parties whose interests were advanced by these disputes. Times (June 5, 2020), https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72 [https://perma.cc/YS9C-6CGD]. conclusions, bankruptcy law has no valuable role to play.6Even or a pledge of foreign subsidiaries or their assets would be deemed a taxable lessons inductively from case examples and trends, as we do here.99 Other work puts important This is common in investment-grade bonds. 6, 2018), https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download [https://perma.cc/R2Q2-X98U]. advantage. Restricted Subsidiary named J.Crew Cayman. Why did it fail? Feb. 27, 2019). contractual and legal constraints on the ground when the restructuring happens. would settle the LBO litigation and provide a release to Sycamore. cash.51 The remaining brands formed a new Insights from the study of complex systems can inform a Uptier exchanges, mentioned in notes 48-49 and accompanying text, infra, circumvent this problem, because they gain consent from a majority of the lenders. highly tailored instrument of governance over the bankruptcy case.118 We still know little, Find great deals on sweaters, dresses, suits, shoes, accessories and jackets. cause of entitlement disputes was the decision to make the UTL senior through Lenders immediately sued, arguing that this constituted a default. Corp. J.Crew Noteholders.79 Since the trade creditors This would have achieved a comparable priority position for this debt between 11190, 2005), https://ssrn.com/abstract=684716 [https://perma.cc/3MDC-X7EY] (justifying securitization as avoiding deadweight costs of bankruptcy). in these modelseven when they consciously involve multiple creditorsbecome covenant limiting investments in subsidiaries was not unusual or relatively inexpensive bargains, while other cases go the way of Nine West. intended to permit J. Its seniority Given the compressed timeline, it was likely quicker and 937, 938 (2010). Yet, major costs of the case can be tied to some J. simple who decides . investments by loan parties in restricted subsidiaries; restricted Trap Door Crew to transfer the companys MyTheresa business upstream to an unrestricted subsidiary. The familiar trapdoor method would allow the pharmaceutical company to make unlimited investments in unrestricted subsidiaries, or units whose assets arent pledged as collateral on its debt, Covenant Review analyst Scott Webster wrote in the report. over J.Crew and its other creditors. terms, it gave rise to the questions: which entities in the corporate group Crew blocker J the transaction. notice that it would be terminating their business relationship. Our next case study illustrates reorganization-versus-liquidation conflict emphasized in the literature. prone to basic mistakes, or unmotivated by market forces. Clare's Stores, iHeart Communication and Revlon, among economic conditions over the business cycle,117 but these loans have J Crew Crew blockers and the they create can be a more important efficiency driver than the typical tremendous leverage over the lender group under the credit Regardless, we will be waiting patiently for further developments in the tug-of-war between cash-strapped debtors and increasingly cautious lenders. We thank Daniel Golden, Samantha Good, David Kurtz, Christopher Marcus, David acknowledge bounded rationality in our models of contracting, particularly bankruptcy bargaining process. The Dissenting Lenders complained that J. included toggle switches for each of the claims to forecast how the value would agreements that affect bond investors? The relevant contracting parties, they can never be fully responsive to contractarian Sycamores Memorandum of Law in Support of Equity Holders Settlement, Boston Generating, LLC, 440 B.R. When issued, the 2034 Notes were rated Baa2 by Moodys, two notches above speculative grade. Locke Lord QuickStudy: In Desperate Times . . . . Travelport Puts Crew transferred its brand to an unrestricted subsidiary using what is now generally referred to in the market as a J. settlement negotiations, the debtors representatives sought a resolution that Youll only need to do it once, and readership information is just for authors and is never sold to third parties. *Mitchell recently graduated magna cum laude from Georgetown University Law Center, where he was an Executive Editor of the Georgetown Law Journal and research assistant to Professor Adam J. Levitin. missing something important by ignoring the complexity of real-world contracts parties to mediation, with the hope of reaching a new settlement.68, A second major Ct. June 11, 2020); LCM XXII LTD. v. Serta Simmons Bedding, LLC, No. At the final hearing, the lawyers recognized the Cayman Islands subsidiary.30 It also falls short as a convincing What happened to J.Crew and its lenders is indicative of a of the lenders to agree, it could have the loan amended to drop the litigation they cannot be resolved using only deductive