Lehman Brothers, Inc.’s sale to Barclays is a foregone certainty, but–as Judge Easterbrook reminds us here–the "devil is in the details" (origins of phrase here). Scores of objections (like this one filed by Goldman Sachs) were filed by parties objecting to the posted cure amounts of contracts and unexpired leases
In my last post, I reviewed the structure of Barclays’ $5.7 billion offer to purchase Lehman’s broker-dealer subsidiary. The press has universally misquoted the purchase price as being only $1.7 billion, but–according to the motion filed with Bankruptcy Court–this only represents the pure cash component of the deal and excludes the $1.5 billion…
Meanwhile, back at the ranch, Lehman has just filed this motion to approve postpetition financing and this motion to approve bid procedures for "the sale of the Purchased Assets" (i.e., the Lehman Brothers, Inc. broker-dealer assets) to Barclays. Both motions will be presented at today’s 11:00 a.m. scheduled hearing. Here’s the hearing agenda. …
In most endeavors, it’s important to start off on the right foot. I don’t think you’d call the Lehman bankruptcy filing today one such start. A well-planned bankruptcy case is orchestrated so that the early days of the case represent a seamless flow between the pre- and post-bankruptcy world. Calpine’s "first-day pleadings" (discussed at length here) reflected the kind of significant planning that would avoid a financial meltdown of the firm.
By contrast, Lehman Brothers Holdings, Inc.’s chapter 11 filing early this morning (docket here / petition here) shows that Lehman’s executives must have hired Weil Gotshal as late as possible to avoid any hint to its employees or the market that bankruptcy was possible. It played chicken, and lost. Lehman filed only three motions to open the case, and none are substantive:
- this motion asks the Court to enforce the automatic stay provisions of Code Section 362 (and is in itself a curious motion since the law in the 2nd Circuit is that all actions in violation of the automatic stay are void, not voidable);
- this motion asks the Court to extend the time to file required lists and schedules; and
- this motion asks the Court to waive the requirement that a filing include a list of creditors.
Like Drexel before it, only the holding company filed, so it will be "business as usual" for all of Lehman Holdings’ subsidiaries, none of whose activities are directly subject to the protections of the automatic stay or the Bankruptcy Code and Court generally (SIPC confirmation here).
Maybe, in the end, preparation of a well-executed contingency plan wouldn’t have mattered much since, in BAPCPA, Congress (as discussed at length here) amended or added various provisions to the Bankruptcy Code that enabled a nondebtor party–without limitation–to terminate, liquidate or accelerate its securities contracts, commodity contracts, forward contracts, repurchase agreements, swap agreements or master netting agreements with the debtor. As noted in my previous post on BAPCPA’s effectively excluding Wall Street’s financial firms from the benefits of bankruptcy, Columbia Law professor Edward Morrison, with Columbia GSB economics legend Franklin Edwards, argued in a Winter 2005 article entitled Derivatives and the Bankruptcy Code: Why the Special Treatment? that BAPCPA’s extension of the Code’s protections for the financial services industry "to include a broader array of financial contracts, all in the name of reducing systemic risk … is a mistake." They argued that "[a] better, efficiency-based reason for treating derivatives contracts differently arises naturally from the economic theory underlying the automatic stay [i.e., derivative contracts are rarely needed to preserve a firm’s going-concern surplus]." Still, they warn (at pp.1, 4-5):
[6/19/08 Update: The issues raised by this case are fully explored in connection with my filed objection to the GM 363 Sale on behalf of certain products liability claimants, discussed here.]
I decided to do some digging after reading of last week’s tragic story about the four-month old infant strangled to death when her head got caught in between the metal bars of a defectively designed bassinet manufactured by Simplicity, Inc., of Reading, Pennslyvania. What struck my eye was the statement from Simplicity’s successor, SFCA, Inc.
– a subsidiary of the Bethesda, MD-based $88 million private equity fund, Blackstreet Capital (itself managed and advised by some prominent D.C. financiers, lobbyists, and “political luminaries”)
– that it was not responsible for products previously manufactured by Simplicity since it had purchased only the assets of Simplicity at foreclosure last April, not the liabilities.
