00:00:00.810 - 00:00:26.879

This program is brought to you by Emory University. Well, good afternoon and welcome. I'm Robert Shapiro, Dean of Emory Law School, and I'm so happy that you could be with us this afternoon for this wonderful program. I want to start by saying some thank yous to

00:00:26.879 - 00:00:42.369

some of the people who made this program possible. Uh, first to the fellows of the American College of Bankruptcy from Atlanta who are instrumental in bringing this program here at Emory Law School. It's something we've been looking forward to for a long time and we're so

00:00:42.369 - 00:01:02.080

excited it could happen this year. I'd like to mention a few people by name, uh, Jim Pardo, we call him the other professor Pardo, uh, retired from King & Spalding, longtime adjunct faculty professor here. The Honorable Joyce Bihary. Dennis Connolly of Alston and Bird. Eric Anderson of

00:01:02.080 - 00:01:19.989

Parker, Hudson, Rainer, and Dobbs, uh, and, uh, Jess Austin, a distinguished alumnus of Emory Law School, uh, partner at King and Spalding, and will be our moderator here. Now at Emory I'd like to add some thank yous as well, uh, to Eric Blackwell of our development

00:01:19.989 - 00:01:35.500

alumni relations team who'll be responsible for the wonderful reception that we're gonna have after this program. I hope you can all stay, uh, to Corky Gallo and Scott Andrews who are always responsible for helping with all of our AV technology and who are videotaping this program.

00:01:35.930 - 00:01:52.930

Danesh Modi, head of our operations division, who helped make all these arrangements possible and most especially. Uh, to the Robert T. Thompson Professor of Law, Professor Rafael Pardo, who heads all that we do with bankruptcy at Emory Law School, uh, and we're so grateful, uh, that

00:01:52.930 - 00:02:11.639

he's here and made this program possible. I do wanna mention that at Emory Law School, we emphasize a curriculum that integrates theory and practice to prepare our students for that changing legal world they'll face when they graduate. Through the students we educate, through the service we

00:02:11.639 - 00:02:31.809

perform, through the ideas we produce, uh, we seek to affect positive transformation in the world. And our bankruptcy program is truly a distinctive strength of Emory Law School and a very important way in which we realize our mission. Our bankruptcy program exemplifies our commitment to integrating

00:02:31.809 - 00:02:50.279

theory and practice. We're very proud of the connection it brings us between our students, our faculty, and the practicing bar and bench in Atlanta. The program highlights the outstanding faculty strength we have faculty like Professor Pardo, and also the wonderful students we have here, the

00:02:50.279 - 00:03:03.320

students who help us with the Emory Bankruptcy Developments Journal, and in so many other ways as well and I just want to highlight in addition to the EBDJ, our students are involved in bankruptcy and other areas as well. I hope you know about the

00:03:03.320 - 00:03:19.240

Emory Law School Supreme Court advocacy project through which our students bring cases to the United States Supreme Court. Just last spring, the first case that they brought and had the court accept was fittingly a bankruptcy case, Bullock versus BankChampagne, dealing with

00:03:19.240 - 00:03:33.169

the important topic of defalcation in bankruptcy, and the Emory students took that case to the Supreme Court and won, 9 to 0, giving a great victory to Randy Bullock. So we're proud of all that our students and faculty do with regard to bankruptcy.

00:03:34.529 - 00:03:49.559

Now of course as a leader in bankruptcy law and practice we're especially proud of our collaboration with the American College of Bankruptcy and going forward we hope that programming with the American College will continue and will provide other great opportunities for our students to be involved

00:03:49.559 - 00:04:05.339

in co-curricular activities and we're very proud and pleased about that partnership today and in the future. Now with regards to today's program, as you know, it deals with a timely and important topic of Section 363 sales, which has been the focus of recent scholarly

00:04:05.339 - 00:04:17.975

controversy and important practice controversies as well. I asked being a constitutional law guy myself, I didn't know too much about this, so I asked Professor Pardo if he could tell me something about it. Being a good academic, he gave me an article to read,

00:04:18.144 - 00:04:29.265

asked me to write a report on it, so I did my best, and then I was actually trying to work on something I read about ice cube sales or something like that, melting ice cubes, and I was actually working on some kind of

00:04:29.265 - 00:04:41.989

joke about Section 363 and melting ice cubes and the cold weather we've been having, but I tried it out of my 17 year old daughter at breakfast this morning and got the old uh rolling of the eyes and the dad give it up so I did.

00:04:42.220 - 00:04:58.000

So, with that, I won't burden you with that, but I will say we're so grateful to you all for being here today, and now it's my great pleasure to turn things over to our moderator Jess Austin. Please join me in welcoming Jess. Dean,

00:04:59.410 - 00:05:24.220

thank you Dean Shapiro. I am Jess Austin and I um am as Dean noted, I'm a partner at King and Spalding, The panel we have here today, I think adding it up probably represents 125 years, collective years of experience in bankruptcy, restructures, and lots

00:05:24.220 - 00:05:39.989

of us have done plenty of 363 sales. And we tried to mix this panel up because those of you are that I practice with know that I come at it from representing the senior secured lenders in many instances. But here we have Bill Beddingfield,

00:05:40.279 - 00:05:59.359

on the far right, Bill is managing director for ING Capital, here in Atlanta. He's been in that position since, I think 2012, does both ABL and cash flow secure type lending. So he's our lender representative on the panel. To

00:05:59.359 - 00:06:17.970

my right, we have Greg Rayburn. He's principal with Kobi Partners. Greg often will serve in the capacity of chief restructuring officer, for companies. He's done that for many years. I think initially starting out, I believe was with Anderson's consulting restructure group

00:06:17.970 - 00:06:37.369

here in Atlanta. His most recent and one that's an ongoing engagement for him right now is he's been the chief executive officer, Chief restructuring officer for Hostess Brands. To my left is Jim Decker. Jim is now with Guggenheim Partners.