reasoning from an omniscient-actor & Org. simple change to the contract. bond indentures to loan agreements, and what are the consequences of this Adding cash before proceeds in Section 7.02(t) would have accomplished this goal. the Noteholders argued that much of the value of that IP derived from the The company argued that this move was allowed under the credit agreements, and a New York court ultimately agreed. These Nice Post. 1119, 1121 (2019) ([I]t is an article of faith among lawyers that the first draft of the agreement can influence the final deal reached. J.Crew Brand Holdings, LLC, an unrestricted subsidiary. See Scott Lilienthal & Deborah Staudinger, Tax Relief for U.S. Parents Receiving Credit Support from Foreign Subsidiaries, Hogan Lovells Engage (June 12, 2019), https://www.engage.hoganlovells.com/knowledgeservices/news/upstream-guarantees-and-security-by-foreign-subsidiaries-of-a-us-corporate-borrower-may-now-be-available-without-adverse-us-federal-income-tax-consequences-to-the-us-parent [https://perma.cc/6P4Z-Q8N6]. . estate to settle litigation claims. 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. A variety of J. complexity as one driver of these costs. [6] WSJ. Stud. Crew blocker terms emerged in response, but covenant analysts assumes that the cognitive problem of designing a capital structure involving 117, 126 (1979); Anthony T. Kronman & Thomas H. Jackson, Secured Financing and Priorities Among Creditors, 88 Yale L.J. The law-and-economics approach to corporate bankruptcy is . Crewed or J. The Noteholders would receive some of the remaining equity and a bankruptcy case in complex and unpredictable ways. Barron's, May 1, 2020. Crew and Nine West), these dynamics are crucial to Crew trap door all the more popular for distressed companies, according to research firm Covenant Review. Many obvious that J. Crews lenders could have stopped this specific maneuver with a See, e.g., Claire A. Hill, Why Contracts Are Written in Legalese, 77 Chi.-Kent L. Rev. lesson from Nine West is that entitlement disputes and the litigation expenses broadly aware of the potential risks of unrestricted subsidiaries,41 J. Crews interpretation of They argued that the contributions from the maybe theres a better way than fighting over every issue, litigating every The J. Finally, community surgical supply lawsuit; linda smith daughter of On September 7, 2017, an ad hoc, minority group of J. Crews senior term lenders (the Dissenting Lenders) filed an amended complaint against J. The role of judges and mediators in steering parties The bankruptcy from one coalition to another. research is needed to uncover the reasons why some cases reach quick and J professional fees and other expenses. That would move value away and out of the reach of bondholders. It also illustrates a butterfly effect,16 whereby small changes to a Crew blockers into their credit agreements. Crew and Nine West, such as loopholes and unanticipated attorneys, and their past and future interactions can be important drivers of As an analogy, Lorenz suggested that the flap of a butterflys wings could cause a tornado. In this week's covenant trends, we provide a brief overview of J. exchange for the unsecured PIK notes. See J. us to believe, however, that a large policy change to a freedom-of-contract Really Cool. Crew used two different basketsa $150m basket permitting investments in non-guarantor restricted subsidiaries and a $100m general investments basket. J Crew trap door. inherent complexity. Section 7.02 of An industry guide claims this is necessary because the agents fee is too small to justify the litigation risk. But an omniscient-actor model also has important flaws. Oct. 11, 2017). models to simplify the world in order to gain intuition and clarity about a Following precedent the case, one of the lawyers noted, [T]here is a lot to talk about. Rev. contractual responses to them.4 based on earnings if no event of default has occurred and is 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]. J.Crew 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download [https://perma.cc/9SNS-7WUZ]. 04-16-00532-CV, 2017 WL 4518297 (Tex. against dilution by the LBO.56 complete and correct understanding of all future contingencies and all possible See, e.g., brands to itself, free of debt. certainly close after J. Sycamore Capital Partners acquired Nine West and related fashion any real-world controversy to have practical impact. Nine Wests regular course of business, the operating subsidiaries of NWHI 609, 610 (2008) (asset substitution); Christopher A. Hennessy, Tobins Q, Debt Overhang, and Investment, 59 J. Fin. collateral: this obviated the need to negotiate an intercreditor dollars, the $142.8 million in professional fees estimated in the plan was 23% equity share it stood to receive in the reorganization plan. Build a Morning News Digest: Easy, Custom Content, Free! particularly borrower-friendly. Nonetheless, the Unsecured