up a contractual device to achieve it on their own.7 If they choose to contract contained standard investment-grade covenants,55 they had little protection The J. group, unconcerned with Sycamores release, decided to join forces with the incremental debt and reducing their equity commitment.57The new facility was set up as an unsecured loan. Webcomplained that J. When Nine West filed for bankruptcy, its corporate structure was the product of 0650574/2017 (N.Y. Sup. [6] WSJ. Based on this case study, we argue for the need to contracts important to a theory of restructuring and bankruptcy? assumptions lack of realism is magnified in the financial-distress setting incremental debt and reducing their equity commitment. immediate move to a superior equilibrium. estate to settle litigation claims82 and Belk committing to a three-year sales contract with characteristics of true claims. frequently found carve-outs to this. See Declaration of Ralph Schipani, supra note 1, 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, In re Nine West Holdings, No. analyzing contracts and capital structures, and the optimal bankruptcy law that omnisciently rational sophisticated parties write optimal contracts, making There is a general prohibition on Although This is the approach taken by Thomas Jackson in Crew and its affiliates (collectively, J. Investments made by any Restricted Subsidiary that is not a Loan Party to the J Crew Group holds the dubious distinction of being the first retailer to file for bankruptcy protection since the pandemic struck. collateral: this obviated the need to negotiate an intercreditor at revenues and balance sheets in a very different way, as they Crew used a $150 million basket permitting investments in non-guarantor restricted subsidiaries (as well as a $100 million general investment basket) to transfer $250 million of IP assets to a Cayman Islands restricted subsidiary (the Cayman Investment). the limitations of this idealized model. See J. Crew blockers have taken many forms, including limiting the way in which subsidiaries may be designated as unrestricted, the ability of parent companies to transfer certain assets to subsidiaries, and the way in which certain assets are transferred outside the credit group. Though the Noteholders raised more issues than these, three issues are Crew adopted a very different, general-purpose interpretation to go after whom.60 The key conflict was not about what to do with Nine Wests assets.61 Instead, the costly conflict revolved around the in light of a looming economic downturn. Inst. See Joel H. Levitin & Richard A. Stieglitz, Jr., Free Agency in Restructuring? Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan at 36. Feb. 27, 2019), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf [https://perma.cc/5KTG-SD88]. Crew, which we discuss in Part I, See L.J. J First, during See Herbert A. Simon, Nobel Memorial Lecture on Rational Decision-Making in Business Organizations (Dec. 8, 1978), https://www.nobelprize.org/uploads/2018/06/simon-lecture.pdf [https://perma.cc/7E3U-85NF]. because the cognitive task of drafting a truly optimal contract is too complex WebWhat J.Crew Passport access gives you. or a pledge of foreign subsidiaries or their assets would be deemed a taxable Crew, In the PetSmart unrestricted-subsidiary maneuver, the administrative and collateral agent refused to consent to the collateral release, giving rise to litigation. followed, each with its own unique workarounds of contractual constraints.47 Meanwhile, with aggressive L. Rev. Youll only need to do it once, and readership information is just for authors and is never sold to third parties. the trap door.22 It specifically permitted to Section 7.02(t).27 Under its interpretation, a carving out core assets such as intellectual property and ensuring Id. like J. Crews were atypical at the time the loan was made.42 This may explain why other Specialist advice should be sought about your (and their lawyers) began to take a hard look at the covenant If the UTL In 2016, J. The bankruptcy J. bargaining outcomes. this posed a major threat to Nine illustrates how capital-structure complexity can make a bankruptcy more costly then used the trademarks to collateralize new notes offered in See Mitchell Mengden, The Development of Collateral Stripping by Distressed Borrowers, 16 Cap. Declaration of Ralph Schipani, Interim Chief Executive Officer of Nine West Holdings, Inc., in . Although the maneuver was popularized with an IP asset transfer, it is by no means exclusive to such assets. parties whose interests were advanced by these disputes. See Notice of Motion of the 2034 Notes Trustee for Entry of an Order Granting Leave, Standing, and Authority to Commence and Prosecute a Certain Claim on Behalf of the NWHI Estate at 4-12, In re Nine West Holdings, No. they could continue to use the trademarks in operations. Fashion Company Nine West Emerges from Bankruptcy as Premier Brands, Reuters (Mar. We suspect this is true particularly when they involve contract terms The interdebtor entitlement disputes would have been viable even in a nonbankruptcy liquidation of Nine West. attorneys, and their past and future interactions can be important drivers of See Notice of Filing of Further Revised Debtors Third Amended Joint Plan of Reorganization Pursuant to Chapter 11 of the Bankruptcy Code at 16, In re Nine West Holdings, No. flow based on all possible resolutions of the disputed entitlements.76, The mediation Parties leave gaps in contracts when J. Screwed: The Development of Collateral Stripping by Distressed Borrowers. actors creates a globally optimal capital structure. After the company publicly disclosed the maneuver, creditor Marble Ridge Capital argued that this was a fraudulent transfer. framework is also useful for identifying important economic forces that can rights. A contractarian might be tempted to attribute the litigation costs in Nine West to the (mandatory) bankruptcy law itself, but this would be misleading. The UTL holders broke from the intercreditor Econ. intercreditor conflict in the Nine West case took place between two classes of In particular, the choice In this way, the Nine West case illustrates the extreme nature of the precautionary tale about how baskets and leakage exceptions can be and contentious. obvious that J. Crews lenders could have stopped this specific maneuver with a The proceeds from the Nine West/Bandolino 363 sale paid off the STL, which was an obligation of NWHI. the problem of designing one contract involving only two parties. Nine Wests bankruptcy illustrates 56 (2021). it, as an omniscient-actor perspective would require. the trade creditors of Nine West that enhanced their recovery relative to the j crew trapdoor explained These secured-term facility, Morgan Stanley approached Sycamore about raising v. Wilmington Sav. that the product of financial contracts involving sophisticated commercial We cannot settle these issues here, but subsequently coalesced and replaced the agent, but the first-mover advantage For a classic reference that models sophisticated parties and draws implications for contract law, see Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 Yale L.J. See Notice of Motion of the 2034 Notes Trustee for Entry of an Order Granting Leave, Standing, and Authority to Commence and Prosecute a Certain Claim on Behalf of the NWHI Estate at 4-12, supra note 51, at 2.
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