00:06:37.589 - 00:06:56.640

Jim is our investment banking representative on the panel. He started out, I think, one of his, early investment banking side was Houlihan Lokey's, worked in the space of both buy and sell, businesses both inside and outside of bankruptcy. So he brings

00:06:56.640 - 00:07:16.429

that type of perspective to this panel. And lastly, we have Neil Herman. Neil is a senior bankruptcy partner at Morgan Lewis. Neil has, he and I've done many cases together. Generally he's been representing either the second lien lender or a buyer

00:07:16.429 - 00:07:30.329

in the assets of the company in the instances where he was representing the second lien lender, they were also the buyer of the company, which is one reason we're probably having the conversations which we are today. So Neil brings that piece of and that focus

00:07:30.329 - 00:07:52.290

to this panel. The topic we put put together is 363 sales. And we've put it together by saying it's the new, is it the new M&A and is there a demise of the Chapter 11 plan? And the focus of that has been because

00:07:52.290 - 00:08:10.929

when you look in the newspapers, you read about companies filing, it seems that most of the companies that we are experiencing the days of distress in Chapter 11 are going through a very quick sale processes. How I want this panel to run today, how

00:08:10.929 - 00:08:28.910

we've tried to set it up is I want to talk about we're trying to present the ideas around five different kind of areas. First, we'll talk about your standard M&A transaction. Standard in the sense that it's not under Section 363 of the bankruptcy code.

00:08:29.880 - 00:08:49.609

And as a practical matter, how does that differ from doing a sale or an asset acquisition inside bankruptcy? We then talk generally about 363 sales and distressed M&A's. That's the kind of the buzzword in the marketplaces as to 363 sale when you're selling all

00:08:49.609 - 00:09:08.900

or substantially all of the company's assets. We then will move to what I think's going to be or hope to be the bulk of the discussion from the panel, which is are we really seeing more 363 sales in lieu of a chapter 11 plan? And if

00:09:08.900 - 00:09:24.140

that is the case, is there a reason for that? We then then want to move to talking about that, OK, if you've done a 363 sale, how do you then get rid of the case? And we're not gonna spend a lot of time on

00:09:24.140 - 00:09:37.419

it, but you know, people tend to think that, well, the, you know, we've sold all the assets, you know, let's move on. Well, that bankruptcy case still exists. It's kind of like the same concept that if you confirm a plan and people say, well, I've exited

00:09:37.419 - 00:09:55.320

bankruptcy, you still have bankruptcy cases rolling on for years and to some of the judges chagrin, too many years, I suspect. And then lastly, we just want to touch on what do we as the practitioners, what do these people see as whether this,

00:09:55.450 - 00:10:10.219

if this is a perceived trend of 363 sales, is that something that's going to continue or we're going to see more of those? What do we think is gonna be coming up? What might well be the next cycle, restructuring cycle. One

00:10:10.219 - 00:10:25.070

thing that we won't be doing, I don't anticipate is this is not gonna be a, we're not gonna be talking about comparative legal cases. Like what did this case, do in the sense of the decisions I'm hopeful that this panel and we tried to put it

00:10:25.070 - 00:10:39.190

together to address on a very practical basis what are the issues that are driving these cases so that you, if you find yourself in these cases, have something to think about as to which way you may go. What, why, why it is going to be the

00:10:39.190 - 00:10:57.820

way it may ultimately come up to employ a 363 cell? One housekeeping matter is that if any of you want CLE credit, we do have a sign up sheet outside. So just put your name down with your relevant bar information and

00:10:57.869 - 00:11:15.679

our firm is taking responsibility for submitting that to Georgia Continuing Legal Education to obtain the appropriate CLE credit. So with that we're gonna get started. Lastly, we will leave time at the end for some question and answer and as the dean noted, there

00:11:15.679 - 00:11:31.070

will be a a reception following the presentation. I think right outside the Toll Auditorium. So we'll go ahead and get started and hopefully it now becomes easy for me because all I've got to do is throw out a few questions

00:11:31.070 - 00:11:49.450

and I think these people can talk. I've never seen them to be reticent in any time I've had opportunity to spend with them before. Jim, from an investment banker standpoint, as someone who actually processes some of these sales, can you give a general

00:11:49.450 - 00:12:06.510

outline description if you think it's different, how, uh, M&A outside of a 363 sale outside of a bankruptcy context. What are the differences that people kind of are looking at? OK. Well, I came up with 17 thoughts, and this is not an exhaustive list. It

00:12:06.510 - 00:12:24.429

is, it is a long list, but it's not meant to be everything. In general, and guys, please jump in here Now that you've gotten through your 17 points, Jim, let's go...We wouldn't dare jump into that. I mean to generalize, um, the biggest difference between

00:12:24.429 - 00:12:42.159

a distressed M&A transaction and a 363 or otherwise, a distressed transaction, I distinguish between there are distressed transactions that happen quite frequently that are done out of court, and they have many similar dynamics more akin to a 363 sale than they would a

00:12:42.159 - 00:13:00.380

regular M&A transaction. I personally am indifferent as to whether you implement through Chapter 11 or outside of court. Obviously you avoid, paying guys like these folks here a lot of money if you can do it outside of court. But generally the biggest

00:13:00.380 - 00:13:22.500

demarcation point between distressed and non distressed is financial performance. Um, when you are financially distressed, you're in a situation where the company is being compelled to sell itself oftentimes over the objection of the equity holders and perhaps junior parts of the capital structure. It usually emanates

00:13:22.500 - 00:13:43.530

from a secured lender or Fulcrum security forcing the issue. What generally forces the issue is a lack of liquidity or a maturity or some other form of default that precipitates lack of access to capital. So in the world of non-distressed you don't see

00:13:43.530 - 00:14:03.950

generally compelled sales transactions. For example, Verizon recently acquired the 45% of Verizon Wireless that it did not own. It was owned by Vodafone over in the UK. This was a transaction we advised Verizon on. It was a $130 billion transaction that took the better part

00:14:03.950 - 00:14:26.330

of 10 years in gestation to finally consummate. And as you can imagine with a business of that size. There are enormous tax consequences, structural consequences, and really no compelling reason why Vodafone had to sell this. So that, that runs to value as well and how

00:14:26.330 - 00:14:45.429

you're gonna finance the transaction. You don't see that in the world of distress. Typically in the midcap arena, and I'll define that as sort of below a billion dollars, a non-distressed transaction, M&A transaction might take somewhere between 6 and 12 months. There's no real

00:14:45.679 - 00:15:06.200

compelling reason to hurry up, generally speaking again. Whereas in a 363 bankruptcy context, oftentimes you have a secured lender that's saying I want out of this right now because value is eroding. My collateral value is going down and the cost of this sale, particularly if that

00:15:06.200 - 00:15:26.359

secured lender is impaired, the cost of this sale is generally being borne entirely by that lender, so they want it done yesterday and oftentimes these companies are losing cash as with each passing day. So you can see 363 processes. I've went through a