Quoting (or misquoting) Wilkie Farr’s Barry Barbash, the Washington Post story reported that “[l]egal experts said SFCA is not obligated to comply with the CPSC’s request to do a recall because of the way its purchase of Simplicity’s assets was structured.”
It may be true as a practical matter that SFCA is not obligated to fund the recall of 1 million bassinets (since assumption of that responsibility would surely force SFCA out of business just as it had forced its predecessor out of business). It may even be true as a matter of law that this Minnesota district court decision is correct and that even Simplicity itself (and hence SFCA without question) is not liable to any consumer that has not been physically injured by the design defect (with the court apparently not recognizing as a “legally cognizable injury” the worthlessness of the crib itself, yet who in their right mind would continue to put a baby in a crib that’s been recalled). It is by no means clear, however, that SFCA has sidestepped liability for deaths or other injuries caused by the defectively design cribs.
The background to how SFCA came to own Simplicity is itself interesting. Simplicity was a family-owned company that was founded in 1947 and grew into the nation’s largest crib manufacturer on the backs of the post-WWII baby boom and the “echo boom” of the next generation. Difficult business conditions, and the September 2007 product recall (prompted by a Chicago Tribune reporter’s dogged pursuit of the story), forced Simplicity to “explore strategic alternatives, including a sale or restructuring.” According to this press release, the sales process played out as follows:
After conducting a broad sale process and negotiating with several strategic and financial partners, professionals with the [National City Capital Markets] Special Situations Group concluded that the greatest value for Simplicity’s stakeholders would be achieved through a sale of Simplicity’s senior debt and subsequent UCC Article 9 asset sale to an affiliate of Blackstreet Capital Management (“Blackstreet”). This solution allowed Simplicity’s management team to remain in place while leveraging Blackstreet’s Asian sourcing and retail expertise. The sale closed in April 2008.
The transfer of Simplicity’s assets to SFCA is as notable for the route not chosen as it is for the route chosen. Many have prophesized that the “end of bankruptcy” is near, and the decision not to pursue a bankruptcy sale of Simplicity’s assets is surely a sign that this prophesy has merit. After all, the Third Circuit’s decision in United States v. Knox-Schillinger (In re Trans World Airlines, Inc.), 322 F.3d 283 (3d Cir. 2003) (pdf), had significantly enhanced (at least for bankruptcies filed in Pennsylvania, Delaware, and New Jersey) the ability of purchasers to buy a bankrupt debtor’s assets “free and clear” of “any interest,” including potential successor liability claims arising under federal common law. Had the buyer felt that the bankruptcy route could have extinguished potential successor products liability claims, it’s hard to believe it wouldn’t have chosen that path.
The fact that it didn’t certainly suggests that – at least privately – SFCA isn’t as certain about its lack of responsibility for successor product liability claims as it’s willing to confess publicly. And with good reason, too, for as the 7th Circuit held in Chicago Truck Drivers, Helpers & Warehouse Workers Union (Indep.) Pension Fund v. Tasemkin, Inc., 59 F.3d 48, 49-51 (7th Cir. 1995), even purchasers of a chapter 7 debtor’s assets in a state foreclosure sale are not shielded from potential successor liability claims for delinquent pension liabilities.
More to the point, many jurisdictions hold that even “free and clear” bankruptcy sales under Bankruptcy Code § 363(f) don’t insulate a successor corporation from product liability claims that could have been asserted against its predecessor if applicable state law would hold the successor liable for such claims. See, e.g., Western Auto Supply Co. v. Savage Arms., Inc. (In re Savage Indus., Inc.), 43 F.3d 714, 718-23 (1st Cir. 1994) (product liability case against successor not enjoined by “free and clear” sale where tort claim arose before sale but debtor made no effort to notify claimant of sale); Lemelle v. Universal. Mfg. Corp., 18 F.3d 1268, 1274-78 (5th Cir. 1994) (wrongful death action against purchaser of chapter 11 mobile home manufacturer’s assets may proceed for home constructed before commencement of case). As the New Jersey Supreme Court stated in Lefever v. K.P. Hovnanian Enters., Inc., 734 A.2d 290, 160 N.J. 307 (N.J. 1999), when it affirmed that “product line exception” product liability actions survive “free and clear” sales under Code section 363(f) and may be sustained against the successor purchaser:
It’s been a while since I’ve talked about the subprime mess. For the record, I believe I was the first person to ever link the words "subprime" and "tsunami" in a single article when I predicted back on March 16, 2006, in a post entitled "The Subprime Squeeze," that "tsunami-like" waves of defaults would likely result from the "hockey stick" growth patterns in the subprime industry. In fact, I just did a search of WESTLAW’s newspaper database, and no one had ever used the words subprime and tsunami in the same article before I had written that post. How things have changed! The "Subprime Tsunami" has hit land, deluged households, stalled the economy, revived a moribund class action industry, and become the full employment act for a battalion of defense lawyers worldwide.