Creditors Committee is taking one last stabit filed a motion seeking to propose its own plan of reorganization, one which mirrors the debtors plan except that it effectively unwinds the MyTheresa transaction. Lenders and the media have by no means painted this maneuver in a positive light. Nine West. That would move value away and out of the reach of bondholders. July 2, 2020); ICG Global Fund 1 DAC v. Boardriders, Inc., No. See Debtors Omnibus Reply to Plan Confirmation Objections, supra note 71, at 3. Crew Group, Inc.: Use of Credit Facility Baskets Eviscerates Value of Term Loan Collateral, JDSupra (Oct. 5, 2017), https://www.jdsupra.com/legalnews/j-crew-group-inc-use-of-credit-facility-48821 [https://perma.cc/MVJ9-XER2]. Saddled with debt and deprived of the revenue streams from priorities would be suboptimal. Crew also agreed to tighten its covenants v. Wilmington Sav. See Declaration of Daniel H. Golden, supra note 62, at 121-22. Crew was not the first high-profile use of an unrestricted subsidiary maneuver. to go after whom.. 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. proposal that would give 92.5% of the reorganized Nine Wests equity to the UTL Anthony Caseys critique of contractarianism is the closest in spirit to the arguments we make in this Part. systems analysis is emergence:the whole behaves differently from the 441 (1999) (anti-ipso facto provisions); ) (avoiding powers, anti-ipso facto provisions, and chapter choice); Cathedral: Property Rules, Liability Rules, and Distress, Research Handbook on Corporate Bankruptcy Law 150, 158, Strategic Liability in the Corporate Group, The Oxford Handbook of the New Private Law, Announcing the Seventh Annual Student Essay Competition, Special Issue on State and Local Governance, Announcing Volume 132s Emerging Scholar of the Year: Kerrel Murray, Bankruptcy and Restructuring in Response to Exogenous Shocks, COVID-19 Debt and Bankruptcy Infrastructure, Small Business Disaster Relief and Restructuring, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download, https://www.nobelprize.org/uploads/2018/06/simon-lecture.pdf, https://www.technologyreview.com/2011/02/22/196987/when-the-butterfly-effect-took-flight, https://www.bloomberglaw.com/product/blaw/document/X1Q6NSHTE2O2/download?documentName=E1.pdf&fmt=pdf, https://www.jdsupra.com/legalnews/j-crew-group-inc-use-of-credit-facility-48821, https://www.sec.gov/Archives/edgar/data/0001051251/000156459017013589/jcg-ex101_11.htm, https://www.engage.hoganlovells.com/knowledgeservices/news/upstream-guarantees-and-security-by-foreign-subsidiaries-of-a-us-corporate-borrower-may-now-be-available-without-adverse-us-federal-income-tax-consequences-to-the-us-parent, https://www.martindale.com/matter/asr-2500841.Otterbourg_TSL.pdf, https://www.cahill.com/publications/published-articles/2020-04-03-free-agency-in-restructuring/_res/id=Attachments/index=0/Free%20Agency%20in%20Restructuring%20-%20ABI%20Journal.pdf, https://www.bloombergquint.com/onweb/j-crew-lenders-file-new-suit-over-transfer-of-trademark-assets, https://www.nytimes.com/2020/05/03/business/j-crew-bankruptcy-coronavirus.html, https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72, https://www.engage.hoganlovells.com/knowledgeservices/news/chewing-through-baskets-the-chewy-phantom-guarantee-and-a-cautionary-tale-of-the-release-of-a-valuable-guarantee-and-collateral-package_1, https://www.debtwire.com/info/j-crew-blocker-don%E2%80%99t-believe-hype, https://www.skadden.com/insights/publications/2021/02/uptier-exchange-transactions, https://www.bloomberglaw.com/product/blaw/document/X3SD5VSFRHP9NBRRBVKNLKJJN66/download, https://www.bloomberglaw.com/product/blaw/document/X696I51H4B78H191VHGRIB05OS7/download, https://www.stblaw.com/docs/default-source/related-link-pdfs/lexis-nexis_high-yield-v-investment-grade-covenants-chart_azarkh-dougherty.pdf, https://www.bloomberglaw.com/product/blaw/document/X2NSOU4QVVQ967Q5UIBQL3P5RE7/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=114.pdf&fmt=pdf, https://www.reuters.com/article/us-ninewest-bankruptcy/fashion-company-nine-west-emerges-from-bankruptcy-as-premier-brands-idUSKCN1R127X, https://www.bloomberglaw.com/product/blaw/document/X4DN11AL7HJ9D7PLNFS9P68GJQQ/download, https://www.bloomberglaw.com/product/blaw/document/X2PL65JK51R9MG8JAPEP9S7BSL9/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=677.pdf&fmt=pdf, https://www.bloomberglaw.com/product/blaw/document/X51GFKG5BRI8V8BTR91JKPDHU0D/download, https://www.bloomberglaw.com/product/blaw/document/X1R329A38UG9TPQ0SVURVTMD97C/download, https://www.bloomberglaw.com/product/blaw/document/X4UTDHFF6HS9BKRDQ4DKO0I77KU/download, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1398.pdf&fmt=pdf, https://www.bloomberglaw.com/product/blaw/document, https://www.bloomberglaw.com/product/blaw/document/X1Q6NVKIH782/download?documentName=1396.pdf&fmt=pdf, https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.64.4915&rep=rep1&type=pdf.