00:15:26.359 - 00:15:42.200

process down in South Alabama several years ago that we sold the company in 10 days from start to finish. I don't recommend that, but they can go that quickly. It's rare though for a 363 process to extend out beyond 6 months, and I

00:15:42.200 - 00:16:04.080

would say that the one standard deviation of time frame is probably somewhere in the neighborhood of 60 to 120 days would be what we tend to see nowadays. You mentioned Jim, that one of the things that might be forcing the 363 process is that

00:16:04.080 - 00:16:24.330

the the lender may be pushing that and that might be a good point to ask Bill, do you tend to agree with that Bill, or what's your perspective from, from someone who's maybe providing the the funding or financing for the operations? I think I could probably

00:16:24.330 - 00:16:42.260

candidly say that in every instance the lender would prefer a 363 sale to get out within the first week, if that's possible. However, that usually isn't practical and usually we're restrained from doing that. Um, you know, in most cases, the equity or the junior

00:16:42.260 - 00:16:54.599

debt holders don't want you to move that quickly, but frankly, it's to the lender's benefit to do it as fast as they can. Obviously it's a reduction in cost. It's probably the most value you're gonna get out of the deal and it

00:16:54.599 - 00:17:07.199

really depends on where you are in the food chain. If you're a lender that's got quite a bit of security and collateral, the most important thing in the bankruptcy to the lender I think is liquidity. So once that liquidity starts to burn through either through

00:17:07.199 - 00:17:21.048

cost or through bad performance, then you have more of a problem and then you wanna push it harder. But the reality is if we could get out faster, we get out faster. So I think that may be driving a number of sales

00:17:21.048 - 00:17:36.688

and the thing that's happening today probably is the fact that there's been a number of transactions uh that are cash flow oriented transactions and we kind of do both, but there's a number of cash flow oriented transactions where value erodes extremely fast and the value

00:17:36.688 - 00:17:48.729

is essentially an enterprise value to start with. So that, once that value starts to go down, it can diminish to nothing. And so, at that point, you want to get out as quickly as you can. Only when you have the assets,

00:17:48.739 - 00:18:06.630

you have a little more room because often the assets aren't deteriorating as rapidly. And is the diligence that you have to do any different? You're a seller or you're a purchaser, is it the diligence that has to be done on whether the sale

00:18:06.630 - 00:18:28.109

is a non-distress or 363 versus not a court deal? Well, it's yes and yes. Diligence in a distress situation generally results in a buyer wanting to really fully understand what's the source of the distress here, right? What is deteriorating in the performance

00:18:28.109 - 00:18:47.640

of this business so they will focus their diligence around those issues whereas in a healthy sale generally you're talking about either an asset purchase or a stock purchase, but generally the buyer is assuming all of the liabilities of the business. It may be refinancing the debt

00:18:47.640 - 00:19:06.619

that exists on the business, but it's assuming a lot of liabilities that in a 363 context they may not have to assume. One of the beautiful things about 363 is the ability to buy only assets. You can completely in theory ignore the liabilities of

00:19:06.619 - 00:19:30.640

the business and focus on what is that asset value worth. Another, benefit is oftentimes if you were leaving behind trade liabilities, for example, the buyer of that business post closing is going to receive a cash flow benefit as they resume normalized trade terms

00:19:30.959 - 00:19:43.969

so that has a value to a buyer. So one of the things that we try to convey to a buyer is focus on the left side of the balance sheet, the asset side of the balance sheet. Don't worry so much about all those liabilities because you

00:19:43.969 - 00:20:03.160

can leave them behind. And oftentimes that will yield a higher value than and certainly from a secured creditor's perspective, would leave more money for a secured creditor, particularly in the case where you're impaired, than you might otherwise see in a regular non distress

00:20:03.160 - 00:20:24.510

context. Neil, from your view, can you outline how you see the advantages of doing a 363 sale as opposed to one that's out of court and also from your perspective, what are the disadvantages, if any? Sure, um, let me just mention a couple things before

00:20:24.510 - 00:20:37.420

I start on that topic. We don't say melting ice cube anymore. I just want you to know we, putting on my debtor's hat, when you file companies for bankruptcy that are in distress is something called the first day hearing which actually takes

00:20:37.420 - 00:20:49.619

place on the second day, go figure, but you run to court on the second day of the case and when you're a debtor's lawyer, you always say to the judge, Your Honor, we need to have this 363 sale as fast as possible. The company's a melting

00:20:49.619 - 00:21:00.300

ice cube. Well, it got to the point where judges were saying, counsel, if you say melting ice cube, I'm gonna sanction you. So actually now I say we have tomatoes rotting on the dock, so we don't say ice cube anymore. I just want you to know.

00:21:00.920 - 00:21:16.020

Um, the other thing is just to put 363 sales in perspective, they mentioned the Hostess case. My firm represented Apollo which bought the cake business, so we saved the Twinkies through a 363 sales. So there's something actually practical here, but in terms

00:21:16.020 - 00:21:30.810

of that, that was us. So when you eat a Twinkie, thank us. Listen I happen to have a very strong bias that's why I tend to be a a bad panel member on these things. I have very strong opinions on 363

00:21:30.810 - 00:21:45.930

sales versus out of court, 363 sales versus plans, I'm a big fan. A 363 sales is the greatest thing since sliced bread. Hostess excluded, right? Hostess excluded. So 363 sales. A big fan of it. So when you asked me to list the advantages

00:21:45.930 - 00:22:01.300

and disadvantages, let me list the advantages first, and then we'll see if we can find any disadvantages. But a 363 sale, so a bankruptcy sale pursuant to 363, it's federal law, right. A federal court, and Congress wanted to create a situation where the assets of

00:22:01.300 - 00:22:14.469

a debtor in bankruptcy were maximized and that the process was fast and certain. So Congress went out of its way to make sure that a 363 sale was a good thing for a company in bankruptcy. So here's just a a few things and I don't have

00:22:14.469 - 00:22:29.020

17 sorry Jim. I've got I've only got 5 or 6, but the great things about a 363 sale are first of all, a 363 sale is a sale free and clear of liens and claims. OK, you can't do that outside of bankruptcy. If you've

00:22:29.020 - 00:22:44.219

got a factory that has a first mortgage, a second mortgage, and the factory has been belching smoke and there's class action claims out there and there's trade creditors and landlords, you can't sell that asset free and clear of all those claims to some buyer outside

