[Part II – Testing the Limits of Section 363 Sales; Part III: Will the Absolute Priority Rule Kill the Sale?]

[6/09/09 Update:  See also my analysis of the Chrysler Sale Opinion (Part I) and (Part II).]

And so, with these fighting words by President Obama, Chrysler files for bankruptcy in the Bankruptcy Court for the Southern District of New York.  Clearly, we’re in uncharted waters as never has the Office of the President become so engaged in the restructuring of America’s largest businesses.  In supporting Chrysler’s filing, a visibly angry President Obama came out swinging, stating:

A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. I don’t stand with those who held out when everyone else is making sacrifices. They were hoping that everybody else would make sacrifices and they would have to make none. We will use the bankruptcy laws to clear away remaining obligations. It will be designed to deal with the last remaining holdouts. It was unacceptable to let a small group of speculators endanger Chrysler’s future by refusing to sacrifice like everyone else.

For his part, Congressman John Dingell, the longest serving member of the House, promised that “[t]he rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury – firms I label as the ‘vultures’ – will now be dealt with accordingly in court."

The secured debt holdouts didn’t see things quite the same, obviously, and issued this statement justifying their holdout, saying:

[W]e offered to take a 40 percent haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50 percent or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100 percent recoveries, while even G.M.’s unsecured bondholders are receiving a far better recovery than we are as Chrysler’s first lien secured lenders. We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests. Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well-established legal framework and cannot be rationalized as being commercially reasonable.

So the petition is now filed.  Let’s examine the carnage:

Continue Reading Chrysler Files Bankruptcy – Part I: Assessing The Financial Carnage

NPR’s Planet Money, which interviewed me in this podcast last November about how the US government might get involved in a GM bankruptcy, called again asking for my thoughts on recent developments in GM’s restructuring saga, particularly now that the Obama administration has become so engaged in attempting to dictate the results.

You can hear some of my comments in this latest podcast, just released today.  The interview starts at 6:16 minutes into the podcast.  Be sure to also listen to the fine introductory song, The Fear, by Britain’s Lily Allen (full version and lyrics here).

Many thanks to Kathleen Brooks, David Kestenbaum, Laura Conway and the staff at Planet Money for the call and the opportunity to share some of my thoughts with others!

© Steve Jakubowski 2009

In June 2007, I wrote here about Judge Small’s opinion that BAPCPA’s expanded "safe-harbor" definition of "swap agreement" did not apply to ordinary supply agreements in which a seller and an end-user entered into a contract "for delivery of a product that happen[ed] to be a recognized commodity."  As such, Judge Small held, these contracts were not exempt from avoidance as fraudulent transfers (on the theory that the supply contracts were made for less than market value when the debtor was insolvent).

Well, to the delight of the ISDA, which filed an amicus brief in support of the appellant-purchasers of natural gas under various supply contracts with the debtor, the 4th Circuit yesterday reversed Judge Small and remanded with instructions that the Bankruptcy Court "allow the customers to attempt to demonstrate facutally and legally that their natural gas supply contracts were swap agreements based on the classification included in § 101(53B)."  Hutson v. E.I. du Pont de Nemours and Co. (In re Nat’l Gas Distribs., LLC), 2009 WL 325436 (4th Cir. 2/11/09) (pdf)

In reaching this decision, the 4th Circuit undertook to determine the meaning of "commodity forward agreements," and ultimately concluded that "the bankruptcy court in this case construed ‘commodity forward agreements’ too narrowly–i.e., by requiring that they be traded on an exchange and not involve physical delivery of the commodity."  In so doing, the 4th Circuit found:

  • First, that "the Bankruptcy Code does not require that a ‘forward contract’ [which necessarily is narrower in scope than "forward agreements"] be traded on an exchange or in a market";
  • Second, that the contracts at issue were not "simple supply contracts" because "they also were part of a series of contracts in which the customers hedged their risk of future fluctuations in the price of natural gas … that were only a part of a larger risk management program in which the customers ‘regularly use[d] forwards and other derivatives."
  • Third, that while BAPCPA’s legislative history, which Judge Small quoted, "does provide support for the notion that traditional supply agreements are not ‘swap agreements’ … the conclusion that the contracts in this case are traditional supply contracts overlooks the fact that the contracts in this case contained real hedging elements … [and thus] Congress did not preclude physical delivery in connection with a ‘commodity forward agreement,’ as defined in § 101(53B)(A)."