Back about a year ago when subprime litigation was first revving up, I was moved to comment in this post on the Bankers Life v. Credit Suisse case, one of the first subprime litigation complaints filed nationwide, based on a post I had read in the Calculated Risk Blog (which remains to this day my number 1 "go-to" blog for timely, insightful, and depressing financial news). In that post, I predicted the 8-count complaint wouldn’t fare too well.
Well, my prediction proved correct, as the plaintiff substantially amended the complaint about five months later to drop the four securities law-related counts and the third party beneficiary count that I predicted would be dismissed. In its 17-count amended complaint, the plaintiff kept the fraud claims, which I predicted would be dismissed for lack of particularity, and added several new breach of fiduciary duty and breach of contract causes of action. It also repled the negligent misrepresentation claim, which I predicted would be dismissed, by smartly beefing up this count to include specific allegations pointing to alleged misstatements in the prospectus upon which plaintiff allegedly relied in purchasing the depressed securities.
So how did the amended complaint fare against BigLaw’s motion to dismiss?
As winter’s glove descends on Chicago with the onset of standard time, many of us in Chicago begin to count the weeks until "May Day," that festive day the world over when hope springs eternal and workers (and pagans) of the world unite.
Next year’s "May Day" offers lawyers an opportunity to reflect on the state of their profession, but only if they attend the 6th Annual DePaul Business & Commercial Law Journal Symposium, whose program this year is entitled "Lawyers, Law Firms & the Legal Profession." Some–such as my former classmate, and now Stanford Law dean, Larry Kramer–scream "May Day" when they ponder the state of the legal profession today. This rallying cry, Larry hopes, will encourage today’s generation of law students to "secure the future of our profession" and "preserv[e] the qualities that attracted so many of us to the study of law in the first place." Of course, if Larry’s more radical, anti-establishmentarian generational predecessors could be overseeing today’s system where–as he sees it–success and prestige are first and foremost judged by how well the firm’s "profits-per-partner" are maximized, then Larry’s hopes of a sea-change in attitude among today’s newly-minted lawyers when they assume the profession’s leadership reins 25 years from now will likely go unrequited.
My firm’s founder, Bob Coleman, and many others at the Coleman Law Firm, have spent much of their professional careers analyzing, advising, and litigating issues regarding a lawyer’s professional and ethical responsibilities. Many are also DePaul Law grads. It is thus with great pride that Coleman Law Firm will co-sponsor (with Development Specialists, Inc., and Financial Solutions Network) DePaul’s "May Day" Symposium on Lawyers, Law Firms & the Legal Profession.
To that end, Holly D. Howes, Editor-in-Chief of the DePaul Business & Commercial Law Journal, has graciously agreed to guest blog today’s post and describe the one-day symposium’s topics, distinguished panels, and enrollment details. To say that the $75.00 entry fee is a real bargain for the one-day event is an obvious understatement given the quality of the presenters, the complimentary catered lunch, the many hours of CLE credits earned by those attending, and thick stack of program materials distributed to all. It’s also a great time to visit Chicago!
So, without further ado, heeeeeeere’s Holly!
© Steve Jakubowski 2007
Be sure to free some time up between 10:00 and 11:00 a.m. EDT on July 12 for this free web seminar sponsored by the Washington Legal Foundation entitled The Ongoing Saga of Marshall v. Marshall: Beyond the Anna Nicole Headlines.