00:22:44.219 - 00:22:59.500

of bankruptcy. In bankruptcy you can sell it and cleanse it and wash the asset and all those claims and liabilities stay behind. And the buyer gets nice clean title to the asset. It's a wonderful thing. It creates value. It unlocks value. The second thing is

00:22:59.859 - 00:23:15.800

that Section 365 of the Bankruptcy Code is a very magic, wonderful thing. It says that you can assign or sell for lack of a better word, contracts and leases and disregard any anti-assignment clause that's in those. So if you have a lease or a contract that

00:23:15.800 - 00:23:29.564

says this lease cannot be assigned to a new user without the landlord's consent, or this lease terminates if you try to assign it or this lease can't be assigned you can just willy nilly ignore that in bankruptcy. Outside of bankruptcy, my friend Jim here, if you

00:23:29.564 - 00:23:44.854

have a retailer with 3000 stores, he's got to get 3000 consents. He's gotta get landlord consent to every one of those. In bankruptcy, we just ignore it. Federal law says we override it. It unlocks the value in those contracts and leases. A third

00:23:44.854 - 00:23:59.410

thing is that in bankruptcy while I'm trying to sell these assets, there's something called the automatic stay which is in place when you file for bankruptcy. There's a nationwide stay, an injunction that goes into place and creditors are stopped from sending notices, making calls,

00:23:59.609 - 00:24:15.449

collections, continuing lawsuits, starting lawsuits, doing anything. And so in bankruptcy while Jim and his investment banking peers are marketing the asset, no one's running to court, no one's running to grab the assets. No one is trying to foreclose and I have a single forum. I have

00:24:15.449 - 00:24:28.910

a one bankruptcy court with nationwide jurisdiction where we can run if there's a bad actor. You can't do that outside of bankruptcy. If you have a company that's operating in 40 or 50 states, things can happen anywhere. Someone runs into, you know, some local court in

00:24:28.910 - 00:24:44.089

Tennessee and tries to foreclose or tries to file an involuntary petition. So in a 363 sale Jess, we get the automatic stay. It's a wonderful thing. In addition, um, in bankruptcy you can cut off appeals and there's a lack of standing for unsuccessful bidders.

00:24:44.209 - 00:24:57.310

So outside of bankruptcy, if there's a contested auction, they could be 2 or 3 years of litigation about what the heck just happened. In bankruptcy court, if you have an auction and you get court approval you can close the next day and the appeal of the

00:24:57.310 - 00:25:09.189

losing bidder is generally moot and courts also say that unsuccessful bidders don't have standing go away we don't wanna hear you. You can't do that outside of bankruptcy, so that makes a lot of, uh, a lot of sense to do it in court. And then the

00:25:09.189 - 00:25:23.819

last thing that I want to mention is, it shouldn't go overlooked, is that in bankruptcy 363 is a court proceeding. You run to court and you say we just had an auction. We just had a process and Your Honor, we're

00:25:23.819 - 00:25:38.670

here to approve so and so was the winning bidder at the following price, OK, what you what you get then is a sale order you get federal court blessing of the process of the documents of the party's. It's the greatest thing since sliced bread, right? You

00:25:38.670 - 00:25:49.040

don't get that outside of court. If any creditor comes up to you 6 months later, 9 months later when you're the buyer, you wave a federal court order in their in their face and say this is contempt of court. I'm gonna run back to the bankruptcy

00:25:49.040 - 00:26:01.810

court and sanction you we left you behind. So you don't have fraudulent conveyance risk. You don't have preference risk. You don't have all these sorts of risk because you get a federal court order. So that's just a short highlight. Now the things that make. He is biased.

00:26:03.010 - 00:26:17.310

Just to show you how biased, let's now talk about the things that make an out of court sale better. I turn it to you, Jess. I don't see any. Maybe cost. Maybe it's a little cheaper. And would it be also safe to say it's dependent upon

00:26:18.630 - 00:26:30.530

investment grade type companies are probably gonna be looking at just doing their out of court deals because one of the points Jim noted is a lot of those deals are stock deals. If you're doing a stock deal, that's probably where most of, is it fair to

00:26:30.530 - 00:26:45.670

say it's probably where most of your board...That's a fair point actually. I should mention one. It depends on the size of the transaction, you don't see that many stock deals in lower size transactions sort of below a half a billion. It depends

00:26:45.670 - 00:27:00.729

on what you're selling though, and in almost every case because you're only gonna see, these days, and I'm always gonna look at this with a like a CEO hat on, so from a debtor's perspective, but from a practical standpoint, if what

00:27:00.729 - 00:27:18.449

you're selling out of court can be discreetly carved out and add value and if it would be somehow harmed by a bankruptcy filing or tarnished in some way as a brand might be you know those are situations where you may see somebody try to

00:27:18.449 - 00:27:35.199

do it out of court. The reality though is that you're gonna end up dealing with solvency opinions. And potential substantive consolidation issues, uh, a whole rat's nest of things that make it really hard to sell in a distressed environment unless like I

00:27:35.199 - 00:27:48.079

said, it's a very discreet piece of the business. It's, it's not, you know, you can't pierce the veil, you can't call it back in because otherwise it can get overturned in a subsequent filing and I think, um, you know, back 25 years ago you would never

00:27:48.079 - 00:28:00.790

see airlines or other companies file because they were worried it would hurt their brand and these days, you know, they all have at least once. So I don't think. The one that I was gonna mention is restaurants. They seem to do very poorly in

00:28:00.790 - 00:28:13.400

bankruptcy because you know Kmart filed for bankruptcy, and a lot of those retailers filed for bankruptcy, the consumers just don't care in fact. They think they're gonna get something cheaper when a restaurant files for bankruptcy, they think they're saving money on

00:28:13.400 - 00:28:24.959

the milk and the quality of the food, and they stay away from the restaurants in droves. So I agree with you there are certain industries that 363,there's a somewhat of a stigma of being in bankruptcy, maybe personal services companies as well don't want to be

00:28:24.959 - 00:28:41.829

associated with. The only thing I have, the only problem I have with, and I, and I think 363 is a great thing, It just depends on what kind of lender I have. As a security. Always cooperative for sure. You know my preference would

00:28:41.829 - 00:28:58.709

be to have a really heavily impaired lender as opposed to, uh, a minorly impaired lender, that's what we had in the Hostess matter. And when they're heavily impaired, they're more inclined to listen to the management team come up with ways that

00:28:58.709 - 00:29:12.829

maybe they can get a better outcome than what is effectively just a liquidation sale. But that's just, gonna be, you're gonna have whatever hands you're dealt when you get there. But that's a question I did, I'd like you to kind

00:29:12.829 - 00:29:28.329

of address, focus on a little bit is it you're the management, you're running the company, everybody around you says, Let's go to a sale. How do you deal with that because you still have a business to run to make sure that if you do go through

00:29:28.329 - 00:29:44.670

the sale, there's a business to be sold. Yeah, you know, and it varies a lot, uh, you know, depending on, you know what those facts and circumstances are, but in general I think if the business is distressed and it has been on a multi-year decline,

00:29:44.869 - 00:30:01.680

you're likely sale transactions are gonna be people wanting the brand or people wanting, you know, the footprint or the distribution, but not necessarily wanting the management team, or any large number of whatever management team may be left over from, you know, old Co.

