postings by Melissa Jacoby

Seeking nominations for the Grant Gilmore Award

posted by Melissa Jacoby

GilmoreThe American College of Commercial Finance Lawyers seeks nominations for scholarly articles to be considered for the Grant Gilmore Award. It is not awarded every year, but when it is, the main criteria is "superior writing in the field of commercial finance law."  I am chairing the award committee this year, so please email me or message me on Twitter before December 14 to ensure your suggestion is considered. Especially eager to get suggestions of articles written by newer members of the academy that might otherwise be missed.

What Skews the Public-Private Balance in Corporate Bankruptcy Cases?

posted by Melissa Jacoby

In a prior Credit Slips post, I shared a paper, Corporate Bankruptcy Hybridity, positing that bankruptcy should be conceptualized as a public-private partnership. The second section of Corporate Bankruptcy Hybridity identifies factors that have skewed the Bankruptcy Code's ideal balance between public and private interests and values. Preemptively I'll note it is not new to observe the increased privatization of bankruptcy and the qualitatively different nature of the oversight and ethics (see, e.g., Mechele Dickerson). More novel, I hope, is the articulation of a broader set of factors contributing to the skew. The list is illustrative, not exhaustive.

Continue reading "What Skews the Public-Private Balance in Corporate Bankruptcy Cases?" »

In the Zone: The Weinstein Co. Chapter 11 Hearings #9-13

posted by Melissa Jacoby

Since my last Credit Slips post about The Weinstein Co. chapter 11, there have been five public hearings/status conferences (some of which were telephonic). Disparate observations from those hearings below.

Continue reading "In the Zone: The Weinstein Co. Chapter 11 Hearings #9-13" »

Corporate Bankruptcy as a Public-Private Partnership

posted by Melissa Jacoby

I have just posted on the Social Science Research Network a forthcoming article called Corporate Bankruptcy Hybridity. Although the article has several intersecting objectives, today's post focuses on the first aim: conceptualizing corporate bankruptcy as a public-private partnership.  A public-private partnership, most plainly stated is "a legal hybrid which possesses some characteristics of a purely private corporation and others of a purely government.... however it is structured, it is formed to accomplish a public purpose."* As writings of scholars outside of bankruptcy make clear, the fact that a system relies in part on private actors and private funds does not absolve the system of its obligation to the public's broader constitutional, democratic, and welfare aims. In other words, even if a system is driven by a particular public purpose, other public objectives remain salient.

Reframing the system in this fashion explicitly rejects the common assumption that bankruptcy is best understood as a species of private law, as well as the belief that a workable theory requires that the bankruptcy system have only one public purpose.

In addition to enhancing scholarly debates, considering corporate bankruptcy a public-private partnership has real-world implications - most notably, helping reformers (statutory and otherwise) think creatively about the institutional actors and structures that can respond to identified problems, such as the problems carefully documented in the ABI Commission to Study the Reform of Chapter 11. The range of interventions described and prescribed in administrative law and related privatization scholarship is considerably broader than in reform projects such as the National Bankruptcy Review Commission or the ABI Chapter 11 Commission Report.

Of course, the article elaborates on these points, and I hope to highlight other objectives of Corporate Bankruptcy Hybridity in future posts. But in the meantime, I'd love it if you downloaded and read the article.

* This definition comes from an article published in 1969 by Robert Amdursky.

Silver Linings Playbook: The Weinstein Co. Chapter 11 Hearings #7 & #8

posted by Melissa Jacoby

Sale closedSince I last wrote on Credit Slips about The Weinstein Co. chapter 11, the sale of the company to Lantern Capital has  closed. Shortly after it closed, it was announced that Harvey Weinstein's brother Bob Weinstein was resigning from the TWC board of directors, along with several others. (If you read the investigative news reporting on TWC last fall through winter, you may be wondering why there hadn't been earlier board turnover. I have no good answer). Also of potential interest is that, after the closing of the sale, Lantern was immediately sued in California state court by another investment firm for breaching written and oral agreements connected with due diligence that allegedly gave Lantern a bidding advantage in buying TWC. 

