🔥NRA. Greensill. Hertz. Sequential Brands.🔥
Lots of Drama Unfolding in Bankruptcy Courts Across the Country
Public service announcement: for the avoidance of doubt, we just want to state upfront that nothing that follows is meant to be political commentary in any form or fashion.
When the National Rifle Association of America and its affiliate Sea Girt LLC (lol) first filed chapter 11 bankruptcy cases in the Southern District of Texas back in January, we titled our initial coverage of it, “🔥NRA. LOL.🔥,” which … let’s be honest … basically sums things up. Because, seriously, folks, it was a f*cking stupid filing premised on a f*cking stupid affiliate spun up out of thin air for the dubious purpose of filing in Texas. Contemporaneous with the f*cking stupid filing came a f*cking stupid press release where the NRA flicked off the New York State Attorney General Letitia James, a f*cking stupid poke-the-bear tactic that she saw right through and is now primed to throw right in the NRA’s face. It was, as we said previously, an epic “own the libs” moment that was … well … f*cking stupid. Of course, Texas Governor Greg Abbott celebrated the theatrics at the time, exhibiting f*cking stupid ignorance about bankruptcy law and the concept of “bad faith filings.” Yesterday, he was curiously silent on the subject. When you compound f*cking stupid with f*cking stupid you just end up with a whole lot of f*cking stupid. And since the integrity of the bankruptcy system is the flavor of the year, we’re not very surprised that, after some f*cking stupid testimony in court and some even more f*cking stupid leaked video of Wayne LaPierre being a stupid bad shot out of court, Judge Hale booted this f*cking stupid ploy to the curb.
Prof. Jacoby @melissabjacobyOver the last 4 months, NRA got its chance to explain why it was in bankruptcy. Turns out that the initial press release pretty much captured the situation. https://t.co/xtPHro19Vy
Back in January we wrote:
All of this leaves us with some questions.
First, what’s the deal with the affiliate debtor? It’s a f*cking mockery, that’s what. The entity mysteriously appeared less than two months ago and appears to be a shell with little to no assets or liabilities. It’s questionable whether anyone actually works there but we suspect not. We’d expect, therefore, a challenge to venue. That said, we’ve seen so much venue-related BS over the years (looking at you SDTX and White Plains) that “venue shopping” is something that’s fun to talk about in academic circles but often has no real world ramifications. Moreover, Texas — judging by the Governor’s response — seems more than happy to welcome the NRA there. Query whether the judge will be as welcoming. Will anyone care that the NRA has virtually zero pre-existing connection to the state whatsoever? Probably not. 🤷♀️
Indeed the action remained in Texas.
Then there’s the issue of “good faith.”
Here’s where the press release is particularly fascinating. In the same breath, the NRA says it is “dumping New York,” “there will be no immediate changes to the NRA’s operations or workforce,” “[t]he move [to Texas] comes at a time when the NRA is in its strongest financial condition in years,” and there’ll be “a plan that provides for payment in full of all valid creditors’ claims” with the organization “uphold[ing] commitments to employees, vendors, members, and other community stakeholders.” Soooooo, the bankruptcy is foooooor what exactly? Oh, right. Dumping New York. They told us that. The NRA might as well blast in flashy neon lights that it’s operating in bad faith, filing solely to circumvent a governmental authority’s power. Will it matter? Probably not. (emphasis in original)
But it did!! We were too cynical for our own good.
Yesterday in an “Order Granting Motions to Dismiss,” Judge Hale noted that “…it has become apparent that the NRA was suffering from inadequate governance and internal controls.” This goes to the heart of the NY AG’s effort to enforce the law against the NRA and its leadership! And if successful, the end result (and stated goal) of the NY AG’s efforts would be the dissolution of the NRA. And so the Court underscored:
The question the Court is faced with is whether the existential threat facing the NRA is the type of threat that the Bankruptcy Code is meant to protect against. The Court believes it is not. For the reasons stated herein, the Court finds there is cause to dismiss this bankruptcy case as not having been filed in good faith both because it was filed to gain an unfair litigation advantage and because it was filed to avoid a state regulatory scheme. The Court further finds the appointment of a trustee or examiner would, at this time, not be in the best interests of creditors and the estate.
