News for People Tracking Distressed Businesses DECEMBER 2017 VOLUME 31, NUMBER 11 Latest Reports: Year in Review • Bankruptcy Professionals by Julie Schaeffer Refl ect on 2017 There were 6,016 Chapter 11 filings through November 2017, versus 6,179 at the same • Third Circuit Says Received point in 2016. But beyond the numbers, how did 2017 restructuring activity compare to prior years? What were the significant events? And what sectors dominated? Equals Physical Possession We asked six bankruptcy professionals: Thomas Califano, co-chair of DLA Piper’s • Lenders Increasingly U.S. restructuring practice; Benjamin D. Feder, special counsel at Kelley Drye & Become Troubled Retailers’ Warren LLP; Harve Light, a managing director at Conway MacKenzie; Michael J. Musso, a managing director at Conway MacKenzie; Paul Share, a managing director at New Owners ConwayMacKenzie; and Michael J. Venditto, a partner in the financial industry group continued on page 2 Research Report: Who’s Who in Toys-R-Us Keep The Receipt Third Circuit Courts Defi ne Receipt for § 503(b)(9) Purposes Special Report: by Randall Reese Sources of Debtor-in- Those shipping goods to companies in distress are entitled to administrative expense Possession Financing status for the value of goods “received by the debtor within 20 days before” the debtor’s bankruptcy filing pursuant to § 503(b)(9) of the Bankruptcy Code. The question of Worth Reading: precisely when goods are deemed to be “received” for the purposes of determining whether a creditor is permitted to recover the value of the goods as an allowed administrative One Hundred Years of Land expense claim under § 503(b)(9) was addressed in a recent U.S. Court of Appeals decision. Values in Chicago The Third Circuit acknowledged in World Imports that its decision “has important ramifications for a creditor that sells goods to a debtor soon before the debtor files a Special Report: continued on page 2 Outstanding Restructuring Lawyers – 2017 Lenders: The New Owners by Julie Schaeffer Special Report: There’s a new pattern emerging in retail bankruptcies. Recoveries in Retail “The new breed of lenders is increasingly willing to become owners,” says Kenneth A. Bankruptcies Rosen, partner and chair of the bankruptcy, financial reorganization, & creditors’ rights group at Lowenstein Sandler LLP. “It doesn’t scare them in the least.” In the old days, the primary question in a retail Chapter 11 was how you could Gnome de Plume: reorganize the business in a traditional way by closing stores, warehouses, and distribution The Royal Bank of Scotland centers. Indeed, until this year, most bankrupt retailers, such as American Apparel, The and its Global Restructuring Limited, and Sports Authority, were dismantled. Their intellectual property and other Group assets were acquired, and at times some of their brands were sold online, but they ceased to continued on page 2 www.turnaroundsworkouts.com 2 Turnarounds & Workouts December 2017 Year In Review, from page 1 Receipt, from page 1 Lenders, from page 1 at Reed Smith LLP. Chapter 11 bankruptcy petition.” operate as a going concern because no one From what they told us, in many ways, The appellants, creditors Haining saw value in assuming costly store leases. 2017 brought more of the same: activity Wansheng Sofa Company and Fujian Today, the norm in a typical retail in retail and energy. But there were also Zhangzhou Foreign Trade Company, were Chapter 11 is becoming a debt-to-equity some new considerations, including Chinese companies that sold furniture conversion as creditors, as well as activity in healthcare and the changing and similar goods to the debtor – World landlords and vendors, are seeing an dynamic of the private-equity market. Imports, Ltd. – in the ordinary course of opportunity to minimize their losses by business. The goods were shipped via cashing in on whatever value is left. Chapter 11 Filings Nationwide common carrier from China to the U.S. Certainly, a quick sale of assets is still popular. Many lenders, whether they are 2017 YTD 6,016 “free on board” (FOB) at the port of origin. As such, the risk of loss or damage bondholders or banks, do not have the 2016 6,591 passed to World Imports upon transfer at patience to spend years in bankruptcy 2015 6,651 the port. or the inclination to spend a fortune on 2014 6,787 Haining and Fujian both sought to have legal and accounting fees. “In many of their claims relating to those shipments my retail bankruptcies, the lender will tell 2013 8,577 allowed as administrative priority claims us we have 60 to 90 days to find a buyer, 2012 10,057 under 11 U.S.C. § 503(b)(9). Section and if we can’t find a buyer, we have to 2011 11,459 503(b)(9) grants administrative priority liquidate,” Rosen explains. Source: ABI., as of November 2017. to claims if: “(1) the