authority of the person submitting the proof. Creditors are now entitled to ratify the filing made in their names by a third party until such time as the judge is obliged to accept or reject the claim, i.e., several months after the opening of proceedings.

The second main simplification applies with respect to a creditor who fails to file a proof of claim within the deadline. until now, a second filing period was only available for a period of up to six months after publication of the opening judgment and where the creditor was able to prove that the debtor intentionally failed to mention the claim to the creditor’s representative, which was very difficult to prove in practice. The reform removes the willful misconduct element and therefore a second filing period will be available if a creditor can prove, as a matter of fact, that its claim was not mentioned by the debtor to the creditor’s representative irrespective of whether such failure was intentional.

IMProvEMENT of ThE DEBTor’S PoSITIoN

Wider scope for pre-packaged safeguard proceedings

until the reform was implemented, pre-packaged safeguard proceedings were limited to financial restructurings within the framework of accelerated financial safeguard proceedings, applicable only to financial creditors. The reform does not remove accelerated financial safeguard proceedings, but they have been re-categorized to form only one type of a wider group of proceedings called accelerated safeguard proceedings. The purpose of the accelerated safeguard proceedings is to implement, within the framework of creditors’ committees (and if applicable, the general meeting of all noteholders), any restructuring (effected by a safeguard plan) that was not completed during the conciliation period due to the lack of unanimity among creditors. The accelerated safeguard proceedings may not last more than three months and, in contrast to the accelerated financial safeguard proceedings, trade creditors will be included within the plan.

A welcome measure for the financing of safeguard proceedings

Previously, safeguard and recovery proceedings were subject to a common rule for the financing of day-to-day business activities after the commencement of the proceedings: trade creditors had to be paid cash on delivery (regardless of pre-existing contractual terms of payment), which had a negative impact on the working capital of the debtor. This rule has been removed for safeguard proceedings (but remains in place for recovery proceedings) so that pre-existing contractual terms continue to apply in safeguard proceedings notwithstanding any previous payment default or the opening of proceedings.

Further protection granted to the debtor under mandate ad hoc and conciliation procedures

The reform provides that any contractual term that modifies the contract to the debtor’s detriment in the event of the opening of mandate ad hoc and conciliation proceedings is deemed void (e.g., the acceleration of the debt based on the sole opening of mandat ad hoc or conciliation proceedings would not be possible, but it would remain possible if other events of default have occurred). Notably, this means that the triggering of the usual insolvency events of default in credit agreements would be deemed void on the opening of such proceedings. In addition, any contractual term requiring that the debtor pay the creditors’ professional advisory fees on the opening of such proceedings is also deemed void in respect of 25% of the total amount of such fees (this percentage having been fixed arbitrarily by a decree). finally, any agreement rescheduling debt that is completed under conciliation proceedings may not provide for the compounding of interest.

Improved monitoring of the conciliation agreement reached at the end of conciliation proceedings

Prior to the reform, if a creditor sued the debtor individually for payment of its claim during conciliation proceedings, the debtor had the right to petition the President of the Commercial Court who opened the conciliation proceedings to obtain a grace period (i.e., a deferral or a rescheduling of the due dates of payment obligations over a maximum period of two years). The ability to petition

8

the President of the Commercial Court was limited to the duration of the conciliation proceedings, which meant that it was no longer available during the subsequent implementation of the conciliation agreement. The reform now provides that if, during the implementation of a conciliation agreement, a creditor who is party to the conciliation proceedings sues the debtor individually for payment of a claim that was not included in the conciliation agreement, then the President of the Commercial Court retains jurisdiction to defer or otherwise reschedule the due dates of the payment obligations for such claim over a maximum period of two years. In addition, to monitor the implementation of the conciliation agreement, the reform provides that the conciliator may be appointed at the end of the conciliation period as a “special representative for the implementation of the agreement” (mandataire à l’exécution de l’accord).

Specific measures to improve the financial situation of a distressed debtor

The reform also provides that from the commencement of safeguard or recovery proceedings, any portion of the debtor’s share capital that has not been paid up becomes immediately due and the creditors’ representative is empowered to recover such sums. In addition, after the commencement of safeguard or recovery proceedings and where interest continues to accrue on a debt, such interest may not be compounded.

