Hearing #4 was held in The Weinstein Co. bankruptcy and you won't believe what happened next

Actually, if you are in and of the corporate restructuring world, you will believe what happened next. Major objections were were resolved by the parties, and the court approved the sale of The Weinstein Co. to Lantern Capital.

Resolving objections without litigation is perceived positively in bankruptcy-land, not to mention in federal courts more generally. Some cash proceeds of the sale will be held back for the next phases of the case, and that is an important development. What, then, makes the situation seem less than satisfying, at least to this outside observer?

1. At Hearing #3, TWC reported that around 60 parties were interested in buying the company. By Hearing #4, the number of qualified bids capable of outdoing the stalking horse had dwindled to zero; the auction was cancelled. That might be just the way things work out sometimes. But it is hard not to wonder whether various aspects of the process chilled serious bidders. For example, in addition to the breakup fee owed to Lantern, there are considerable uncertainties about exactly what Lantern has agreed to buy. TWC has many executory contract rights that it seeks to assume and then assign to Lantern. Many contract counterparties have filed objections relating to whether contracts were already terminated, whether TWC is even working with the correct version of the contract in the sale documents, the amounts counterparties are owed, etc. At Hearing #4, TWC announced that contract counterparties have agreed to postpone a hearing on those objections until after entry of the sale order. It wouldn't be shocking if other bidders, including the much-discussed Kagan, expected more certainty about what is being acquired before meeting the qualified bid standard.
2. You may have read that the sale to Lantern will bring in $310 million in cash. At Hearing #4, though, a lawyer for the creditors' committee said the dollar figure likely will be closer to $260 million. And, upon sale consummation, a big chunk of that lesser pile of cash will go immediately out the door to pay a major prepetition loan, the DIP loan, and TWC's investment banker, although subject to disgorgement. Lantern rejected the creditors committee's request to allocate its bid among the dozens of entities comprising the TWC corporate family, but the estate will not have the luxury to do the same. Other creditors with security interests in assets of particular entities are not getting cashed out immediately but expect to be repaid from sale proceeds, along with an unknown number of other claimants (the deadline for filing proofs of claim is not yet set).
3. Bankruptcy is often about shared pain, but it is already clear that general unsecured creditors are not going to be treated equally in this case. The sale order disclaims Lantern's responsibility for previous sexual harassment and assault. But Lantern is eager to remain liable for many of the unsecured debts arising from executory contracts. Counterparties on those contracts will be entitled to 100%. Essentially, claims of women arising from sexual harassment and assault are being subordinated to claims of those who were not harassed and assaulted.
4. While the creditors' committee was working around the clock to accommodate the timeline demanded by the stalking horse bidder and DIP lender, TWC insisted on deposing one of the committee's senior lawyers, James Stang, whose prior experience includes representing tort claimant committees in Catholic diocese bankruptcies. The deposition topic apparently related to the committee's preference for buyers who would bring more to the table for those who allege sexual harassment and assault. Presumably TWC's lawyers will seek reimbursement in 100% dollars for the time they spent going down this discovery rabbit hole; that's even more money diverted away from women harmed by the company.  
5. TWC raises issues of extensive corporate wrongdoing, and very few people were fired and replaced prior to the bankruptcy. But no one sought to dismiss the chapter 11 for lack of good faith or to request appointment of a chapter 11 trustee. 

In any event, by the time of Hearing #4, no one spoke on the record against entry of the sale order. Maybe all major differences truly had been reconciled. Or maybe the threat of losing the stalking horse bidder, which might trigger a default on its DIP loan, was sufficient to quell continued dissent.

Whatever one's reactions to what has happened so far, the next phases of the TWC bankruptcy are, of course, very important. Many potential causes of action could bring money into the estate, and also could affect how those funds are distributed. Also, in a twist on the so-called "gifting" doctrine in chapter 11, perhaps Hollywooders whose contracts will be honored by Lantern will donate some of their recoveries to sexual harassment and assault claimants, or to the Time's Up legal defense fund.  Much in the case has yet to unfold.

Comments

[Eric Goldberg]

"Essentially, claims of women arising from sexual harassment and assault are being subordinated to claims of those who were not harassed and assaulted."

Oh, come on! That's hardly fair, and not even accurate. General unsecured claims, like those of vendors and suppliers, will also not be paid in full. But those claims will not be treated any better than the unsecured claims of harassment victims; the victims' claims are therefore NOT "subordinated to claims of those who were not harassed and assaulted."

The fact is that what is happening here is that ALL general unsecured claims get treated worse than claims arising under assumed contracts. But that is the same in every 363 sale, and not unique to this case. It is the result of the statutory scheme and BCode section 363, which mandates that cure costs be paid when a contract is assumed.

[Melissa Jacoby]

Eric - I stand by the accuracy of the assertion and appreciate your taking the time to comment. Melissa

[Adam Levitin]

"Lantern rejected the creditors committee's request to allocate its bid among the dozens of entities comprising the TWC corporate family, but the estate will not have the luxury to do the same."

Why not? I assume that TWC's plan will have a deemed consolidation for voting and distribution purposes as occurs in most large Chapter 11s. No one wants to spend the money to figure out the allocation among corporate affiliates especially as no one is sure if they are a creditor of a winner or loser in an accurate as opposed to pro rated allocation.

[Adam Levitin]

Interesting observation that no one has requested a trustee. Nothing stops harassment victims from such a motion. Why do you think they haven't made one?

Likewise, why no examiner motion? That would possibly be a way of getting a full report of Harvey Weinstein's misdeeds through TWC. It's not money, but it's something.

Finally, do you think the treatment of the sexual harassment victims in TWC is materially different than the treatment of other sympathetic creditor groups, say environmental claimants or retirees, in 363 sales?

Part of the problem here seems to be that while Congress has expressed its moral sense about the sorts of debts that should be avoidable through discharge in section 523, that provision has no application to a 363 sale. What do you think about applying something like 523 to 363 sales--say, buyers must assume liability for willful/malicious torts? It would push down sale prices, which would harm the residual creditor, whoever that might be. Do you think it would encourage better monitoring? I'm skeptical. I worry it just harms that residual creditor, who cannot know ex ante that s/he will be the residual creditor and therefore won't monitor (even if s/he could).

[Melissa Jacoby]

Thanks for the comments, Adam.

The committee has been vocal at hearings on need for allocation - at filing date there were unencumbered assets in some entities, and secured lenders with interests in discrete bundles of assets. How insistence on allocation will play out in negotiations overall may depend on a lot of other things, but it is an important distributional issue.

[Adam Levitin]

How many entities are there? TOUSA didn't have that many entities and it found that it took a month of forensic accounting work to unravel one month of intercompany transactions. After that, the committee threw in the towel--the cost and the delay weren't worth it as no one knew what the ultimate outcome would be anyhow.

[Melissa Jacoby]

That is a risk here - which is why it was less than ideal to do the quick sale, as that allows companies to delink the extraordinary relief their buyers & lenders want from the sunlight that is supposed to be part of the bankruptcy bargain.

50+ entities
http://dm.epiq11.com/#/case/TWC/info.

& TWC started the case by telling the court its structure is complex complex complex http://www.creditslips.org/creditslips/2018/03/weinstein1.html