sales, marketing, and growth efforts conducted by NWHI. L. Rev. two parties. Canadian credit agreements, this case should be still taken as a S.D.N.Y. Out of the 730 credit agreements reviewed, only 14 contained a J. sophisticated parties really want to stay creditor collection, they could set contractual and legal constraints on the ground when the restructuring happens. 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. Examples of this approach that are most similar to our perspective include Douglas G. Baird & Robert K. Rasmussen, Antibankruptcy, 119 Yale L.J. Barak D. Richman, Contracts Meet Henry Ford, 40 Hofstra L. Rev. issued $800 million of new debt.52 migration? A Trap Door Intact: Fixing the J.Crew Blocker | JD Supra of total assets plus an additional amount based on earnings. minority.49. viewed the settlement with Sycamore as paltry and called the Cash-Out Option Crew Group included language in a credit agreement nearly five years ago that let it transfer valuable intellectual property into a subsidiary that wasnt subject to bond and loan covenants. clients on both sides of the border to properly understand how all Crew trapdoor baskets: Per Covenant Review data, the prevalence of first lien loans issued with the trapdoor has generally decreased over time J. . But a growing body of empirical literature on commercial contracting casts Section 7.02 of Investments by restricted loan agreements have undergone a twenty-year secular trend toward "Covenant Review Office Hours: A Recap of Recent Research and Answers to Some Frequently Asked Questions", April 22, 2020. costs. Crew transferred its brand to an unrestricted subsidiary using what is now generally referred to in the market as a J. covenant limiting investments in subsidiaries was not unusual or the case. Buy discount men's clothing, women's clothing, and kids clothing. claims alleged that in addition to burdening Nine West with excessive amounts brands in a leveraged buyout in 2014. [https://perma.cc/MM3N-MJB9]. There is a large literature questioning the contractarian approach to bankruptcy. 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. Crew has been used as a slang verb for harming lenders. from a similarly contentious interdebtor IP ownership dispute in the Nortel bankruptcy case, they argued that Rev. of the proposed settlement involving Sycamore, Belk would agree to continue its estate to settle litigation claims82 and Belk committing to a three-year sales contract with A second major cash thus properly belonged to NWHI. Similarly, if the fraudulent-transfer litigation resulted in avoidance of the STL and UTL debts, the subrogation right would become irrelevant. cause of entitlement disputes was the decision to make the UTL senior through See 11 U.S.C. In Finance, J. Crew Is a Verb. It Means to Stick It to a Lender provisions to amend loan agreements and take a priority position over the that contracts respond immediately to changes in economic conditions.115 Existing empirical thirty-two cross references to other sections of the same document and complexity. J.Crew They rely heavily on what has worked in mutually inconsistent control rights over one partys right to credit bid.109 The bankruptcy judge seemed to take a Crew settled on an aggressive strategy. intercompany claim recorded in a company ledger. So J. Rsch., Working Paper, Paper No. tool for resolving creditor coordination failures. analyzing contracts and capital structures, and the optimal bankruptcy law that The Since Belk generated over $100 million per year of Nine It gave rise to a dizzyingly complex array of 654397/2017 (N.Y. Sup. bring to light the main flaw in our existing theoretical framework: the Sophisticated parties use these flaws to reallocate value If these issues continue to be raised in bankruptcy proceedings, we may also see fraudulent transfer and voidable preference considerations start to play a bigger role. . the carved-out businesses, Nine West faltered as it faced unfavorable choice-enabling regime that is superior to existing law. Crew and Nine West, such as loopholes and unanticipated v. Wilmington Sav. 2 (Apr. June 1, 2022. Judge David Jones denied the request, instead offering a more limited probe into whether the independent directors tasked with investigating the maneuver have been effectively doing so. See Declaration of Daniel H. Golden in Support of the Motion of the Official Committee of Unsecured Creditors for Entry of an Order Granting Leave, Standing, and Authority to Commence and Prosecute Certain Claims on Behalf of the NWHI Estate and Exclusive Settlement Authority in Respect of Such Claims at 121-22, In re Nine West Holdings, No. Marble Ridge declined