Unbundling Business Bankruptcy Law

A long-in-process draft article has just become available to be downloaded and read here. Comments remain welcome.  The Weinstein Company bankruptcy features prominently in this draft article. 

Every contract in America contains an invisible exception: different enforcement rules apply if a party files for bankruptcy. Overriding state contract law, chapter 11 of the federal Bankruptcy Code gives bankrupt companies enormous flexibility to decide what to do with its pending contracts. Congress provided this controversial tool to chapter 11 debtors to increase the odds that a company can reorganize. To promote this objective while also preventing abuse and protecting stakeholders, Congress embedded this tool and others in an integrated package deal, including creditor voting. The tool was not meant as a standalone benefit for solvent private parties to pluck from the process for their own benefit, like an apple from a tree.

In recent decades, the chapter 11 package deal has been unbundled in practice, typically on grounds of economic urgency. While scholars and policymakers have attended to the quick going-concern sales of companies featured in unbundled bankruptcies, they have not sufficiently explored the challenges associated with a contract-intensive business.

To help fill that gap, this draft article illustrates how the ad hoc procedures used to manage quick sales of contract-intensive businesses can undercut two major chapter 11 objectives: maximizing economic value and fair distribution. They amount to a wholesale delegation of a substantial federal bankruptcy entitlement to a solvent third party. In addition to the impact on economic value and distribution, this draft article also explores a Constitutional problem with this practice: it arguably exceeds the scope of the federal bankruptcy power.

 

Elliott, Apollo, Caesar's Palace and a Bunch of Bankruptcy Law Professors

One of the most dramatic stories in corporate finance and bankruptcy over the past decade has been the Caesar's Palace battle between a bunch of hard nosed distressed debt hedge funds and big bad private equity shops.  A bunch of masters of the universe types fighting it out to the death. (For my part: I'm interested in this because some of the big players from the Argentine pari passu battle are involved and there was a battle over the aggressive use of Exit Consents).

Turns out that this Caesar's story is going to be front and center at an upcoming bankruptcy conference that three good friends, Bob Rasmussen, Mike Simkovic and Samir Parikh are running, where one of the authors of "The Caesar's Palace Coup", the FT's Sujeet Indap, is going to be on a panel with the heavy hitters, Ken Liang, Bruce Bennett and Richard Davis. I always find it fascinating to hear how financial journalists and law professors, both of whom have dug deep into a set of events, tell the same story. 

The formal announcement, courtesy of Samir Parikh, is here:

Trump's Personal Guaranties and Liquidity

The revelations about Donald Trump's taxes might hold in them an explanation for why he didn't divest from his businesses when he became President, despite the obvious political problems that was going to create:  he couldn't afford divesting.  

Trump seems to have personally guarantied hundreds of millions of dollars of corporate borrowing. That's not uncommon for someone in his position, but I would imagine that at least some of those personal guaranties have key man provisions that require him to remain involved with the business. If he doesn't, the loan (and guaranty) might be in default and callable. And there are surely cross-default clauses in some of the borrowings, so it wouldn't be just one loan that could come due, but a bunch of them. It's pretty clear that in 2016 Trump didn't have the liquidity (and perhaps not even the assets) to deal with that sort of situation. 

Now let's be clear. There might have been other motivations for Trump to retain control over his businesses. But to that list, we should add the possibility that he had boxed himself in and couldn't divest even if he had wanted to without ending up broke. 

The Weinstein Company Bankruptcy: What She Said

Nearly a year has passed since my last Credit Slips post on The Weinstein Company bankruptcy. The case, filed March 2018, remains open. Contract disputes have dominated many if not most bankruptcy court hearings this past year. The issues have been interesting, the amounts at stake substantial, and, in litigated disputes, the buyer of TWC's assets typically has prevailed (some appeals are pending). Other contract disputes have settled, but often with key terms redacted, further complicating efforts to evaluate this bankruptcy on even the most accepted of metrics. In May 2019, parties informed the court they were still negotiating a deal with misconduct survivors, although TWC acknowledged that it had not conducted an investigation that would enable its board to sign off on any such deal, and its existing legal team was neither equipped nor priced to handle that work. That this acknowledgement should be astonishing is the subject for another day. In any event, updates on negotiations have yet to materialize in the form of a court hearing or status conference. In the past few months, the TWC docket has grown mainly with the reliable beat of monthly professional fee applications.

