when a reorganization derails: alternatives and landmines 2 when a... · inability to effect...

When a Reorganization Derails: Alternatives and Landmines

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Over the past 10-15 years, chapter 11 has been used with increasing frequency to implement 363 sales, perhaps more so than to accomplish reorganizations Recently, we’ve started seeing more cases filed with the goal of implementing a reorganization – or at least trying Debtors and lenders trying to navigate a chapter 11 reorganization, however, must have their eyes wide open – and be prepared for the problems they may face if a reorganization effort through chapter 11 fails

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Recent Example (sort of): Aeropostale Case filed May 4, 2016. DIP Financing in place. DIP Financing had tight milestone and deadline requirements. Beginning on day 1, litigation with a secured lender and related entities took center stage At filing – all options were on the table: reorganization with exit financing, M&A through a plan, M&A through a sale, a sale of all assets as a going concern, and liquidation with GOB sales at hundreds of locations Within 2 weeks of filing, debtors sought 3 month extension of time in which to determine whether to assume or reject contracts


Litigation got under way with secured lender/litigation target. Recharacterization, equitable subordination, challenges to right to credit bid While litigation was under way, an “all of the above” approach was pursued Bankruptcy court held trial and, 3 ½ months after the cases were commenced, entered an order that permitted full credit bidding rights Auction was held. Third parties (landlords, liquidators, and a brand aggregator) came together to present high bid. Credit bid was pursued, but ultimately the secured party stepped aside and allowed sale to third party JV


On September 13, 2016 – just 4 months, 9 days after the chapter 11 cases were commenced, the bankruptcy court entered an order approving the sale. The sale closed just 2 days later, on September 15th Take Away: The Aeropostale chapter 11 cases started to go off the rails, ultimately failing to achieve a chapter 11 reorganization; however, because a sale was pursued simultaneously with a reorganization, and because creditors with financial exposure came together with third party purchasers and liquidators to bid for assets through a new JV, the case had a better ending than might otherwise have come to pass


Endeavour International Corporation Endeavour had a complex prepetition capital structure, with domestic and cross-border elements, aggregating $1.2 billion in secured and unsecured debt, including: • $375 million of U.K.-based secured debt, including

monetary production payments • $83.7 million of unsecured convertible notes sourced in

Luxembourg • $554 million of secured debt sourced in the U.S. secured

by a $500 million intercompany note and a 65% equity pledge of a foreign subsidiary

• $152.5 million of U.S.-based unsecured convertible notes


Endeavour International Corporation

• The company was overleveraged and faced significant liquidity constraints after delays and interruptions to its North Sea production increased operating costs and decreased revenues

• There was also concern that a chapter 11 proceeding might cause it to lose its valuable North Sea oil & gas interests and default on its U.K.-based secured debt

• Accordingly, the company negotiated a Restructuring Support Agreement that would:

• Exchange $568 million of Endeavour’s existing debt for equity interests in the reorganized Endeavour entity

• Free approximately $50 million in liquidity for reinvestment in the business

• Provide recovery to all major creditor groups, including general unsecured claimants

• Not require the sale or disposition of any oil & gas interests


Endeavour International Corporation • Before the plan of reorganization that was embodied in

the RSA could be implemented, commodity prices fell off a cliff and the company determined that the plan was no longer feasible

• The company pivoted to a sale strategy, arguing that such strategy would stand the best chance of preserving the value of the North Sea operations

• Unsecured creditors pressed for a chapter 7 conversion, but the court ultimately gave the go ahead for a structured dismissal after a deal was reached with unsecured creditors


Things to watch out for in a Reorg that can take you “off the rails” –

• Lack of liquidity and failure to make budget • Unreasonable Reorganization Support Agreement • Inability to effect turnaround on compressed timeline • “Surprise” priority and administrative tax debt and

other failures that may not be readily apparent • Industry-specific factors/events – e.g., commodity

pricing • Claim trading and changes in landscape • Prospects for effecting a reorganization hinge on

whether debtor succeeds in litigation


Warning signs –

• Post-petition accounts receivable build-up • Lack of access to information • Failure of timely reporting • Significant discounts proposed to resolve certain

claims as an attempt to create liquidity • Lack of cooperation with/by trade • Requests for appointment of a chapter 11 trustee or

examiner


Once you’ve gone “off the rails,” things to look out for and options to consider –