The seventh public court hearing, on July 11, 2018, paved the way for the sale to close. It was then and there that Judge Sontchi, filling in for Judge Walrath, approved an amendment to the sale agreement reducing the sale price. The judge telegraphed early in hearing #7 that he viewed other pending objections (dealing with executory contracts and default cure amounts, which still remain pending) as collateral attacks on the prior sale order. The objection that would have prompted a bona fide evidentiary hearing, from the creditors' committee, had been settled.  Although hearing #8 on July 18 was extremely brief, it is clear there's much left to be worked out behind the scenes in this case - most notably, how to allocate the money.

Keeping up with the Appointments Clause: Puerto Rico bankruptcy update

posted by Melissa Jacoby

In January I wrote about Aurelius seeking a do-over. In a carefully reasoned thirty-five page decision, the district court has denied the do-over.  Put more legally, the court held that PROMESA's method of establishing the Puerto Rico Oversight Board did not run afoul of the Constitution's Appointments Clause. The Oversight Board is an instrumentality of Puerto Rico, concluded the court, not officers of the United States.

Keeping up with the Contracts Clause: the Supreme Court's decision in Sveen v. Melin

posted by Melissa Jacoby

In June 2018, the U.S. Supreme Court decided Sveen v. Melin, a case applying Contracts Clause* jurisprudence to a state revocation-on-divorce statute and preexisting insurance contract. It isn't like the Supreme Court hears a Contracts Clause case every week, every term, or even every decade. Given its relevance to many Credit Slips topics, such as a financially distressed government unit without bankruptcy access or mortgage/foreclosure crises, it seems worth fostering a conversation about the case here.  

Continue reading "Keeping up with the Contracts Clause: the Supreme Court's decision in Sveen v. Melin" »

Hurry Up and Wait: The Weinstein Co. Chapter 11 Hearing #6

posted by Melissa Jacoby

All Credit Slips readers are old enough to remember when a quick going-concern sale of The Weinstein Company was said to be imperative. So much so that even the seemingly skeptical creditors' committee ultimately went along, thus making the request to sell the company to Lantern Capital uncontested.

On June 22, at its 6th hearing, and about 6 weeks after the court's sale approval, TWC essentially acknowledged it cannot close the sale to its stalking horse bidder on the terms requested and approved by the court, and certainly not by the end of June as represented at hearing #5. TWC therefore will be seeking court approval for Lantern to acquire the company for less money than the agreement and court order specified. By the creditors' committee's calculation, TWC is seeking a 11% reduction in the cash price, but that estimate is one of several points of contention between it and TWC. Given the dates and deadlines in various financing orders and deals, TWC said the issue absolutely positively must be resolved in early July - while the presiding judge is out of the country. The parties did not embrace the presiding judge's suggestion of a popular federal court tool: mediation by a fellow sitting judge. So a key outcome of the June 22 hearing is that a different Delaware bankruptcy judge will preside over a July 11 hearing on changing the TWC/Lantern deal. That judge already has held a quickly-scheduled telephonic status conference today, June 25 (see dockets ##1106, 1107).

As an outside observer not privy to the negotiations, I have no idea whether this deal will close. Perhaps due to lack of imagination, I have never understood how a potential purchaser could be deemed the highest and best bid for a company without a basic understanding what contracts and licenses were included. Meanwhile, especially if it was true that some competing bidders could not meet the deadline due to inability to get information from TWC in a timely fashion, significantly changing the deal without resuming some competitive process seems troubling.

No one at the June 22 hearing disputed that general unsecured creditors would be directly affected by TWC's request to change the terms of the sale. But the judge implied some skepticism by asking whether, say, "very secured" creditors have reason to care. The answer depends, it seems to me, on how  "very secured" is determined, due to allocation issues among entities in the TWC corporate family. If there was ever a case to highlight why one should resist the assertion of a single waterfall, it is this one.