Tomorrow, Sept. 10, 2019, is the official release date of She Said, by Jodi Kantor and Megan Twohey, on their investigation of Harvey Weinstein leading up to their October 2017 reporting. I doubt She Said will contain new information about TWC's bankruptcy per se. In all likelihood, though, She Said will drive home just how much Harvey Weinstein's alleged predatory acts were intertwined with the operation and management of TWC. 

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

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.

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

Since 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.

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

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.

 

 

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

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.

 

 

 

 

 

Stormy Daniel's Three-Way (Contract) & Donald Trump's Performance Problem

I want to return to the Stormy Daniels-Donald Trump-Michael Cohen Three-Way Contract.  It's actually really interesting from a contract doctrine perspective (besides being of prurient interest). The continued media coverage and scholarly commentary seems to be missing a key point, namely that this is a contractual ménage à trois, not a typical pairing. The fact that there are three parties, not two to the contract actually matters quite a bit doctrinally.

 

Let’s start with a point on which I think everyone agrees.  For there to be a contract, there needs to be mutual assent. This assent may be manifested in different ways—it may be manifested expressly, say through a signature, or implicitly, say through performance or, in rare cases, through silence. 

 

The complication we have in this contract is that it is a 3-party contract, not the standard 2-party contract.  That’s a problem because basically everything in contract doctrine is built around 2-party contracts.  Traditional contract doctrine is monogamous and doesn't really know what to do with three-ways, especially when one party has a performance problem.  It's not, for what it's worth, that multi-party contracts are rare--they're not. In fact, they're the common arrangement in corporate finance where a contract will involve numerous affiliates. But traditional contract doctrine developed in an era in which these multi-party contracts were rarer (indeed, look at how the Bankruptcy Code is not drafted with the contemplation of multi-entity debtors!) and there's always been a wink-wink, nod-nod about the separateness of corporate affiliates. 

 

In re Trump Entertainment Resorts, Inc. in Retrospect

Today in bankruptcy I taught In re Trump Entertainment Resorts, Inc. (Bankr. D. Del. Feb. 20, 2015).  The case isn't in my casebook (although some might notice that I presciently included in the problem sets a recurring character named Ronald Grump, a real estate developer with frequent bankruptcy dealings), but I added it to my syllabus this fall because of the election connection.  It was only today, however, that I realized what a hugely important decision it was in retrospect.  

The case involved an attempt by Donald and Ivanka Trump to terminate the debtor's license to use their trademark name, which had been pledged by the debtor as collateral for a loan, despite being nonassignable by its terms.  The Trumps sued in state court to terminated the trademark based on an alleged breach of the license agreement, but the debtor's bankruptcy filing stayed the suit. The Trumps moved to lift the stay.  The bankruptcy court said that the trademark license was an executory contract, and under the hypothetical test for assumption, said that the debtor could not assume the license, and therefore lifted the stay to allow the state court termination litigation to proceed (which I assume resulted in termination).  

Here's the thing.  Imagine if this case had come out differently.  What if the bankruptcy estate could have assumed and assigned the Trump trademark?  And what if it were happening during the election season or now?  One can only imagine the bidding war that might have developed.  

Donald Trump Speaks the Truth

I never thought I'd write this, but Donald Trump speaks the truth, at least as far as bankruptcy is concerned. 

There's plenty to criticize regarding Donald Trump, but I really wish the media would back off the bankruptcy angle of his career, or at least be smarter about it.  

This Morning, I Woke Up With This Feeling

I feel compelled to share this sad but not unexpected filing.  I hope he will not run into any trouble under section 523(a)(9).

When an Oath of Poverty (or Waterboarding) Isn't Even Enough ... !