AuThorS

alexandra BigotVincent Pellier


http://www.willkie.com/professionals/p/pellier-vincent


cross-Border

U.S. Supreme Court Denies Petition for Certiorari in Jaffe v. Samsung, Bolstering U.S. License Holders’ Rights Against Foreign Debtor

on october 6, 2014, the united States Supreme Court issued an order denying a petition for a writ of certiorari in Jaffe v. Samsung, also known as the Qimonda case. In denying the writ, the Supreme Court let stand a decision of the united States Court of Appeals for the fourth Circuit1 affirming the decision of the Bankruptcy Court for the Eastern District of virginia2 to grant non-debtor licensees important and valuable rights under section 365(n) of the Bankruptcy Code in an ancillary case pending under chapter 15 of the united States Bankruptcy Code.

qimonda, a german company that manufactured semiconductor devices, was the subject of an insolvency proceeding in germany. qimonda’s principal assets were approximately 10,000 patents, of which approximately 4,000 were u.S. patents that had been licensed to third parties. In addition to a request for u.S. recognition of the german proceeding as a “foreign main proceeding,” the insolvency administrator simultaneously sought bankruptcy court enforcement of qimonda’s rejection, under german law, of qimonda’s patent licenses.

The u.S. bankruptcy court, and the fourth Circuit on appeal, refused to give force and effect to such rejection in the united States because application of german executory contract law would frustrate the statutory protection afforded to licensees of united States patents

1 Jaffe v. Samsung Elec. Co. Ltd. (In re Qimonda AG), 737 f.3d 14 (4th Cir. 2013).2 In re Qimonda AG, 462 B.r. 165 (Bankr. E.D. va. 2011).

by section 365(n) and could undermine the united States’ fundamental public policy of promoting technological innovation. qimonda’s foreign representative appealed to the united States Supreme Court. In seeking certiorari, qimonda’s insolvency administrator argued that the fourth Circuit’s decision threatened the united States’ interests in international relations by discouraging reciprocal cooperation by other nations, and that allowing the decision to stand would discourage foreign representatives from invoking chapter 15 in the future.3

The Supreme Court’s refusal to grant certiorari will likely lead to the fourth Circuit’s Qimonda decision’s more heavily influencing the manner in which u.S. bankruptcy courts and other courts of appeal approach similar requests for extension of comity to foreign insolvency laws. further, the fourth Circuit’s ruling lends further credence to the theory that chapter 15, and its “universalist” underpinnings, is being applied by u.S. bankruptcy courts in a “territorial” manner. As such, foreign representatives seeking to take full advantage of the benefits afforded by a chapter 15 filing must continue to, and in some cases further, respect that a u.S. bankruptcy court will not act as a “rubber stamp” for orders of foreign courts, even those seated in jurisdictions with well-developed insolvency jurisprudence.

AuThorS

Marc abramsshaunna d. Jonesalex w. cannon

3 Petition for a Writ of Certiorari in Jaffe v. Samsung Electronics Co. Ltd., No. 13-1324, 2014 Wl 1725846 (u.S. Apr. 30, 2014).



http://www.willkie.com/professionals/c/cannon-alex-w

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this newsletter is provided by willkie Farr & gallagher LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. this newsletter may be considered advertising under applicable state laws.

willkie Farr & gallagher LLP is an international law firm with offices in New York, washington, houston, Paris, London, Frankfurt, Brussels, Milan and rome. the firm is headquartered at 787 seventh avenue, New York, NY 10019-6099. our telephone number is (212) 728-8000 and our fax number is (212) 728-8111. our website is located at www.willkie.com.

copyright © 2014 willkie Farr & gallagher LLP.

graham r. LanePartner Business reorganization and restructuring 44 20 3580 4706 [email protected]

If you have any questions regarding this newsletter, please contact any of the above partners or the Willkie attorney with whom you regularly work.

Marc abramsCo-Chair Business reorganization and restructuring 1 212 728 8200 [email protected]

alexandra BigotPartner Business reorganization and restructuring 33 1 53 43 4550 [email protected]

shaunna d. JonesPartner Business reorganization and restructuring 1 212 728 8521 [email protected]

Matthew a. FeldmanCo-Chair Business reorganization and restructuring 1 212 728 8651 [email protected]

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