00:30:02.349 - 00:30:17.079

So as from my perspective, that's really, it's almost like anything else in the case you have to then determine, you know as you would in any case, you know, who's adding value, who's critical to get through that process? I don't, I, I rarely

00:30:17.079 - 00:30:31.839

see any sale transactions that happen without some active involvement from the existing management team. It's just impossible to get it, especially on a large scale company, it's impossible to get it done, so you gotta find ways to incentivize them in that process and, and fortunately in

00:30:31.839 - 00:30:45.920

the code you can still do that on a sort of a discrete basis relative to that transaction. There's one thing before we move on kind of to the next, I'd like you to, um, Greg, specifically, uh, speak to, and there was a point, I think,

00:30:46.479 - 00:31:07.209

uh, Neil made over here, which is, you know, sometimes, and, and I think even Jim said, that doing a 363 sale because of the fact you can leave certain claims behind, uh, that, that may unlock value that you couldn't otherwise have, uh, found. Outside of a

00:31:07.209 - 00:31:21.250

363 sale, and I think you and I were both involved now with Hostess, that that was a good example of that. Well, there's no question. I think, um, you know, if you go back and look, Hostess had gone through a process, uh, pre-filing and

00:31:21.250 - 00:31:35.439

subsequent to filing with its investment bankers trying to find someone to acquire it and also trying to find someone to invest money in it to sort of sort of fund a turnaround plan, uh, looking at synergistic buyers. I mean, basically everyone on the planet. Uh, the

00:31:35.439 - 00:31:49.260

killers there were the things that were unlocked when we, when we finally sort of closed the doors. So if you think about it in terms of relative value, the plan that we had actually approved with the Teamsters and approved with all the other unions that

00:31:49.260 - 00:32:04.250

the bakers struck on had an inherent enterprise value of about $400 million. So in essence, the lenders, the first lien, 3 lien, 4th lien, 4th was getting flushed, 3rd was getting flushed, first lien was gonna take some kind of enormous hit, but everybody was gonna live

00:32:04.250 - 00:32:20.199

with some kind of notional $400 million dollar value post reorganization if the bakers had not struck and if it had been able to survive or or emerge. Um, as it turned out when they struck and I ended up closing the business because of the strike, we

00:32:20.199 - 00:32:35.750

unlocked the value from the standpoint of a buyer could come in and not be tied to the CBA's and not be tied to the the union contracts. B, they could also buy the specific assets they wanted. If you think about Hostess, we had 36 plants or

00:32:35.750 - 00:32:50.099

30 plants by that time around the country. Uh, the buyers, I think the cake buyers only took 5 plants, uh, so they could cherry pick the assets that they wanted and not be burdened with, with the rest, uh, and then there was a third piece there

00:32:50.099 - 00:33:04.780

where we sort of extended the dating to allow them to direct ship product, but the differential in value was huge. We still collecting money on Hostess, but we're at about a billion dollars, so we're more than double now the recovery that would have been inherent

00:33:04.780 - 00:33:19.050

in that plan of reorganization. And we've in fact paid all the 1st lien, all the 3rd lien and and now paying into the 4th lien, which had actually been written off a long time ago. And that's an excellent segue into answering Neil's, uh, question. What's not

00:33:19.050 - 00:33:37.380

to like about 363? Well, if you're an equity owner, if you are management, if you are an employee, if you are a trade creditor. Uh, 363 very likely will have a very negative outcome. Uh, most equity owners, when they find themselves in financial distress, essentially are

00:33:37.380 - 00:33:56.000

out of the money option holders and therefore they only have two alternatives to get back into the money extend duration or increase volatility. It's simple option theory. And they don't like 363 processes because they run fast and they basically get shut out of the process,

00:33:56.329 - 00:34:13.489

as a result of requirements by a dip blender, for example, and don't have that opportunity to try to get back into the money a, uh, creditor, particularly a trade creditor may lose a customer. Those people that bought the Hostess plants may not do business

00:34:13.489 - 00:34:30.639

with the existing trade creditors of those respective plants. So those are potential losers out there. Let's move into uh and by the way, just before you do that, I'm not not a fan. I'm a fan of the 363 process. I'm not, and I wasn't

00:34:30.639 - 00:34:45.129

joking before about a fully impaired lender. I mean, you know, I have a problem with the speed sometimes just because from the debtor's perspective you're supposed to be maximizing the value of the estate and every decision you make is supposed to go towards that end and

00:34:45.129 - 00:34:55.810

I think you know there are a lot of times when we get sort of locked in with you know the various people at the table and it wouldn't be surprising for a lender to have a very a secured lender to have a very strong

00:34:55.810 - 00:35:10.189

view that, you know, there none of these other options are gonna work and nothing you're laying out here is worth funding uh to sort of get to and I just wanna get paid and move on but I think the nature of the

00:35:10.189 - 00:35:24.199

cases we see now that are filing and I think there are a couple of reasons for it. Most of the ones coming into 11 now, as you said at the outset, are they're almost DOA. They're either a very long shot for a reorganization, and I

00:35:24.199 - 00:35:37.179

mean like a Hail Mary type shot to get it through and get it out. Or they're gonna be some kind of sale, but there's so many parties in in various layers in that structure. It's never as clean as sort of one party being able to

00:35:37.179 - 00:35:49.459

say, well, this is what I want to have happen, at least in the larger case. Well, and that's the phenomenon over the say the last 10 years that we've observed. It used to be in the old days the pre-petition lenders were the legacy lenders. They

00:35:49.459 - 00:36:03.770

were the par lenders and they stuck around all the way through to the bitter end. Nowadays you see extensive trading of all sorts of claims, particularly among senior creditors. So Greg, I might take a little bit of exception just on the one thing you