The NRA apparently offered testimony that was all over the place. They offered a variety of reasons for the bankruptcy filing — from (a) controlling the cost of ongoing litigation (not just the NY AG action) to (b) dealing with banking and insurance issues to (c) effectuating a move from Texas to New York to (d) streamlining operations with the benefit of the bankruptcy “breathing spell.” Judge Hale didn’t bite. Why not? So what were the reasons the Court relied upon?
First, it appears that Mr. LaPierre unilaterally decided to file for bankruptcy without the knowledge of the rest of management or the board of directors. Second, testifying witnesses were in consensus that “the NRA is in its strongest financial condition in years and intends to pay creditors all allowed claims in full.” The NRA’s former CFO and current acting CFO testified that the NRA is capitalized enough to fund all litigation. Moreover, the NRA’s general counsel apparently failed to establish that there was any immediate threat of dissolution or other litigation which might reasonably place a financial strain on the company. There was also no near-term existential threat: Mr. LaPierre testified that the NRA had not been put on notice that the NY AG intended to seek a receiver. All of which, in the aggregate, indicated that there was no imminent financial distress and only speculative near-term legal risk that my impact the financials. Here’s some testimony taken from the Order:
That’s pretty damn clear. And so the Judge concluded:
The evidence does not support a finding that the purpose of the NRA’s bankruptcy filing was to reduce operating costs, to address burdensome executory contracts and unexpired leases, to modernize the NRA’s charter and organization structure, or to obtain a breathing spell. While some of these could be added benefits of going through a bankruptcy process, they do not appear to have been significant considerations for the NRA.
Based on the statements of counsel and the evidence in the record, the Court finds that the primary purpose of the bankruptcy filing was to avoid potential dissolution in the NYAG Enforcement Action.
So then, thanks to late 20th century case law that stands for the proposition that “a Chapter 11 petition is not filed in good faith unless it serves a valid bankruptcy purpose,” Judge Hale had to consider whether there was such a valid bankruptcy purpose, keeping in mind whether “the petition [was] filed merely to obtain a tactical litigation advantage.” Thanks to Mr. LaPierre, it wasn’t hard to conclude that it was.
Interestingly, Judge Hale highlights the high burden the NY AG must fulfill to achieve the dissolution of the NRA. A successful pursuit by the NY AG is no fait accompli (though this filing may have actually made the case easier!). The court noted:
A dissolution that requires this showing is not the type of dissolution that the Bankruptcy Code is meant to protect against. The Court is not in any way saying it believes the NYAG can or cannot make the required showing to obtain dissolution of the NRA, but the Court is saying that the Bankruptcy Code does not provide sanctuary from this kind of a threat.
For this reason, the Court believes the NRA’s purpose in filing bankruptcy is less like a traditional bankruptcy case in which a debtor is faced with financial difficulties or a judgment that it cannot satisfy and more like cases in which courts have found bankruptcy was filed to gain an unfair advantage in litigation or to avoid a regulatory scheme. The purpose of this bankruptcy filing may not have been to end the NYAG Enforcement Action immediately, but it was to deprive the NYAG of the remedy of dissolution, which is a distinct litigation advantage. This differs materially from the prescribed parallel proceedings structure for regulatory actions where regulators can obtain monetary judgments in one forum and then are required to have any claims treated through a bankruptcy process in that it is the NRA’s goal to avoid dissolution and subvert the remedy provided for under New York law entirely through this Chapter 11 case. The Court does not know what specific mechanism the NRA plans to use, but its intention is clearly to “take dissolution off the table.”
The NY AG wasted no time taking a victory lap:
Big picture? Lots of people have been messing with the bankruptcy process lately, doing all kinds of f*cking stupid stuff. The “process” is finally fighting back.
🔥Greensill Capital = DRAMA!🔥
Back on March 25, 2021, Greensill Capital Inc. (the “Debtor”) filed for chapter 11 bankruptcy in the Southern District of New York. The company is the direct subsidiary of Greensill Capital Management company (UK) Limited(“GCUK”) and the indirect subsidiary of ultimate parent, Greensill Capital Pty Limited; it is the direct parent of Finacity Corporation (which we’ll come back to in a moment). All together, the Greensill situation is a complete clusterf*ck — as you likely know from extensive Financial Times coverage of everything Greensill…
…wait…let’s take a moment to just revel in the sheer bounty of FT coverage on the matter…seriously, look at that ⬆️, they’re cranking out a new story, like, every 9 hours on the subject!