• Appointment of a chapter 11 trustee and/or CRO • Lack of sufficient liquidity to get through productive

sale process • DIP lender refuses further advances • Additional liquidity unavailable from other

sources, including trade creditors • Failure of prior valuation data and information

• Divergent interests of creditor constituencies as failure becomes apparent and sale/liquidation is implemented

• Surcharge claims and impact of prior budget consent


• Managing sale process • Control of narrative – don’t let the market sense

blood in the water • Timeline - Impact of delay due to initial attempt

at sale and DIP financing maturity issues • Deadline for assumption of contracts • Cost control • Maintaining employees necessary to complete

process • Committees

• Carve-out for unsecureds • Czyzewski v. Jevic Holding Corporation

“Gifting” is at center of the case • Case pending before SCOTUS


• Wrapping it up – • Conversion • Liquidating trust • Fund professionals

• Ensure resources remain in place to pursue chapter 5 recoveries

• Firms willing to pursue claims on a contingency basis

• Structured dismissal • Czyzewski v. Jevic Holding Corporation Permissibility of structured dismissal may be

addressed by SCOTUS


Panelist Biographies:


Hon. James L. Garrity, Jr. United States Bankruptcy Court for the Southern District of New York James L. Garrity, Jr. was sworn in as a United States Bankruptcy Judge for the Southern District of New York on February 17, 2015. Judge Garrity received a B.A. from the College of the Holy Cross, a J.D. from St. John's University School of Law and an LL.M. in Taxation from New York University School of Law. At the time of his appointment, he was a partner in the law firm of Morgan Lewis & Bockius LLP and the co-head of the Bankruptcy & Restructuring group. Judge Garrity is a fellow of the American College of Bankruptcy, a member of the American Law Institute and a member of the International Insolvency Institute. He is an adjunct professor at St. John's University School of Law's LLM in Bankruptcy Program.


Melinda C. Franek Vice President & Deputy General Counsel CNH Partners, LLC


Melinda C. Franek is a Vice President and Deputy General Counsel at CNH Partners, an arbitrage affiliate of AQR Capital Management. In this role, she is responsible for sourcing, researching and evaluating potential debt and equity investments, as well as for providing risk analysis and investment screening on distressed and other credits. While at CNH, Ms. Franek has served as the co-chair of the Official Committee of Unsecured Creditors in the chapter 11 cases of SunEdison, Inc. and Sabine Oil & Gas Corporation. She has also actively participated in other leading restructurings on behalf of the firm, including Caesars Entertainment Operating Company, GT Advanced Technologies, Black Elk Energy Offshore Operations, Endeavour International, Cal Dive International, Education Management Corporation, and NII Holdings among others. Prior to CNH, Ms. Franek was Senior Counsel at Chevron where she drafted and negotiated complex agreements across a full range of business activities including lending transactions, workouts and general corporate matters. Earlier in her career, Ms. Franek was a Senior Finance Associate in the New York office of Latham & Watkins LLP, focusing on the representation of investment banks and other financial institutions in restructurings, senior secured lending transactions and special situations investments. During her tenure at Latham, Ms. Franek was a secondee and legal analyst at Citibank, where she advised their distressed desk on trading strategy and risks, performed credit analysis, and made trade recommendations. Additionally, she was seconded to Credit Suisse where she advised various business divisions including the corporate bank, workout and recovery group and the bank loan trading desk on a wide range of issues.

Ms. Franek frequently speaks and writes on topics affecting distressed investors, including the Trust Indenture Act, the impact and enforceability of make-whole premiums in bankruptcy, the enforcement of intercreditor agreements in bankruptcy, privilege issues in insolvency matters, and trading restrictions following the decision in Washington Mutual, among others. Ms. Franek was a member of the New York City Bar Committee on Bankruptcy and Corporate Reorganization from 2011-2014, and during such time was a panelist and program chair for several New York City Bar events on distressed investing.

In April 2013, Law 360 featured Ms. Franek’s publication with Mark Broude: A Lesson in Drafting Make-Whole Provisions. Other publications include Enforcement of Intercreditor Agreements – When Should Their Terms Give Way to the “Bankruptcy Imperative”? with Mitchell Seider, Catherine Martin, and Joseph Fabiani (2011), District Court Reverses Bankruptcy Court’s Decision in TOUSA with Mitchell Seider and Emily Menchel (2011), and The Extraterritorial Reach of the Foreign Corrupt Practices Act: Risk and Challenges for Multinational Companies with Richard Owens and Annette Rosskopf (2007).