I've been following with some interest the saga of pitchman Kevin Trudeau and his battle with a federal judge here in Chicago. The judge refuses to believe that Trudeau is not hiding scads of wealth in offshore accounts to avoid paying a $37 million FTC fine against him. In a move that harkens back to the dark days of not-so-jolly old England,  the judge remanded Trudeau to prison for failing to reveal his supposed hidden assets. Indefinitely. No way out. Indeed, when Trudeau came back for the "have you had enough" hearing today, he offered to be waterboarded to prove that he wasn't hiding wealth offshore. The judge simply refused to believe him and, oddly, seems to have admitted that he "may never believe Trudeau has disclosed everything – waterboarding or not." If this isn't prejudicial bias, I'm not sure what is.

Foreclosing On The Life Story In Your Head

In the fictional worlds of Charles Yu, George Saunders, or Etgar Keret, a person's accumulated life stories and thoughts when she files for bankruptcy might be withdrawn, like blood, then filtered for marketability. In such a world, a debtor might be required to spin her tale for the sole benefit of creditors, or forever silenced. Planning to give a five-minute anecdote about your childhood at The Moth? Don't even think about it.

Casey Anthony's bankruptcy was filed in January 2013 as a no-asset Chapter 7, with nearly  $800,000 in debt - not counting scores of claims with amounts identified as "unknown." Ms. Anthony's income and expense schedules list, literally and rather remarkably, zeroes all the way down. At the 341 meeting of creditors in March, Ms. Anthony asserted that friends and strangers take care of her needs. Presumably, this arrangement is not sustainable. Will she seek to support herself in the future by talking about her past? 

The bankruptcy trustee wants to auction off something that probably has never been expressly sold in a bankruptcy case (it certainly wasn't listed as an asset in the schedules): exclusive rights in perpetuity to the commercialization of Ms. Anthony's life story, including "her version of the facts, her thoughts and impressions of whatever nature, in so far as these pertain to her childhood, the disappearance and death of her daughter . . . her subsequent arrest . . . and withdrawal from society. . . ." (see the lengthy paragraph 3 in here). How much debt would be satisfied by such a sale? 

Who Says Earnings Management's Just for CEOs?

A story from the sports world.

Happy New Year: Shall We Make Some Resolutions?

Welcome to 2013 Credit Slips Readers! It’s time to think about our debtor/creditor future, what to keep and what to leave behind. Sometimes I ask my fellow bloggers if they made any financially-related resolutions but usually everyone say no, so this year, we’ll just make a nice list of resolutions through your comments!   My List:

1. I resolve to read less about the financial crisis (leave it behind, all) and more about other juicy financial news. First, I want to get my hands on Pound Foolish, a new book by Helaine Olen slamming the financial advice industry. Ms. Olsen claims that advisors are not generally on the side of clients but rather on the sides of various people who buy their love. Yes we knew that, but this still might be a good read. Olen exposes the fallacies spun by some of America's current personal-finance celebrities, including  David Bach, a former senior vice president at Morgan Stanley, and his Latte factor theory. Olen also takes on Robert Kiyosaki (Rich Dad, Poor Dad), apropos since one of his companies (Rich Global, LLC) filed for Chapter 11 back in August.

Right of Publicity as an Asset in Bankruptcy?

A quick post to announce that intellectual property scholar Jennifer Rothman has just published an article that engages with the bankruptcy treatment of the "right of publicity." Painting with the broadest brush, the piece questions the alienability of an identity-holder's right of publicity more generally, and concludes creditors should not be entitled to "own (or control)" a debtor's right of publicity (p.236). For the bankruptcy and commercial lawyers reading this post, or courts confronting questions of creditor entitlement to a debtor's right of publicity, the article contains references to recent court decisions of potential relevance (pp. 199-200) in addition to important arguments on these questions. According to Rothman, there still is no published caselaw explicitly holding that creditors are entitled to the value of a bankruptcy filer's right of publicity. (If Credit Slips readers know of examples that did not result in published decisions, I would welcome a comment below, or a note to bankruptcyprof@gmail.com).