Greensill was in the business of arranging factoring and reverse factoring programs around the world. Here is a company-provided description of the business:
The Debtor constituted Greensill’s US presence and sold these ⬆️financial products to clients and investors in the Americas, with revenue therefrom flowing up the corporate org chart to GCUK.
Unfortunately for Greensill, however — and, by extension, the Debtor — a lot of company-wide funding arrangements went sour, triggering a domino effect that first sparked a UK administration filing, a company-wide liquidation and, by extension, the US-based bankruptcy filing. Per The Financial Times:
Greensill Capital, a SoftBank-backed company that says it is “making finance fairer”, has had a string of its clients default on their debts in high-profile corporate collapses and accounting scandals.
The London-based finance group, which employs former British prime minister David Cameron as an adviser, arranged funding for scandal-plagued hospital operator NMC Health and controversial “rent-to-own” retailer BrightHouse, which have both fallen into administration in recent weeks.
Greensill, which received $1.5bn of investment from Japanese conglomerate SoftBank’s Vision Fund last year, also provided financing to Agritrade, the Singaporean commodities trader that collapsed earlier this year amid accusations of fraud from its lenders.
These corporate collapses mean Greensill and a group of insurers are having to cover losses in funds managed by Credit Suisse.
Greensill Capital filed for insolvency on Monday after losing insurance coverage for its debt repackaging business and said in its court filing that its largest client, GFG Alliance, had started to default on its debts.
Cause ⬆️. Effect ⬇️.
The Debtor is a much smaller piece of the overall Greensill puzzle: it listed 50-99 creditors, $10mm-$50mm in assets, and $50mm-$100mm in liabilities on its petition. It has no revenue and no secured debt. Prior to the leadup to bankruptcy, it had just one director, Alexander Greensill, and its top 20 list of creditors is comprised of employees. It is fully redacted though we know at least two of the names from the UST’s appointment of a 2-member official committee of unsecured creditors. To effectuate the filing, the Debtor added an independent director, Jill Frizzley, to its board (PETITION Note: she effectuated the filing of the petition) and hired Togut Segal & Segal LLP as legal and, after the filing, GLC Advisors & Co. LLC as investment banker. The purpose of its filing is insulate the Debtor from the general Greensill global sh*t show, minimize liabilities (PETITION Note: the Debtor filed a rejection motion on day one which encompasses both its lease in NYC, a WeWork location Chicago, and other contracts) and sell its valuable assets (read: Finacity) for the benefit of its creditors and shareholder. It secured $2mm of DIP financing from The Peter Greensill Family Trust to pursue this course.
Within days of filing, the Debtor filed a motion seeking approval of bidding procedures and approval of stalking horse protections on behalf of a stalking horse purchaser, the Katz Parties, which includes Finacity’s original founder and CEO. The bid is for $24mm which includes $3mm of cash, and the release of some $21+mm of earn-out payments still owed to the Katz Parties from the 2019 sale of Finacity to the Debtor. That last bit is interesting because, if ultimately successful, it will eliminate a massive general unsecured claim that dwarfs the rest of the unsecured claim pool and, consequently, will enhance general unsecured creditor recoveries. The Debtor initially sought a April 20th bid deadline with an auction on April 23 and a sale hearing on April 27. The bankruptcy court entered an order approving the procedures and stalking horse protections on April 6.
The next day the UST’s office appointed a three-person creditors’ committee. The committee then chose Arent Fox LLP as its counsel and Cohn Reznick LLP as its financial advisor.
On April 15, the Debtor filed a notice of revised dates and deadlines relating to the sale of Finacity, making the bid deadline May 5, the auction May 7, and the sale hearing May 12. Meanwhile, the composition of the UCC kept changing: it turned over for a third time on April 19. That must have been fun for everyone.
But the fun merely followed! Things got weird. On April 30, the UCC filed a motion to extend the sale process and push the bid deadlines, auction date, and sale hearing date. They wrote:
…it has come to the Committee’s attention that wrongful conduct and flaws in the sale process are chilling bidding. The Committee requests a reset of the sale timeline and remedial measures to bring bidders back to the process. Without these curative steps, the Debtor’s ability to maximize value will be compromised and general unsecured creditors, consisting largely of former employees, will feel the brunt of the wrongful conduct and irregularities in the sale process.