00:36:03.770 - 00:36:15.929

said which was I prefer to have a more or I think you said something along the lines of I prefer to have a more impaired creditor than a not so impaired creditor. Uh, and I would simply say be careful what you wish for because you

00:36:15.929 - 00:36:29.489

start to get distressed creditors buying those claims and all of a sudden you've got a mixed group of lenders. Some of them may have been par, some of them may be hedge funds, that's the norm. I mean, I, I think if I go back to

00:36:29.489 - 00:36:44.219

2002, I was the CEO of a company called Sunterra Corporation and we had a complete changeover of the existing bonds who sat on the committee who really were the people that were the fulcrum at that point outside of a small DIP facility and

00:36:44.219 - 00:36:55.850

that entire community changed over the course of that case. Almost two times so yeah I mean but I don't mean, I see that all the time and I don't think there's much we can do about it. I think the drivers for

00:36:55.850 - 00:37:09.870

me of why you see cases come in now that are sort of have very little hope, are the code revisions that restrict the amount of time you can stay in a Chapter 11 and put faster deadlines on that process which I don't agree with.

00:37:10.320 - 00:37:23.510

And then the second part is just the complete availability of funding. I mean there's so much capital out there that will go at these situations well in advance of a filing. And there's so much sort of pretend and extend and kick

00:37:23.510 - 00:37:39.550

the can down the road lending that goes on in that process that, you know, it's easier to keep them out and it's easier to keep rolling that dice. I think the biggest difference today versus say 10-15 years ago is the reorganization has largely

00:37:39.550 - 00:37:54.840

occurred from a financial perspective, not necessarily from an operational perspective. Long before you get into Chapter 11 by virtue of the fact that the trading has occurred from those who are who were power holders who don't want to stick around for the ride, they just want

00:37:54.840 - 00:38:12.139

their liquidity out and they want to leave it to somebody else to come in and and affect that operational turnaround so they buy in and then they use 363 as a means to gain control. is that your perspective? Well, it's interesting. I

00:38:12.139 - 00:38:29.739

would sort of agree it seems to me on these two issues one is the speed and why the speed, and two is that the financial restructuring aspect, a 363 sale is wonderful to implement a financial restructuring. It's terrible to implement a restructuring of the business. So

00:38:29.739 - 00:38:40.739

if you have a retailer. And you want to see if a change in the merchandise or change in the marketing or change in the advertising or we needed, you know, to go to a different type of structure or go high end or

00:38:40.739 - 00:38:51.030

low and you can't do that in a 363 sale. It used to be in the good old days that lenders would stay in a case for a year or two. We had cases that would go on for 2 or 3 years and you'd have the same

00:38:51.030 - 00:39:01.520

lender sitting there lending money. And the debtor would say this is what we're gonna try to do this holiday season and they were business changes that they would try to implement and then in January we all look to see if it worked or

00:39:01.520 - 00:39:12.810

not and then we tinker with it. You can't do that anymore in Chapter 11. One is because of the trading in of the claims traders so that the bank that lent the money originally, as soon as it starts to go into default, they're

00:39:12.810 - 00:39:23.399

gone, they're selling it to the market to people who think they can sell the debt, you know, buy the debt at 90 and sell it at 92 or maybe buy the debt at 30 cents and maybe they'll become a shareholder. But for whatever reasons,

00:39:23.449 - 00:39:42.090

363 has now become a financial balance sheet restructuring. It does almost nothing for the operational fixes. Now it is good for leaving behind some of the things causing the operational problems, so you know, friendlies and and journal register and hostess and things like you can

00:39:42.090 - 00:39:55.530

leave behind burdensome leases that are above market or we don't need the space anymore. You can leave behind pension liabilities. You can do some things that are quasi financial quasi business problems, but you can't really do anything for the the business in the

00:39:55.530 - 00:40:13.620

363. I will agree that 363, while it is a wonderful thing, it's primarily a balance sheet fix. I think part of that was brought about and I think what's the 5 amendments that really limited the time frame for substant rejection of leases. I see

00:40:13.620 - 00:40:30.179

him. I'm a big believer that one of the reasons why we're having this panel today is because there was a change in the bankruptcy code a few years ago that led to an unintended negative consequence that no one foresaw at the time. It used

00:40:30.179 - 00:40:41.320

to be in the again in the good old days, a debtor had until the end of the case to assume or reject leases, OK. And so they would go to court and they would keep getting extensions or they would go to court and get one extension

00:40:41.320 - 00:40:53.165

in the front that says I don't have to assume or reject my leases until the time a plan is done and so basically you had an indefinite period of forever to fool around with with your leases and make decisions. The landlord lobby, which is very powerful

00:40:53.165 - 00:41:09.790

and with an organization called the International Council of Shopping Centers, the ICSE, which is a very powerful industry, went to Congress and lobbied Congress to get that statute changed and now it says you have a maximum of 210 days. Yet to make a decision whether to

00:41:09.790 - 00:41:24.729

keep your leases or reject your leases and if you don't make a decision on day 211, every single lease you have is deemed rejected. So let's take a look at let's say just, Kmart for example with what 4 or 5000 real estate leases they're

00:41:24.729 - 00:41:37.489

not gonna be able to make a decision on every one of those leases in 210 days. First of all, put that aside, here's the unintended consequence. What happened then is when Congress passed that law, smart lender and their counsel like Jess over here would say

00:41:37.489 - 00:41:49.429

to their client, you know, if if the company can't figure out what to do in time, we need, I don't know, 45 to 60 days for us to liquidate our collateral in place if we're gonna have a going at. Business sales at 4000 Kmart stores, we need

00:41:49.429 - 00:42:02.310

60 days to hire liquidators and advertise and do that so the debtor doesn't really have 210 days to make a decision. It's 210 minus 60 because Jess is putting in in his dip lending agreements that it's an event to default if you haven't made a

00:42:02.310 - 00:42:16.739

decision 60 days before the 210 days. So now you're down to 150. Now in order to get a sale done or plan done, you probably need 60 days to get it done. So really you have about 75 days from the bankruptcy filing to negotiate with creditors,

00:42:16.820 - 00:42:28.100

find a bidder, that's literally impossible to get a plan of reorganization done in 75 or 90 days. So it comes down to, well, we gotta do something or else we're gonna be in default. We better have a 363 sale. So I'm of the view

