Transcript Slide 1

Is Section 363 All You Need to
Know about Chapter 11?
Breaking it Down
and Recent Developments
Jonathan N. Helfat
David W. Morse
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Overview
• The New Chapter 11 Paradigm? 363 Sales replace the
Plan of Reorganization—How did we get here?
• The 363 Sale Process
– What is it?
– Why is it so popular?
– What do you need to know about it?
• What’s a “credit bid” and how does it work?
• Chrysler in perspective: What really happened?
• Your rights under the loan documents when it comes to a
sale of the business
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Why Are We Talking About 363 Sales?
How Did We Get Here?
• Once upon a time…Companies spent months and
years in Chapter 11
• Now—30, 60, 90 days—Then, a sale of the
business…
• Why?
– The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 (BAPCPA)
– Too much leverage…
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What about the 2005
Amendments Led to This?
• Utilities protection: Additional adequate assurance for
utilities
• Vendor protection: Additional reclamation claims for
vendors
• Employee protection: Increase in monetary limits on priority
claims for wages, etc.
• Post-petition claims for ad valorem taxes priming secured
and administrative claims
• Accessing value of real estate: Timing for acceptance or
rejection of leases
• Limiting exclusivity period
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The Debt Laden Balance Sheet…
• Access to credit allows weak companies to survive longer
• Companies arrive in Chapter 11 with more debt
• Where are the assets to generate liquidity to support the
restructure?
• No reason for secured lenders to take risk to provide
liquidity unless certainty of collateral values
• Scarcity of capital generally
• Loss of value of real estate and leases
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What is a Section 363 Sale?
• Section 363(b):
– Chapter 11 Debtor may only sell assets--other than in
the ordinary course of business—
– with approval of the Bankruptcy Court after notice and a
hearing
• Sales can be of any assets or all or substantially
all of the assets
• Highest and best price
• Good faith: Sale in good faith in an arms’ length
transaction
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The Section 363 Sale Process
Step 1
Debtor markets
assets
Step 2
Step 3
Step 4
Step 5
Step 6
Prospective buyers
offer LOIs
20 days later: Court
approves bid
procedures
Step 7
First Auction: Debtor
selects stalking horse
Second Auction:
Highest and best
Step 8
Order entered to
approve sale
Step 9
10 days after sale
order, if no objections
order becomes final
and non-appealable,
unless waived by court
Step 10
Closing
Debtor and stalking
horse negotiate:
•Purchase agreement
•Deal protections
•Bidding procedures
Debtor files motion to
approve sale and
bidding procedures
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Why a Section 363 Sale?
Reason #1: Speed
• Timing: Faster than a plan process
• Origins of 363: The “melting ice cube”
metaphor
• 1983 Second Circuit Lionel decision:
– Is the asset increasing or decreasing in value?
– Proper business justification
• Sub rosa plan argument
• Some courts have problem with speed
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Why a Section 363 Sale?
Reason #2: Transfer of Executory Contracts
• Buyers have ability to obtain some
contracts and leases and not others
• Anti-assignment clauses otherwise
enforceable, not enforceable in bankruptcy
• Requirements for Debtor to “assume and
assign”
– Cure any defaults
– Adequate assurance of future performance
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Why a Section 363 Sale?
Reason #3: Sale Free and Clear of Liens
• Section 363 allows sales free and clear of liens with or
without consent of lienholder
• But under Section 363(f) one of following conditions must
be satisfied:
– Applicable non-bankruptcy law permits sale of such property free
and clear of interest
– the lienholder consents
– The sale price of the property is greater than the “aggregate value
of all liens on such property”
– The interest in the sold property is in a bona fide dispute
– The lienholder could be compelled, in a legal or equitable
proceeding, to accept a money satisfaction of its interest
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Why a Section 363 Sale?
Other Limitations on Sale Free and Clear
• Lienholder must receive proper notice of
sale
• Some liabilities cannot be eliminated
– Environmental liabilities
– Successor liability for labor and tort claims
• Assets outside of the United States
• Assumption of liabilities
• New caveat of Clear Channel
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Reason #4: Finality of Sale--Good Faith
Purchaser Protection
• Court examines conduct of buyer—absence of:
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Fraud
Collusion between buyer and seller
Unfair advantage of other bidders
Bribes to insiders of debtor
• Sale order must expressly state: buyer is “good
faith purchaser”
• What are protections?
– Waiver of automatic 10 day stay period after sale order
– Statutory “mootness”: Sale cannot be modified or overturned,
unless the sale is stayed pending appeal
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Trouble in Paradise: Good Faith Purchaser
Protection Meets Clear Channel
• DB Burbank, LLC makes $40 million loan to PW secured
by 18 parcels of real estate
• Borrower defaults
• DB Burbank starts foreclosure
• PW files Chapter 11; Chapter 11 trustee appointed
• DB becomes stalking horse bidder with credit bid equal to
its $40 million debt
• DB is winning bidder; assets sold free and clear of all
liens—including junior lien of Clear Channel
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Why a 363 Sale? Other Reasons
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No fraudulent transfer liability risk
No bulk transfer liability
Ability to bind non-consenting stockholders
Less diligence on liabilities since sold free
and clear
• Ability to credit bid
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Consent to the Sale and Credit Bidding:
What is Credit Bidding?