Irregularities? In a case that kicked off due to irregularities?! Stop the insanity!!
The UCC continued:
Most troubling – and the immediate cause for expedited relief – is that the Committee has learned of specific wrongful conduct by Finacity management this week alone that has tainted the sales process. At this point, the question is not whether damage has been done. The question is whether the damage can be repaired….
The UCC went on to cite (i) correspondence from a Finacity senior executive to a prospective bidder that informed said bidder that it was “not a good fit,” (ii) aggressive, adversarial and. unprofessional behavior towards a second potential bidder, (iii) slow processing of NDAs to the detriment of the expedited sale process, (iv) poor messaging that appears to be “artificially inflat[ing]” any required entry bid, and (v) some inside baseball shenanigans — including special discounts (in exchange for IP transfers) — that favor the Katz Parties to the detriment of other prospective bidders (without consideration for whether the Katz Parties are subject to additional scrutiny on account of, among other things, potential preference exposure related to earn-out payments paid in conjunction with the sale). They write:
The totality of the circumstances have created an environment that is chilling bidding and positioning the Stalking Horse to re-acquire Finacity for a mere $3 million cash, despite the fact that Finacity is performing better than when the Debtor acquired it for a price tag exponentially higher less than two years ago.
The UCC proposed pushing everything to mid-June. The Debtor did not agree to those dates but they did push the bid deadline to May 10, rendering the UCC’s objection moot. A member of the UCC subsequently said “f*ck this sh*t” and quit, leaving just a two-person committee. Ok, maybe it wasn’t that dramatic but you get the idea. This UCC has had more change than J.Lo has had long-term relationships that go nowhere.
Sh*t. We’ll take this drama over that drama any day of the week.
Anyway, yesterday the Debtor filed a notice indicating that “…the Debtor has received more than one ‘Qualified Bid,’” and therefore pushed the auction date — yet again! — to May 14 with a proposed sale hearing on May 21.
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⚡️Update: Hertz Global Holdings Inc. ($HTZGQ)⚡️
As discussed last week, this week is Hertz Auction Week! 🎉👏🏼
And it sounds like it was a hoot: the auction commenced on Monday May 10 at 10:30am ET and, as indicated in a motion filed late on Tuesday by the Hertz Debtors to extend certain deadlines in the plan sponsor bidding order, it “proceeded uninterrupted” for more than 24 hours. In fact, it reportedly lasted well into last night.
The upshot? Word is that the group consisting of Certares Opportunities LLC and Knighthead Capital Management LLC will prevail:
At the time of this writing (11:15pm ET Tuesday), the final details of the proposal have not yet been revealed but the Hertz Debtors have apparently chosen that group — the initial plan sponsors —as their winner. Consequently, the Hertz Debtors ought to be well on their way to satisfying their stated goal of being out of bankruptcy next month. They win. Certares/Knighthead win. And it looks like shareholders may actually win too. 🤯
More to come.
⚡️Update: Sequential Brands Group Inc.⚡️
In Sunday’s coverage of Sequential Brands Group Inc. ($SQGB), we quipped:
November covenant waivers along with growing optimism about an eventual reopening pushed the stock back to mid-teens by January, where it remained generally non-responsive until the (nearly bi-weekly!) rolling waivers. But then our resident quant intern pointed out a hilarious trend:*
Yesterday continued the trend. The company announced yet another default waiver extension until June 7th. How did the stock react? Consistently with how it has reacted in the past to waiver announcements.
It’s hard not to love these markets. 😂
We have updated our compilation of a$$-kicking resources covering restructuring, tech, finance, investing, economics and disruption. You can find the full compilation here.
Adam Chonich (Managing Director) joined Portage Point Partners LLC from EY.
Adam Shiff (Partner) joined Fried Frank Harris Shriver & Jacobson LLP from Kasowitz Benson Torres LLP.
Benjamin Tennenbaum (Associate) joined Lincoln International from FocalPoint Partners.
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Gregory Pesce (Partner) joined White & Case LLP from Kirkland & Ellis LLP.
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Jennifer Meyerowitz (Executive Vice President) joined Stretto from Keen-Summit Advisors.
Paul Harner (Partner) joined Sheppard Mullin Richter & Hampton LLP from Ballard Spahr LLP.
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Accordion Partners, a private equity-focused financial consulting and technology firm, on acquiring Mackinac Partners
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