 

 

The Weinstein Co. Chapter 11 Hearing #5

posted by Melissa Jacoby

The fifth hearing in The Weinstein Co. chapter 11 occurred on June 5, 2018. The hearing included discussion about when the sale to Lantern Capital, approved by the court in early May, will actually close. Among other regulatory and transactional hurdles, TWC's lawyers mentioned that it still is not resolved which contracts will be included in the sale, but they hoped the sale would close within the month.

As for matters that resulted in a ruling, I'll briefly mention two.

  1. Sustaining a United States Trustee objection, the court denied the motion for Harvey Weinstein's October 15, 2015 employment contract to be filed under seal, as the standards of 11 U.S.C. § 107 were not satisfied. That contract is now available on the bankruptcy court docket. The document was filed by the Geiss plaintiffs (stemming from alleged sexual misconduct, discussed below) but TWC was the party advocating for sealing.
  2. The court approved the Geiss parties' motion to lift the automatic stay to permit the Geiss action to go forward against TWC, alongside other defendants, in the Southern District of New York, allowing liquidation of those claims. The SDNY district judge presiding over the Geiss action directed the plaintiffs to file the lift-stay motion; hearing transcripts illustrate his aim to minimize duplication of efforts. Part of TWC's argument against lifting the stay was the classic matter of distraction. Applying the relevant case law to the facts, the court observed that while closing the sale was a complicated matter, TWC was neither reorganizing in a traditional sense or seeking to stabilize its operations at this time. And, as in other cases, the distraction argument may be weakened when separate lawyers are handling the non-bankruptcy litigation. Seyfarth Shaw was representing TWC in the Geiss litigation, at least prior to the bankruptcy (leading the firm to successfully seek payment of its prepetition claim out of an insurance policy, over the creditor committee's objection - seek dkt #1000).

Speaking of professionals, initial interim fee applications for TWC's professionals for March 19-April 30, 2018 were not on the June 5 agenda, but are on the court docket. TWC has NY counsel and local counsel. Just to give you a sense, Cravath's fee application includes over 3,200 hours billed by 27 attorneys (dkt #929). Richards, Layton & Finger's fee application includes over 1,200 hours billed by 16 attorneys (dkt #932). Plus paraprofessionals at these two firms. Billing separately, of course, are FTI Consulting (dkt #870) and Moelis, the investment banker (dkt #946).

The next hearing in TWC's bankruptcy is scheduled for June 22, 2018. The SDNY Geiss action, in the motion to dismiss phase, is also very much worth watching.

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

posted by Melissa Jacoby

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?

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

Loans and Liens: The Weinstein Company Chapter 11 Hearing #3

posted by Melissa Jacoby

CollateralThe third hearing in the The Weinstein Company chapter 11 took place on April 19, 2018 (prior 2 hearings here and here). The hearing focused on final court approval of a $25 million loan to fund the debtor during its chapter 11 (or, really, until a standalone 363 sale) ("DIP loan"). Apparently a competing offer for the DIP loan discussed at Hearing #1 never fully materialized. Prior to the chapter 11 petition, TWC had no single lender/syndicate claiming a so-called blanket lien on substantially all assets (the lender leading the now-approved DIP loan had a prepetition security interest in movie distribution rights held by TWC Domestic, and lenders with prepetition security interests in other assets also are participating in the DIP loan). As indicated in the visual accompanying this post, the DIP financing order states that TWC seeks to grant its DIP lenders a security interest in nearly all property. There are some important exclusions from the collateral package, however, including "claims arising out of or related to sexual misconduct or harassment or employment practices." 