vendor sold ‘goods’ But more and more often, especially to the debtor; (2) the goods were received in mega-cases such as the Toys R Us Overall, what did restructuring by the debtor within twenty days [before bankruptcy, where institutional debt that activity look like in 2017? the bankruptcy] filing; and (3) the goods was used for acquisition purposes is still were sold . in the ordinary course on the balance sheet, the debt-to-equity Venditto: The trend to pre-negotiated of business.” The parties agreed that conversion is popular. cases has helped reduce the length Appellants shipped the goods from China “In highly leveraged retailers, where a and cost of Chapter 11 cases. Even “more than 20 days before the bankruptcy sale to a third party is not a viable option, liquidations have benefitted from pre- filing,” and that World Imports “took and the debt is the fulcrum security, filing coordination by the debtor and physical possession of the goods in the the best option for the debt holders is a lenders. This increases the significance United States fewer than 20 days before debt for equity conversion,” says Perry of the first-day-orders, which can the bankruptcy filing.” However, they Mandarino, a senior managing director at significantly impact case outcomes. disagreed on which action – shipment B. Riley FBR, Inc. “The other alternative or physical acceptance – constituted is a liquidation, which would most likely What sectors saw the most “receipt” under § 503(b)(9). be less favorable economically. So, in restructuring activity? Why? Circuit Judge Hardiman, writing the event of a sale not happening, debt- in his opinion for the Third Circuit, to-equity conversion will be the ‘norm’ if Feder: The turmoil in the retail explained that the Bankruptcy Code the liquidation option is less appealing.” industry continues unabated, and ongoing doesn’t define the word “received,” so “What makes these retail cases unique changes and uncertainty in other sectors the Court normally construes it “in accord is that they have a lot of institutional debt, such as media and healthcare are giving with its ordinary or natural meaning.” and the reorganization is a question of rise to a great deal of activity. Although the dictionary definitions are not how much of the debt will get converted to Musso: Without question, the identical, Judge Hardiman said that all the equity,” says Rosen. A retailer might have changing retail landscape took front and definitions require physical possession. multiple tiers of debt, he explains. Perhaps center headlines. It appears that this is As a result, applying the definitions to § tier 1 is secured debt, tier 2 is subordinated a trend that will continue in 2018. Its 503(b)(9), a debtor must “take” goods into debt, and then there is institutional debt, ripple effect will continue to reach far into its “possession,” “custody,” or “hands” in typically bonds. “Whether the bonds are other industries especially in Consumer order to receive them. secured or unsecured, the only question Packaged Goods and Consumer Products. The court further stated that many in the case is how far up the balance sheet The battle is on between Wal-Mart and cases have looked to Article 2 of the you will go to convert debt to equity,” Amazon, and consumers will ultimately UCC when analyzing § 503(b)(9) claims. says Rosen. be winners as this ultra-competitive The legal and dictionary definitions Rosen believes that in the Toys R Us environment will lead to better shopping correspond with the definition found in case, the equity will be substantially continued on page 5 continued on page 5 continued on page 5 www.turnaroundsworkouts.com December 2017 Turnarounds & Workouts 3 Who’s Who in Toys “R” Us’ Bankruptcy Cases by Carlo Fernandez Toys “R” Us, Inc. is an American toy with their stakeholders. Prime Clerk LLC is the claims and and juvenile-products retailer founded in The Company intends to emerge from noticing agent. 1948 and headquartered in Wayne, New chapter 11 before the 2018 holiday season. Jersey, in the New York City metropolitan U.K. PROCEEDING area. CCAA APPLICANT News reports emerged in early- Toys “R” Us and certain of its U.S. Grant Thornton LLP is the monitor December 2017 saying that Toys “R” Us subsidiaries and its Canadian subsidiary appointed in the CCAA case, with the is preparing to close 26 of its 105 stores sought Chapter 11 protection (Bankr. engagement headed by Michael Creber, located in the U.K. Toys “R” Us wants E.D. Va. Lead Case No. 17-34665) to as senior vice-president. to do that under the terms of a company restructure $5 billion of long-term debt Cassels, Brock And Blackwell LLP is voluntary arrangement, but a reported and establish a sustainable capital the Monitor’s Canadian counsel, with the demand by the Pension Protection Fund structure.