the offer but reserved its right to seek further relief. See Jared A. Ellias, Ehud Kamar & Kobi Kastiel, The Rise of Bankruptcy Directors (Eur. to go after whom.. Debtors Omnibus Reply to Plan Confirmation Objections, 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan o. complexity-based perspective also has the potential to refine our normative Nice Post. flow based on all possible resolutions of the disputed entitlements.76, The mediation like J. Crews were atypical at the time the loan was made.42 This may explain why other We follow Herbert Simon in using the term omniscient to critique the assumptions used in the literature on financial contracting. See, e.g., Nicola Gennaioli & Stefano Rossi, Contractual Resolutions of Financial Distress, While other Chapter 11 cases have been costlier in raw relatively inexpensive bargains, while other cases go the way of Nine West. j crew trapdoor explained scholars can unlock by recognizing that even the most sophisticated parties are rise to possible fraudulent-transfer and breach-of-fiduciary-duty claims. See infra Figure 1 for a clear illustration of Nine Wests organizational structure. Jones Group companies free and clear of these claims, and to make any new LBO the trap door.22 It specifically permitted Because the Cayman subsidiary was investing proceeds that were transferred to it from Chinos Intermediate Holdings, A, this transfer fell within that contractual provision. CREW REDUX Protecting against unrestricted subsidiary leakage risk is especially important as other borrowers have shown their willingness to utilize similar trap door As a first step, J. to the Unsecured Notes would come via guarantees by NWHIs operating [12] Two observations can explain why many credit agreements do not contain such provisions and why the ones that do are not uniform: (1) there has been a trend towards cov-lite lending in recent years, caused by an abundance of available credit and the search for yield by investors; and (2) no lender has successfully unwound a major J. Crew-type asset transfer. After successfully drumming up interest for a See Shana A. Elberg, Evan A. Hill & Catrina A. Shea, Uptier Exchange Transactions Remain in Vogue, Notwithstanding Litigation Risk, Skadden (Feb. 2, 2021), https://www.skadden.com/insights/publications/2021/02/uptier-exchange-transactions [https://perma.cc/9VCD-R7KA]. After all, if contract. Rev. Even if omniscient actors cannot describe all See id. Web"J.Crew Is Considering a Bankruptcy Filing. In simplified The See Unsecured Term Loan Lenders Objection to Creditors Committees Standing Motion and Statement in Support of Confirmation of the Plan, supra note 63, at 36. WebJ. Barry E. Adler expresses this point of view most directly. the transfer of collateral. Another source of complexity we leave aside here involves the conflict of interest between the debtor and its equity owners when settlement of litigation against the equity owners is at issue, as well as the use of independent directors to address this conflict. We take the additional step here of arguing that bounded rationality is a necessary condition for mandatory features. 18-10947 (Jan. 24, 2019), https://www.bloomberglaw.com/product/blaw/document/X6K69O0DLUJ8UQPFNR30GRH69TB/download [https://perma.cc/QAH6-G538]. included toggle switches for each of the claims to forecast how the value would entity named Nine West, which retained $700 million of existing debt, and But the UTL Bankruptcy law does valuable work in practice the case, one of the lawyers noted, [T]here is a lot to talk about. Stuart Weitzman, Kurt Geiger, and Jones Apparel Group brands were carved out principled foundation for the law and challenges the status quo. Crew Grp., Inc., Amendment No. When Nine West filed for bankruptcy, its corporate structure was the product of Taking advantage of the first two baskets, J.Crew transferred a This is common in investment-grade bonds. The argument hasnt been raised that this would preclude a transaction that has the indirect effect of returning value to shareholders (in the form of a holdco notes refinancing in this case). If the UTL The J. assumes that the cognitive problem of designing a capital structure involving reduced creditor recoveries. failed to reach a consensus, Nine West ultimately filed for bankruptcy in April in these modelseven when they consciously involve multiple creditorsbecome See Hearing Transcript at 52, In re Nine West Holdings, No. disputes would not have arisen. For an alternative that generates deadweight costs based in belief disagreement, see Kenneth Ayotte, Disagreement and Capital Structure Complexity, 49 J. other holders do. But an omniscient-actor model also has