Ms. Franek is qualified to practice before the New York and California bars. She obtained her J.D. from the University of Washington School of Law. Following her graduation from law school, Ms. Franek was a judicial clerk for the Honorable Wm. Fremming Nielsen of the Federal District Court for the Eastern District of Washington. She also clerked for Federal District Court Judge Justin L. Quackenbush, who sits by designation on the United States Court of Appeals for the Ninth Circuit. Prior to pursuing her law degree, Ms. Franek received her Bachelor of Arts in Kinesiology from Westmont College.

2 Greenwich Plaza, Greenwich, CT p: +1.203.742.3007 e: [email protected]

Stephen Darr Managing Director Huron Business Advisory


Professional Experience Mr. Darr’s experience also includes providing litigation support and expert testimony in bankruptcy and non-bankruptcy matters involving preference and fraudulent conveyance actions, professional liability claims, patent infringement, royalty and intellectual property disputes, construction claims, wrongful employment discharge and lender liability and business tort claims. He has testified in U.S. Bankruptcy Court proceedings in Delaware, New York, Pennsylvania, Massachusetts, Rhode Island, Connecticut, Maine, New Hampshire and Vermont on a wide range of bankruptcy matters, including feasibility of business plans, allowability of creditors’ claims, best-interests test for unsecured creditors, fraudulent conveyance claims, preference actions, solvency, debtor-in-possession financing, substantive consolidation issues, cash collateral arrangements, valuation, equitable subordination, reorganization tax issues, and key employee retention plans. Representative examples of Stephen’s engagement experience include: • Serve as Chief Restructuring Office for a Pharmaceutical Company,

responsible for overall operations of the business. • Served as Chief Financial Officer for two series of investment trusts

investing in collateralized debt obligations; total assets under management in excess of $4 Billion. Directed successful IPO’s for both funds.

• Chairman of the Board of $100 Million international, publicly held manufacturer. Directed the business for approximately 15 months; negotiated settlements between and among the majority and minority shareholders, developed confidential offering memorandum and sale procedures, assisted potential purchasers’ due diligence, and negotiated

sale of Company. • Legal Data Systems, Inc. – served as Chapter 11 Trustee for approximately

two years while stabilizing operations, maintaining relations with user group and developing next generation computer software; directed sale process and negotiated sale of Company.

Education and Certification • M.B.A., University of Chicago • B.B.A., Boston College • Certified Public Accountant - Massachusetts,

New Hampshire • Certified Insolvency and Restructuring Advisor • Certification in Financial Forensics • Certification in Distressed Business Valuation • FINRA Series 7, 24, 79 Professional Associations • Fellow, American College of Bankruptcy

P: 617-226-5593 C: 617-510-7766 [email protected]

William C. Heuer, Partner Duane Morris LLP 1540 Broadway New York, NY 10036-4086 USA Phone: +1 212 692 1070 Fax: +1 212 208 4521 Email: [email protected]

William C. Heuer practices in the areas of commercial litigation and transactions, primarily in the context of business reorganization engagements and bankruptcy matters. Mr. Heuer's litigation and transactional experience spans a wide range of industries, including shipping, satellite and telecommunications, golf and entertainment, print media, intellectual property, consumer goods, real estate, finance, chemical manufacturing/distribution, insurance, retail merchandise, air travel (domestic and international), health care and long-term health management facilities. Mr. Heuer has been retained in international bankruptcy proceedings, and has expertise in addressing jurisdictional issues in bankruptcy.

Mr. Heuer also has considerable appellate experience. Mr. Heuer has been involved in appeals in New York state courts and federal courts, and has been involved in a number of landmark bankruptcy appeals decided by the U.S. Supreme Court. Mr. Heuer's appellate experience includes the representation of academic and other groups of amici curiae.

Mr. Heuer is a member of the Editorial Advisory Board of the Norton Journal of Bankruptcy Law and Practice, has authored numerous articles on bankruptcy law, and is an adjunct professor of law in the LL.M. in bankruptcy program at St. John's University School of Law. Mr. Heuer also devotes substantial time to pro bono matters, including consumer bankruptcy matters before the U.S. Supreme Court. He is also an elected member of the American Law Institute.

Mr. Heuer is a 1997 graduate of St. John's University School of Law, where he was articles editor of the American Bankruptcy Institute Law Review, and a graduate of the State University of New York at Buffalo.


when a reorganization derails: alternatives and landmines 2 when a... · inability to effect...

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