Notably, however, the Court "[did] not direct the bankruptcy court to find that the contracts in this case are ‘commodity forward agreements’ or ‘swap agreements.’"  Recognizing that § 101(53B) "contains its own counterintuitive definitions, as well as inconsistencies," the 4th Circuit would not attempt to provide its own definition.  Instead, it "point[ed] to certain nonexclusive elements that the statutory language appears to require," those being:

Continue Reading 4th Circuit Overrules Judge Small And Holds That Ordinary Commodity Supply Contracts Fall Within BAPCPA’s “Swap Agreement” Amendments

As if he doesn’t have enough to do as head of Levenfeld Perlstein’s restructuring group and as executive editor of the must-read ABI Journal, Jonathan Friedland has undertaken the gargantuan task, never yet accomplished, of assembling in a single treatise, entitled Strategic Alternatives for Distressed Businesses, the varied state law approaches to the liquidation and disposition of distressed businesses (including so-called "assignments for the benefit of creditors" or "ABC’s").

What motivated Jon to commit himself to this public service?  Apparently, frustration!  Now while most lawyers let out their frustrations on some hapless administrative assistant or airline gate agent, not so Jon, who writes:

This book was born out of frustration.  Beginning several years ago, I noticed that more and more companies in need of a restructuring or sale could afford neither the time nor cost of a Chapter 11.  My frustration came from the fact that I, like so many other lawyers who focus their practices on the representation of parties in Chapter 11 and out-of-court workouts, simply did not have the same rich resources of information at my fingertips with respect to nonbankruptcy alternatives for distressed business as I did with respect to bankruptcy.

The need for a book like this was brought home to me when, in several deals, we decided that we likely needed an Assignment for the Benefit of Creditors, and likely had the ability to do one in any of several different states.  I needed to understand the pros and cons of each state’s procedure.  I found that more information resided in the heads of a few people here and there than in any book.  I wanted a single volume that compiled relevant statutes from across jurisdictions.  I looked and looked, but there simply was nothing like that.  This book seeks to fill the void.

On this score, Jon is right.  Many state bar and continuing education associations have developed outlines covering a particular state’s law and practice regarding ABC’s (such as this excellent one covering ABC’s in Illinois).  Bob Eisenbach also has neatly summarized in this blog post "the ABC option," with links to various excellent works (including Geoffrey Berman’s 118 page practical guide, published by the ABI and now in its second edition, entitled General Assignments for the Benefit of Creditors: The ABC’s of ABC’s).  None, however, point to any comprehensive 50 state review of strategic alternatives to bankruptcy.

Jon’s role in this project is as principal author and editor-in-chief (or as he humbly calls it, "Chief Logistics Manager").  DSI’s Geoffrey Berman also lends his considerable talents as executive editor to the project.  26 other restructuring professionals from around the country (including such household names as Will Kohn, Carl Lane, Patty Redmond, and Nancy Ross) also joined to contribute to the 1,211 page treatise, which divides into the following sections:

Continue Reading Reviewing “Strategic Alternatives For Distressed Businesses” by Jonathan Friedland

12/9/08 Update:  Well, unlike Lehman, the more traditional complement of first day motions were filed late last night (docket here), including a critical vendor motion and a financing motion that authorizes it to continue selling its receivables through an amended securitization facility.  Here’s the 90 page supporting affidavit of Chandler Bigelow III, the Trib’s CFO, in support of all the first day motions, including a brief explanation of the liquidity events that forced the entire enterprise into chapter 11 and a nice chart at the back showing the corporate relationship among the various filing and non-filing subsidiaries.

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I followed Lehman’s free fall into bankruptcy through a number of posts in the first week of Lehman’s case (start here).  Today, the Tribune Company performed its own spectacular free fall into chapter 11, taking not only itself down, but also another 111 subsidiaries (including The Chicago Tribune, WGN, The LA Times, KTLA. The Times Mirror, The Baltimore Sun, WPIX, and even forsalebyowner.com).