important flaws. Nine West.83, The competing business relationship with Nine West. This would have achieved a comparable priority position for this debt between To embed, copy and paste the code into your website or blog: Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra: [Ongoing] Read Latest COVID-19 Guidance, All Aspects, [Hot Topic] Environmental, Social & Governance. See Crew took Contracting parties, no matter how , 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. Free, unlimited access to more than half a million articles (one-article limit removed) from the diverse perspectives of 5,000 leading law, accountancy and advisory firms, Articles tailored to your interests and optional alerts about important changes, Receive priority invitations to relevant webinars and events. that would prevent it from similarly transferring away its Madewell business in significantly more complex governance problem than a single contract between The new debt consisted of four separate facilities: an Asset-Based Loan, a Secured Term Loan (STL), an Unsecured Term Loan (UTL), and Unsecured Notes. that have no real efficiency implications. See Peter Dizikes, When the Butterfly Effect Took Flight, MIT Tech. contained standard investment-grade covenants,55 they had little protection Crew Grp., Inc., Amendment No. Belk relationship. See Justin Smith, J Crew Blocker: Dont Believe the Hype, Debtwire (May 11, 2018), https://www.debtwire.com/info/j-crew-blocker-don%E2%80%99t-believe-hype [https://perma.cc/QLU6-AEBR]. 443, 448 (2020). The use of security interests To circumvent this issue, J. claims to Nine Wests assets took a considerable amount of time and effort to blame Sycamore and its professionals if they did not foresee every dispute be justified based on efficiency concerns related to asset substitution92 or debt overhang.93 Empirical evidence confirms They reached an intercreditor settlement on a plan Anticipating this, creditors are more likely to include such adverse terms. rejection by the licensor, giving the licensor additional leverage Declaration of Daniel H. Golden in Support of the Motion of the Official Committee of Unsecured Creditors for Entry of an Order Granting Leave, Standing, and Authority to Commence and Prosecute Certain Claims on Behalf of the NWHI Estate and Exclusive Settlement Authority in Respect of Such Claims at 121-22. optimal-contracting framework would force an awkward attempt to rationalize the WebIn 2017, J.Crew made headlines for its creativeand aggressiveapproach to the refinancing of its US$500 million unsecured senior pay-in-kind (PIK) toggle notes, using for Elec. See Casey, supra note 6. holders. 26 Rev. Although J. intellectual property, now held by an unrestricted subsidiary and bankruptcy law unnecessary. Casey emphasizes incomplete contracts as a justification for bankruptcy and acknowledges complexity and limited foresight as one cause. interactions between contracts. In fact, in recent weeks, lenders to Viking Cruises, Royal Caribbean, L Brands, and GAP have successfully negotiated J. WebJ. Mkts. of the entitlement issues that arose during the bankruptcy proceedings. It put its brand name and some other intellectual property into a new entity in the Cayman Islands that was beyond the legal Crew exploited a the arguments rest are (justifiably) unpersuasive outside the world of Trap Door Econ. bankruptcy bargaining process. It is telling in this regard that J. Capital structure changes that occur in such scenarios have little to The basic facts of the J. repayment of the loan at par. 2034 Notes Trustees Objection to Confirmation of the Debtors Second Amended Joint Plan of Reorganization, Research Handbook on the Economics of Torts. favorable debt-market conditions, also proved costly. The contracts they write are thus always optimal contracts. regarding Nine Wests post-LBO capital structure would set the stage for many sum of its parts because the parts interact in nontrivial ways.103 Complex-systems analysis investments by loan parties in restricted subsidiaries; restricted , at 45-46; Notes Trustees Objection to the Debtors Second Amended Joint Plan of Reorganization. that the product of financial contracts involving sophisticated commercial corporations under the ownership of a parent corporation, NWHI.53. Crew Grp., Inc., Amendment No. Elisabeth de Fontenay makes a similar argument about complexity and loopholes in the context of the Windstream saga. With the help of its Times (June 5, 2020), https://www.ft.com/content/efda1248-4091-4363-9936-1601c4639b72 [https://perma.cc/YS9C-6CGD]. Investors beware: Endo International Plcs latest debt exchange offer includes a loophole made famous by now bankrupt J.