Page 42 of the DIP financing order gives the unsecured creditors committee only until April 27 to investigate validity, perfection, and enforceability of various prepetition liens, although that date can be extended "for cause." As is typical in such agreements these days, TWC stipulated that it will not challenge prepetition loans made by the postpetition lenders. The order and agreement also require immediate payout of the DIP loan from sale proceeds (pp 55 & 138 of docket #267). If I'm reading the DIP lending agreement correctly, it also gives certain prepetition lenders the right to be paid immediately out of sale proceeds (p138 of docket #267). For reasons Credit Slips readers have heard many times before, I don't understand why paying prepetition debts at that juncture is in the best interest of the bankruptcy estate.

Meanwhile, Peg Brickley and Jonathan Randles of The Wall Street Journal have reported three TWC executives "took home more than $12 million in pay, loans, reimbursements" in the year before the bankruptcy, including after sexual misconduct allegations became public. This reporting comes from the schedules and statements of financial affairs filed just a few days ago.

Other updates:

Continue reading "Loans and Liens: The Weinstein Company Chapter 11 Hearing #3" »

"Drinking water from a fire hose:" The Weinstein Company Chapter 11 Hearing #2

posted by Melissa Jacoby

Sale AdNestled in a review of an album by Spinal Tap bassist Derek Smalls (a/k/a Harry Shearer), the April 10 edition of Variety magazine published a notice of sale of The Weinstein Company. The notice includes a bid deadline of April 30, a sale hearing on May 8, and the soothing assurance to bidders that a buyer would incur "NO SUCCESSOR LIABILITY" (bolded and all-caps) for the heinous acts TWC apparently tolerated and facilitated over many years. The notice anticipates that a buyer might agree to remain liable for some TWC obligations, however, perhaps contemplating valuable licensing contracts.

The Variety notice is a consequence of the second TWC hearing on April 6 (for the first hearing, see here). By the end, objections to the bidding procedures order had been resolved, resulting in docket #190, the order approving the procedures, including a $9.3 million breakup fee and escalating expense reimbursement for the stalking horse bidder if the sale is delayed. The number of times sexual harassment, sexual assault, or rape were mentioned at the hearing: zero.

Counsel to the newly-appointed five-member creditors' committee told the court that getting up to speed in this case (no pun intended) was "drinking water from a fire hose." And a battle is brewing over whether bids should be allocated among the various asset categories (again, given the stated complexity) - something the stalking horse bidder seems to resist. Meanwhile, at least one counterparty to a licensing agreement asserts that its contract was rescinded prior to the filing. Assuming it loses that fight, the party worries it will have insufficient time to consider whether the asset buyer is providing adequate assurance of future performance.

This case invites the caustic lament, "if only the Bankruptcy Code drafters had established a fair and transparent process to deal with all of these issues!" When Harry Shearer decides to send his imaginary-band bassist into a quiet retirement, maybe he will make a film about chapter 11. After all, fairness rocks.

 

Was Charleston Gazette-Mail a good case for an Ice Cube Bond?

posted by Melissa Jacoby

Based only this news report, the answer appears to be yes - an Ice Cube Bond would have honored the claimants' need for speed without allowing them to shift all the risk to the bankruptcy estate. The news article indicates that sale proponents referred to the holdback request as a "Hail Mary." In the foundational Lionel case, the dissenting Second Circuit judge used that characterization for a request to reverse the sale order, not to hold back proceeds. An Ice Cube Bond arguably reduces the possibility of Hail Mary arguments because it allows analysis of entitlements to be determined at a less pressured pace.

 

H/T Ted Janger

 

Notes on Complexity: The Weinstein Company Chapter 11 Hearing #1

posted by Melissa Jacoby

Some rarely-heard terms at The Weinstein Company's March 20 chapter 11 first-day hearing: sexual harassment, sexual assault, rape.

A more common utterance among TWC representatives: complex. The industry, the capital structure, the lending arrangements. All complex. Complex complex complex complex complex.