Like the Lehman chapter 11 filing, the Trib’s filing was accompanied by none of the motions one would expect to see at the outset of the case (such as for approval of use of cash collateral and a DIP lending facility, payment of basic employee benefits for accrued and unpaid wages, maintenance of its cash management system and business forms, and assumption of various customer programs, all accompanied by an affidavit of a senior executive explaining the cause of the filing and the need for the requested relief).

My guess is that the senior secured lenders, led by JP Morgan Chase, as agent for a host of banks and hedge funds in an $8.571 billion senior credit facility (compared with stated total assets of $7.6 billion), are balking at management’s business plan for the near- and long-term, and have been unable to reach agreement with management over the terms by which the Trib and its subsidiaries would have access to cash to fund operations during the case.  Given the widespread recognition that DIP lending facilities simply have dried up, this standoff comes as no surprise.  Until then, the Trib’s operations will run on fumes supplied by the goodwill of its trade vendors and employees.

Here’s the Tribune Company’s voluntary petition, and here’s the docket in the Trib’s main case, which as of 5:30pm EST has a single entry, that of the petition.  Though the other 111 or so subsidiaries identified in the Trib’s petition are listed as co-debtors, none of these entities have yet filed their respective individual petitions, thus potentially enabling three wily creditors of each subsidiary to really throw a wrench in the works by filing an involuntary petition against that subsidiary in a venue other than Delaware (where the parent Tribune Company filed its petition).

Most people in Chicago were appalled by last summer’s dramatic changes to the layout of The Chicago Tribune.  I wonder what’s going to show up tomorrow. 

© Steve Jakubowski 2008

Got a cold call today from NPR’s Alex Blumberg, host of NPR’s Planet Money, who interviewed me about the prospects and pitfalls of a GM bankruptcy.  Here are links to the NPR podcast.  The interview begins a couple of minutes into the podcast.

Special thanks to Alex and NPR for the call and their plugging the blog!

© Steve Jakubowski 2008

9/22/08 Update:  Here’s the final complete Asset Purchase Agreement (including First Amendment and Clarification Letter).  Also, this notice of appeal was filed by Bay Harbour Management and others.  Here and here are the best news reports I’ve seen describing the surreal hearing.

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Just after midnight early today, Judge Peck entered this order approving the sale of Lehman’s broker-dealer subsidiary (LBI) to Barclays and overruling all objections to the sale (identified here).  Note the reference in the order to a first amendment to the asset purchase agreement and to a subsequent letter agreement modifying the original asset purchase agreement.  Neither of these amendments have yet been posted, but the net effect of them appears to have resulted in a $400 million reduction in the purchase price, according to this news report. 

The "Purchased Assets" were sold free and clear of "Interests," including "those that purport to give any party a right or option to effect any forfeiture, modification or termination of the Debtors’ interests in the Purchased Assets."  Interests also presumably include the Lehman Europe Joint Administrators’ demand (described here) for a return of the $8 billion in overnight funds swept by the Debtor in advance of the filing (though it’s doubtful that any of those funds actually went into LBI and thus would be implicated by the sale).

The order also expressly released Barclays from any potential successor liability claims, including taxes, which means that the Debtors will be stuck paying the transfer taxes (to the glee of New York State, per this recent Supreme Court case).  Counterparties to contracts being assumed will have until 10/3/08 to file an objection to the proposed cure amount. 

The sweeping change in the economic and political landscape after the announcement of the government’s bailout prompted Debtor’s counsel to say in Court that "[t]his is a tragedy – maybe we missed the RTC by a week," to which Judge Peck responded, "[t]hat occurred to me, as well; Lehman Brothers became a victim, in effect the only true icon to fall in the tsunami that has befallen the credit markets."  But, as Rod Stewart sang, no one’s gonna help "a victim of a shotgun wedding."

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The inset cartoon is from the Business Cartoon Collection of Shannon Burns, to whom special thanks is owed for granting me permission to post it here.