00:42:28.100 - 00:42:43.489

that especially in the retail industry that 210 day maximum cap on leases is the thing that has single-handedly had the the biggest impact on why we're seeing 363 sales and not plans because you cannot negotiate and get a vote out to creditors and get a plan

00:42:43.489 - 00:42:59.739

out to creditors and disclosure statement and do all that stuff in 75 days in a retail case. It's just literally impossible. It becomes a sort of an elephant in the room. Drives certain behavior that you don't necessarily need and, you know, a real life

00:42:59.739 - 00:43:12.939

example is I was asked to sit on A&P's board when they filed bankruptcy and I stayed on until they got out. That was a huge issue for us because A&P was running 9 different flag brands, Pathmarks and all kind of other stuff and, you know,

00:43:13.020 - 00:43:25.739

you're sitting there and you've got your debtor management and you've got your advisors and investment bankers and you're trying to figure out, well, can this be, you know, rejiggered? Can we, you know, get rid of this flag or get

00:43:25.739 - 00:43:38.469

rid of that flag or shrink down to this geography. And how should that look and then at the same time you've got a sale process running on the sideline because you wanna make sure as a board you've got optionality, but you've got that date looming out

00:43:38.469 - 00:43:50.780

there on those leases that is giving you real agita because that is a hard date. That's a hard deadline. It's the date on the leases and then the dip blender says it's an event to default of having done something 60 days before it.

00:43:50.975 - 00:44:04.685

It takes 30 days to get a sale approved. Now, you know, 210 minus 90, it starts shrinking and shrinking and shrinking. So I, I'm a big believer in your suggestion. Bill's going to require in his dip loan or cash collateral milestones. Yeah, put

00:44:04.685 - 00:44:17.520

you up. Most dip loans say it's an event of default unless the debtor has accomplished the following things by the following dates the bankruptcy jargon is milestones. And you know, as sure as God made little green apples, it's gonna say there's gotta be a sale or

00:44:17.520 - 00:44:28.120

a plan by 60 days before the 210 day. And so the debtor in order to make a motion to get that approved needs to subtract another 30 days from that because you have to make a motion to get it approved. So it's 90 days already off

00:44:28.120 - 00:44:45.580

the 210. Cases or sales as you start. The sale right from the start in almost every situation. I don't think that's the driver. I think it is a big driver in retail, um, anything that's a real estate intensive. I've got multiple locations that I'm selling through

00:44:45.580 - 00:45:03.620

with the restaurant business, what have you. Absolutely that is a that is a factor. The real drivers in my opinion are technology and capital. Um, when I graduated from college in 1982, I bought the very first IBM PC and it had this cool thing called

00:45:03.620 - 00:45:20.060

Lotus 123, and you could build a spreadsheet and that was basically on or about the first year of its general market availability. So imagine trying to build a financial model back in the old days. I don't know how people did this where they had those green

00:45:20.060 - 00:45:35.229

pieces of paper and you had to handwrite. You know, balance sheet, income statement, cash flow, whatever. You know you're older than I am, so I don't remember that. I told you we had 125 years worth of experience up here. I just

00:45:35.229 - 00:45:56.239

didn't say it was all in one person or two. The technological change that has allowed financial manipulation to be modeled and implemented in just an instant is very, very material, but the other part of it is capital. In say in 2000 it

00:45:56.239 - 00:46:13.199

was very difficult to find a buyer for a distressed company to come in and buy the company. There just weren't pools of capital out there that were risk tolerant of distress. I'm not saying they didn't exist, but they were a very, very small sector in the

00:46:13.199 - 00:46:31.469

marketplace. If you fast forward to today, everybody loves this sector because there are huge opportunities to make substantial returns on your capital. If you can buy a business at 20 cents but its senior debt is 20 cents and you think the enterprise value of the business

00:46:31.870 - 00:46:51.040

under your plan for rehabilitating it is 50 cents. That's a phenomenal rate of return and there's a lot of capital chasing that out there. You avoid it, by foregoing the plan process, you avoid time, you avoid a lot of uncertainty and you avoid a lot

00:46:51.040 - 00:47:11.600

of costs. Those, to me, are the bigger drivers. One of the questions I've had and want to explore as an additional driver here is how much, if any of you see that the leverage of these companies is driving the sense that, you know,

00:47:11.719 - 00:47:29.840

Greg spoke about, he'd like to have at least an impaired lender class or secured lender because that at least says that somebody that's might well be the logical, I guess buyer, you might say of the company. Yeah, I look at it from deals on

00:47:29.840 - 00:47:43.689

which I work, from in the Great Recession and remember prior to that, everyone was looking at the first lien, second lien market, and the 1st lien would say, well, I'm not too worried because I have 2 lien debt, that's gonna be the fulcrum and you

00:47:43.689 - 00:47:59.169

find out in these cases that second liens are the money and the first lien is the fulcrum. And back to your point about trading, people are trading in and out with that level of leverage. Are you guys

00:47:59.169 - 00:48:16.649

seeing that as a factor that's driving some of these fast sales? Well, all you have to do is look at the default cycle and as you get into a period, say 2004 to 2007, where you had ever-increasing leverage multiples in the market generally,

00:48:17.110 - 00:48:35.909

you created in effect a bubble of overlevered companies out there that when the economy slowed down and a lot of these credits started to fail, they were just unable quickly enough to rationalize their operations and continue to service that debt. So you know, without leverage

00:48:35.909 - 00:48:52.370

none of us would have a job, I don't think so, um, yes. We're all happy to see in in my business, we're all happy to see these cycles that we're in right now where we're back to lending levels of 2007 in terms of leverage. You

00:48:52.370 - 00:49:09.699

know, those are gonna create a reversion to the mean somewhere down the road where we're gonna see a much higher rate of defaults, opportunities. I think it's a long way away still. Well, the other thing you got is the new banking regulations that

00:49:09.699 - 00:49:23.330

are going into place that are gonna affect how much a lender can carry and leverage on the balance sheet. And that's gonna either be funded by hedge funds I think. It's the big, the big change that's happened is that you got a whole group

00:49:23.330 - 00:49:37.760

of lenders that have come in with low cost money or not even lenders, investors that have come in with low cost money they're prepared to take much smaller, much higher risk in order to maximize returns and that's taken out the function of where the senior

00:49:37.760 - 00:49:49.949

lenders used to be it. Today you have lenders that'll take a discount and just get out of a deal, whereas we used to sit on them for a long time trying to get as much value as we possibly could. You got a whole group of lenders