• Section 363(k)
– Secured creditor right to bid at 363 sale
– Offset claim against purchase price
• Credit bids using senior secured claims are like
cash bids
– Bid total face amount of claim
– Impact on “highest and best” requirement
• Results in transfer of collateral to Lender in
exercise of remedies by Lender
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Key Points for the Secured Lender in a 363
Sale: You May Not Get it All!
• Estate cannot be left “administratively
insolvent”
• Assignment and assumption of contracts
• Other creditors to be paid
• Funding of business from filing to sale
• Transfer of trademark licenses
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Chrysler: What Really Happened?
• April 30: Chrysler and 24 subs file Chapter 11
• May 1: Debtor engage financial consulting and
advisory firms and investment bankers
• May 1: Debtors seek approval for an expedited
hearing on motion to approve bidding procedures
and schedule sale hearing
• May 31: Bankruptcy Court renders opinion
approving the Debtors’ motion seeking authority
to sell substantially all of its assets
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Chrysler: What Happened to the
Sale Proceeds?
• $10 billion first lien facility provided by syndicate
of lenders
• $2 billion second lien facility provided by Daimler
Financial and Cerberus
• $4 billion third lien facility provided by US
Treasury
• $4.96 billion DIP financing provided by US
Treasury and Export Development Canada
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Chrysler: So What is the Issue?
• Equity owners of “New Chrysler”
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VEBA owns 55%
US Treasury owns 8%
Export Development Canada owns 2%
Fiat owns 20%
• What rights would these parties have had in a
plan?
• Bankruptcy Court and secured lenders have no
say over who owns the purchaser
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The “Real” Issue: What are Your
Rights under the Loan Documents?
• Consent to Sale
• Credit Bid
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Your Rights under the Loan
Documents: Background
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Origins of syndicated loan structure
Appointment of Agent
Agent’s discretionary rights
Rights of individual Lenders to enforce rights
Amendments and Waivers
– Forgive principal
– Extend maturity
– Release all or substantially all of collateral or
guarantees
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Rights under the Loan Documents:
The Beal Case
• New York Court of Appeals March 2007
• Parent gives a “keep-well” agreement
• Agent and Lenders with 95.5% of debt enter into
settlement agreement
• Settlement agreement includes forbearance from calling
on keep-well agreement
• Beal holds out—starts unilateral action to collect payment
under keep-well agreement
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The Beal Case: NY Court of Appeals Says…
“Collective Enforcement Mechanism”
• For Beal:
– Keep-well agreement says it is for the benefit of and shall be
enforceable by the Agent and each Lender
– Credit Agreement says no amendment, modification or waiver so as
to release the Sponsors under the Keep-Well Agreement…without
the consent of all Lenders
• For Agent and Other Lenders:
– Credit Agreement says, if any Event of Default occurs…Agent, upon
direction of Required Lenders…shall exercise any or all rights and
remedies…, including recover judgment on the Keep-Well Agreement
– Credit Agreement authorizes Agent to act on behalf of Lenders and to
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exercise powers delegated to it
Consent to Sale: Enforcement Provisions
• Chrysler (May 31, 2009)
– Each lender designated Agent to act as such lender’s agent in
exercising powers delegated to Agent
– During default, Agent has power to take any Collateral Enforcement
Actions including to realize upon the Collateral
– No secured party will take any Collateral Enforcement Action
without consent of Agent
• Metaldyne (August 12, 2009)
– Each lender appoints Agent to take such action on its behalf as are
delegated to the Agent by terms of the Loan Documents
– Agent may exercise all rights afforded a secured party, including the
right to sell or otherwise dispose of the Collateral
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Amendment Provisions v. Enforcement Provisions
• Dissenting lenders argue that credit agreement says no
waivers or amendments to release all or substantially all of
Collateral without the written consent of all lenders
• Courts say:
– Transfer of purchased assets does not require any amendment or
waiver
– Loan documents authorize Agent to consent to sale without need to
amend or modify the loan documents
• Chrysler: “Restricting enforcement to a single agent to
engage in unified action for the interest of a group of lenders,
based upon a majority vote, avoids chaos and prevents a 27
single lender from being preferred over others”.
What about Credit Bidding?
GWLS Holdings
• All first lien lenders except Grace Bay consent to sale of all assets under
Section 363 and purchase with credit bid
• Grace Bay: Credit Agreement says: All Lenders must consent to release
of substantially all of the collateral
• Agent: Security Agreement authorizes Agent to exercise rights and
remedies under applicable law
• Court says:
– Right to exercise rights and remedies under applicable law includes
credit bid under Section 363(k)
– Exercise of remedies is not amendment or waiver based on Security
Agreement
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THE END
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