© Steve Jakubowski 2008

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 to be assumed and assigned at closing.  Making such an objection was critical to those who disputed or were unsure of the cure amounts since the sale notice advises that failure of any contracting party to object to the assumption and assignment or to the posted cure amounts will be barred from later objecting to the assumption and assignment or to the cure amounts.  Other contracting parties (like the Chicago Board of Options Exchange) additionally objected on the basis that generic references to contracts to be assumed didn’t adequately specify the contracts subject to assumption, assignment, and cure.  Otherwise, however, none of these parties had any conceptual objections to the proposed sale.

Other more interesting insights into the case are found in objections filed by parties concerned that non-debtor assets of various subsidiaries of the Debtor are included or implicated in the sale.  One significant focus (as here and here) was Section 2.1 of the Asset Purchase Agreement, which broadly defined the "Purchased Assets" to include "all of the assets of [the Debtor] and its subsidiaries used in connection with the business.  Several subsidiary creditors filed objections to the sale of assets that were in nondebtor subsidiaries and thus not "property of the debtor" that could be sold free and clear. 

Mickey Mouse’s objection, filed by Marty Bienenstock, is the most elegant and comprehensive of all from a bankruptcy perspective.  It raises the same concerns about selling nondebtor assets, and adds a range of related intercompany issues, most significant of which is the concern that entry of the sale order will extinguish the rights in third parties to recover assets of nondebtor subsidiaries that shouldn’t have been included in the sale.  The relief requested thus "would be an illegal, sub rosa substantive consolidation," Mickey complains.

Finally, there’s this lengthy and well-documented objection from the Joint Administrators of the Lehman European Group Administration Companies, who were appointed on the day of the bankruptcy filing by the English High Court of Justice pursuant to the English Insolvency Act of 1986.  The Joint Administrators have hired a team of 200 PWC accountants and consultants, supported by a team of 100 lawyers, to manage these European related entities.  The Joint Administrators say they support the sale, but have concerns about its impact on shared IT and administrative systems, books and records, confidentiality requirements.  And then, of course, there is that matter of the Debtor’s having swept $8 billion in funds last weekend from Lehman Europe and not returning the funds as the Debtor typically did every Monday morning, but couldn’t this past Monday because of the intervening bankruptcy filing.  Respectfully, the Joint Administrators ask, that money (and possibly more) should be returned to its rightful owner.

Have a good weekend all, and thanks for reading!

© Steve Jakubowski 2008

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 in "cure" costs and $2.5 billion in estimated employee retention costs.  Adding in these real costs brings the total consideration paid by Barclays to $5.7 billion.

Barclays’ offer was conditioned upon the deal’s closing no later than Tuesday, September 23.  If you’re planning this year’s National Conference of Bankruptcy Judges, Barclays drop dead date couldn’t have been timed better since the conference begins the next day and, coincidentally, Judge Peck is the featured speaker on two panels: one entitled, "Exit Strategies for the Subprime Mortgage Crisis"; the other entitled, "The Impact of the Subprime Meltdown: From a Ripple to a Tsunami."  Those panels alone are worth the price of admission.

As for the sale dynamics, after an extended hearing into the evening yesterday, Judge Peck entered this order approving Lehman’s motion to set bid procedures and set the hearing to approve the sale for tomorrow, September 19, at 4:00 p.m.  "Qualified bidders" will have until the hearing to submit a bid that must, at a minimum, provide for:

  • a $450 million DIP facility (comparable to this one [Order / Agreement] just approved on an interim basis, subject to a final hearing on October 2); and
  • the replacement by no later than the opening of business on 9/22/08 of all bridge financing advanced to Lehman by the Federal Reserve Bank of New York (and, p.s., good luck finding about $50 billion owed to the Federal Reserve on two days’ notice).

The approved sale procedures attached as an Exhibit to the Order further cement the deal in that they include a highly unusual "no-shop" / "no solicitation" provision, which most practitioners and judges would agree are generally forbidden in bankruptcy.  The procedures also place Lehman in the impossible position of having to provide 48 hours notice of its intent to enter into a competing transaction, though there’s less than 48 hours left until the sale hearing (not that it matters, since no one else is stepping forward).

Finally, the sale order provides that the hearing shall not be adjourned or canceled without the prior consent of the SEC, the CFTC, and the Federal Reserve Bank of NY.  If nothing else, this provision at least guarantees that senior officials from these agencies won’t be working non-stop for their 5th consecutive weekend.