The Entertainment and Sports Programming Network Looks at Bankrupt Athletes

In its acclaimed "30 for 30" series, ESPN is airing a show about professional athletes who go bust after leaving their sport. From ESPN's web site (which also has a trailer for the show):

According to a 2009 Sports Illustrated article, 60 percent of NBA players are broke within five years of retirement. For 78 percent of NFL players, it takes only three years. Sucked into bad investments, stalked by freeloaders, saddled with medical problems, and naturally prone to showing off, many pro athletes get shocked by harsh economic realities after years of living the high life. Drawing surprisingly vulnerable confessions from retired stars like Keith McCants, Bernie Kosar and Andre Rison, as well as Marvin Miller, the former executive director of the MLB Players Association, this fascinating documentary digs into the psychology of men whose competitive nature can carry them to victory on the field and ruin off it.

The episode, simply titled "Broke," airs in the U.S. at 8:00 PM (ET) on October 2 on ESPN.

Hat tip to my former student and current Chicago bankruptcy lawyer, Frank Venis, for drawing this to my attention. And, yeah, I know it has not really been the "Entertainment and Sports Programming Network" since 1985, but the full name has been seared into my brain ever since a moment of personal ignominy in a college sports trivia contest.

Sovereign Debt

From the the second volumn of J.F. Molloy, Court Life Below Stairs (rev ed. 1885), regarding events after the death of George III's spouse, Queen Charlotte:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A 5% recovery is pretty bad, even by modern Greek standards, but maybe that's where things are headed. Of course, maybe the proper point of comparison is actually personal bankruptcy. But note the numbers -- £1,000 in 1818 (the year the Queen died) would be worth about £70,000 today; about £85,000 if we count from 1827, the date of the Duke of York's death. So the Duke's debts were ... large. Much larger that most personal bankruptcies today for sure.

Understanding Anna Nicole Smith (or, at least, Stern v. Marshall): A Must-Read Analysis

Led by my colleague Elizabeth Gibson, four members of the National Bankruptcy Conference have produced a fantastic analysis of the Stern v. Marshall U.S. Supreme Court decision (that most recently has been mentioned on Credit Slips here and here). I strongly recommend it for judges, lawyers, academics and others interested in the bankruptcy system and/or federal court jurisdictional questions.    

Anna Nicole Smith May Be More Than Just the Only Loser on This One

Vickie Lynn Marshall, as she is known to bankruptcy mavens, or Anna Nicole Smith, as she is known to normal people, lost today in her second round before the Supreme Court. In his last post with us, John Pottow provided a good summary of the issues, and guest blogger Troy McKenzie also had offered some thoughts about what the case might mean for some other areas of bankruptcy law (here and here). Now that the opinion is out, I would describe it as scary for the daily workings of the bankruptcy system.

Political Cartoons. Elizabeth Warren edition.

My husband commented the other day that he didn't think Elizabeth Warren was a "political figure." His argument was not that she is not an elected offical or that she doesn't have partisan allegiances. No, instead, he was focused on the fact that she has never been in a cartoon. But look what Google just turned up!  (By the way, I'm putting this under "Celebrity Bankruptcy," another blog category that puzzles me slightly.)

On the Rangers' Bankruptcy

The New York Times has an interesting piece on the Texas Rangers' bankruptcy. It seems that Major League Baseball is supporting one bidder group (including Nolan Ryan), but that group hasn't made the top dollar offer. So do the Rangers have to be sold to the top bidder or do MLB's preferences (and threat to terminate the Rangers' franchise if it doesn't get its way) have to be taken into account? 

The story doesn't explain why MLB prefers the lower bid. Maybe there's a good reason. On the other hand, "we just like them better," or "we think it'd be cool for Nolan Ryan to own the Rangers," (i.e., "in the best interests of baseball") can't be sufficient grounds for going with the lower bid. 

What about the threat of that if their preferred bidder wins, MLB will pack up its toys and leave the sandbox? I would anticipate that a sale order would include some sort of injunction against this (e.g., no termination of franchise except for reasonable cause). To be sure, for some creditors, the loss of the Rangers' franchise would be far worse than a lower sale price, but I don't think a spite termination can be included in a valuation maximization comparison. (Fwiw, I don't think MLB's unique antitrust exemption has any bearing on whether a bankruptcy court order can enjoin it from terminating a franchise.)

On a side note, yes, I'm aggrieved that MLB loaned the Rangers $40M, which was used to land Cliff Lee. Go go White Sox!

[Bob: note the spacing!]