Part of the complexity, TWC said, comes from the fact that some collateral is governed by the Uniform Commercial Code while other collateral (certain intellectual property) is governed by other law. Yes - secured transactions professors keep saying this mixture is difficult to handle especially at the remedial/recovery stage. Another part of the complexity, according to TWC, is that the property interests have been sliced and diced into... hold on, this sounds familiar. 

What if anything is hiding behind this complexity? If TWC and the sale proponents get their way, the mystery likely will be buried.  The company and other proponent of a quick sale (which includes the sale of avoidance actions) says this sale needs to be done ASAP. 

TWC does not look like a melting ice cube now. It melted in the fall of 2017. Claimants need as much, if not more, protection in manufactured ice cube cases as in real ones, especially if the capital structure is so, well, complex. Complexity and speed are not the best of friends. If claimants are going to be denied full process, quick sale proponents need to post an Ice Cube Bond. Otherwise, a sale of TWC should happen through a plan, with all of the constitutional and statutory hurdles that were supposed to be necessary for the extraordinary exercise of federal court power that TWC seeks.

TWC's representatives also emphasized how business judgment should be respected. From the outside, it looks like TWC terminated Harvey Weinstein only when the news media blew their cover on the track record of heinous allegations. Sure, there is a new CRO, but are all who were complicit in the cover up really out of the picture now? 

A lawyer for the motion picture guilds said at the hearing that the guilds have had "difficulty" with the debtor pre-bankruptcy, and that the case calls for "adult supervision."  Another objector (docket #68)  said at the hearing that it heard from third parties that TWC had been "flagrantly" breaching agreements and misdirecting payment - a state of affairs feared to be the tip of the iceberg, but there had not yet been time to do a full investigation. 

A particularly interesting portion of the hearing involved debtor-in-possession financing. Among other reasons, TWC said it preferred to allow an existing lender to offer the DIP financing because that lender understood the complexity of the business and collateral package. Is chapter 11 practice now at a place where a DIP argues with a straight face that, for continuity purposes, it is better off borrowing money at higher interest rates and higher fees, from an existing lender with incentives that unlikely to align with the best interests of the estate overall? That did not go unchallenged, however. In addition to allowing another potential lender to be heard, the court asked a series of reasonable questions that indicated concerns about the cost of the proposed deal for the bankruptcy estate, and then took a brief recess. Then the proposed lender reported to the court the fees would be reduced.  The court approved the financing on an interim basis to avoid irreparable harm but will be looking at this issue fresh when TWC seeks the final order for financing.

The U.S. Trustee is having a creditors committee formation meeting this week. That committee has a lot to investigate.

The TWC enterprise might be complex. But that's not what this case is about.

 

 

 

 

 

Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation

posted by Melissa Jacoby

The lives of Puerto Rico residents remain profoundly disrupted by the aftermath of Hurricane Maria measured by metrics such as electricity, clean water, and health care access, with death tolls mounting. This week, though, in a federal court hearing on January 10, 2018, Puerto Rico has the extra burden of confronting Hurricane Aurelius.

Continue reading "Aurelius Seeks a Do-Over; Puerto Rico and the Appointments Clause Litigation" »

Call for Commercial Law Topics (and Jargon!)

posted by Melissa Jacoby

For the spring semester, I am offering advanced commercial law and contracts seminar for UNC students, and have gathered resources to inspire students on paper topic selection as well as to guide what we otherwise will cover. But given the breadth of what might fit under the umbrella of the seminar's title, the students and I would greatly benefit from learning what Credit Slips readers see as the pressing issues in need of more examination in the Uniform Commercial Code, the payments world, and beyond. Some students have particular competencies and interests in intellectual-property and/or transnational issues, so specific suggestions in those realms would be terrific. Comments are welcome below or you can write us at bankruptcyprof <at> gmail <dot> com. 

We also are going to do a wiki of commercial law jargon/terminology. So please also toss some terms our way through the same channels as above (or Twitter might be especially useful here: @melissabjacoby).

Thank you in advance for the help!

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