So as Barclays enters the "major leagues," accompanied by England’s national anthem "blaring over the loudspeakers," let us pay tribute to the hard working–soon jobless–people who made Lehman great and to the ordinary people who plowed their hard-earned savings into Lehman securities only to be left "holding the bag."  May G-d bless them, and may G-d bless America.

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Rumor had it that former Weil Gotshal partner Marty Bienenstock (now with Dewey & LeBoeuf, NY) would be declared the winner of the Committee beauty pageant (described here), but lo and behold, as reported here, the prize went to Milbank, Tweed, Hadley & McCloy, which also represented the Creditors’ Committee in Enron and Refco.  Congratulations!

© Steve Jakubowski 2008

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.  It’s the first opportunity for counsel to explain the case to Judge Peck and a standing room only crowd.  [Noon Update: The hearing was continued until 4 pm today, probably to allow the Committee to select counsel (and the Judge to digest the pleadings).]

According to the DIP financing motion, Barclays is offering to lend up to $450 million on a senior secured basis, collateralized by a first priority lien on Lehman’s equity interests in Neuberger Berman Holdings LLC. This loan appears to be a bridge to a sale of Lehman Brothers, Inc. (LBI), Lehman’s primary broker-dealer subsidiary, to Barclays for $1.7 billion cash and assumption of certain liabilities and contracts (the cure costs of which will add an additional approximately $1.5 billion to the purchase price).  The $1.7 billion cash consideration is based on a payment of $250 million cash plus the appraised values of Lehman’s NY headquarters at 745 Seventh Ave. and the Cranford and Piscataway NJ Data Centers, which will presumably bear the Barclays logo after closing.

Barclays also has agreed to offer employment to about 10,000 North American-based employees of LBI (or about 70% of the North American workforce) for 90 days, to pay their Christmas annual bonus, and to provide normal severance benefits for any worker terminated based on "reductions in force" or "job eliminations" (all at a projected cost of about $2.5 billion).  Section 3.3 of the Agreement provides for a purchase price adjustment (which could favor either Lehman or Barclays depending on market results) of up to $500 million on the one-year anniversary of closing based on profits or losses realized in various assumed long or short "Positions" (the "Long Positions" alone have a book value today of about $70 billion).  Lehman Commercial Paper, Inc., a more toxic division, is excluded from the deal. 

Time is of the essence for the sale, the motion states (and so does Milbank’s Luc Despins), and the proposed Purchase Agreement contemplates that prior to the sale hearing, LBI will consent to commencement of a case under the Securities Investor Protection Act of 1970 and appointment of a SIPA trustee, which itself will have to ask the consent of the SIPA Court for the sale. 

The break-up fee is $100 million plus $25 million in reimbursable expenses.  In addition, the motion proposes a "KERP" retention plan for about 208 employees, of whom 200 are designated as "key to the success of the business" and 8 as "critical to the success of the business."  Though the motion doesn’t identify who these employees are, my guess is that Dick Fuld (see Congressional invitation here) is not on that list.

The closing date for the sale is September 23, which is like a nanosecond given the size of the deal, but it’s probably just slightly less time than Barclays had to consider the deal.  We’ll see if the Judge authorizes such a short a window, and much will depend on the marketing process that occurred in advance of the filing and the expressions of interest generated.  $5.7 billion is a big nut, and in today’s environment when cash is king and flowing like molasses as the market loses about 5% in value a day, it’ll be a tough number to beat.

Evidencing the furious pace of negotiations is the fact that the executed draft of the Asset Purchase Agreement attached to the sale motion is a marked-up "confidential" draft that was re-marked as the "Execution Copy."  The documents is remarkably loaded with substantive handwritten interlineations and cross-outs on virtually every page.  Rarely does one get this kind of insight into final, last-minute negotiations.  The draft line on the bottom of the page says it’s "v.2," suggesting that the execution copy was the third and final run.

Those interested in seeing who’s on the "A" list of people getting notice of the proceedings will find the current service list here.

My previous Lehman posts are here (Lehman’s Free Fall), here (Bankruptcy Update), and here (Committee Formed).

Thanks for reading, and thanks to those who have called or written with comments, kudos, and suggestions!

© Steve Jakubowski 2008