00:49:49.949 - 00:50:03.570

that won't do that. And the hedge funds have taken up part of that by trading in the debt or by offering to buy the debt. I think the banking regulations are gonna even change that more because now the banks themselves have to worry

00:50:03.570 - 00:50:17.129

about how much leverage is on the deal they're gonna put pressure on, they're gonna have defaults at lower, should have defaults at lower levels and that's gonna create maybe more issues. That does tend to push it though again more into the pre-filing phase, right? You,

00:50:17.189 - 00:50:29.729

You're gonna see a lot more of that because of that. Which is, you know, again, I don't think, I mean I think the upshot to me is that the 11 process is really an 11 process and in some ways my job

00:50:29.729 - 00:50:43.020

is easier when I go in because, you know, the ones that hit now I can kind of sit there around the table with all of the various lenders and participants in the various, you know, mezzanine 2nd, 3rd, whatever, and I can just say, well, you know,

00:50:43.179 - 00:50:56.729

you've got a problem and, you know, the problem is gonna have to get solved by the people at the table because it's highly unlikely in in this environment the way it's been the last few years that someone who wasn't found pre-filing in the year

00:50:56.729 - 00:51:10.820

2 years prefiling is somehow gonna swoop in. Uh, at that point and say, oh, I'll save you, you know, I'll fix it this way. And that gets into what you're saying is that that then gets into a lot of uh discussion among the constituents

00:51:10.820 - 00:51:28.000

out of the proceeding outside of the court. No, I mean in once you, yeah, outside it absolutely should, right, because I think again, to the point earlier there's so much capital available there's so much money chasing whether it's targeted to

00:51:28.000 - 00:51:41.060

distressed or not. I mean the sheer amount out there when I remember when we put Hostess on the blocks. We had Perella Weinberg as investment bankers. We had 189 inbound calls on Monday after we had announced we were closing on Friday, and they had not even

00:51:41.060 - 00:51:56.709

picked up the phone. They didn't put together a CIM. They never even had to, and that's a function reference, CIM in Detroit, Confidential information memorandum, which is, that's now the buzzwords of putting out when you're getting ready to market a company and putting together a package.

00:51:56.909 - 00:52:09.790

So you've got hedge fund money and other private equity money out there that is either unallocated and their returns are low, so they can't be seen as not looking at some deal that comes through. They got to at

00:52:09.790 - 00:52:23.669

least say that they looked at it and you got an equal amount of them that are chasing them for real and chasing them for value, you know, pre-filing, pre some sort of, well, you can, illustrate the point by looking at really the

00:52:23.669 - 00:52:43.199

year 2009 to again roughly middle of 2010 where if you remember Lehman failed in September or October of '08. Uh, in the aftermath of Lehman for the next 9 months or so till about the middle of '09, people walked around going, I don't know if

00:52:43.199 - 00:53:00.280

the world's going to end or not. People had no idea what anything was worth. You couldn't get marks in the marketplace, let alone sell a company in that environment. Management teams could not really forecast accurately what, what is my working capital need? I don't know

00:53:00.280 - 00:53:22.580

how much widgets I'm going to sell. Once you finally got beyond about June of '09 and it became readily uh obvious that the world wasn't just going to blow up, you still had an environment where Capital sources were still dealing with their internal problems. You had

00:53:22.580 - 00:53:38.899

banks that were under tremendous pressure to increase their equity um on their balance sheets. Well, where were they gonna get equity from? No one was willing to provide straight equity, so they couldn't conversely afford to take losses. They, couldn't push credits out the door,

00:53:39.060 - 00:53:54.790

particularly those credits were at least paying interest to them. They were not in a position capital wise to accept the loss against their their balance sheet and and move that deal out there but slowly the market kind of returned to normal equity cushions built back up

00:53:54.790 - 00:54:08.415

in institutions and I'm not just talking about banks. I'm also talking about the hedge funds out there and you return to a normal environment that begat those days of uncertainty we got the kick the can down the road phenomenon that we saw

00:54:08.415 - 00:54:23.334

in those years because there was nothing else to do. There was no market to transact in so either you amended and extended or you did do see reorganizations, but you didn't really see all that many 363s. Now we're kind of having this

00:54:23.334 - 00:54:44.959

topic about the replacement of the plan process with 363 largely driven by a very robust capital market environment. The debt traders, yeah. In that regard, I'd like to ask the panel is that, do you see, what impact, if any, are you seeing

00:54:44.959 - 00:55:06.139

credit bids driven by lenders in impacting 363 sales? Is that a driver for more of those at this point? I certainly have seen over the last, again, 2000 forward over those almost 15 years, a much greater propensity of lenders to credit bid largely driven by

00:55:06.310 - 00:55:25.489

the fact that the lenders aren't really the original lenders they are much more, uh, agile non-regulated entities that see a credit bid is an excellent means to buy the debt. You get control and you implement your control through a 363 process to define what

00:55:25.489 - 00:55:37.659

a credit bid is. So a credit bid for those who don't know is where the secured lender shows up at the auction and says I'll forgive my debt if you give me back my collateral so I'll swap my debt for the collateral. So the secured

00:55:37.659 - 00:55:51.419

lender, if he's owed $100 million and the collateral is has is reduced to $80 million at the auction, the secured creditor says I'll waive that $100 million claim, give me that collateral it's worth $80. He's gonna take the loss, but he figures he's gonna do

00:55:51.419 - 00:56:02.370

something with it now. He'll flip it to someone else or or he'll operate it, but he's gonna take title to it. So what that they're saying here is that in the old days when you had real banks banks were reluctant to take ownership of businesses or

00:56:02.370 - 00:56:13.729

real estate or anything else now when they have a giant market out there where institutions are buying and selling debt, they want to get into the debt so that they can be the owner of the title of the asset at some point. It's called loan to

00:56:13.729 - 00:56:25.050

own, so you have a lot of hedge funds and private equity firms that want to buy debt because they hope the debt will go into full because then they hope to credit bid and get the asset it's a way to buy a company without complying with

00:56:25.195 - 00:56:35.824

Securities laws or other sorts of problems. You can buy the bank debt and then just swap the debt for the assets so that's what credit bidding is. I'm seeing a ton of it, but in particular you have a lot of private equity firms that

00:56:35.824 - 00:56:47.985

have companies in distress when their portfolio companies get in distress, they tend to lend money to their portfolio companies to keep them alive a little bit so they can figure out what to what to do. So you have a lot of situations out there where the

00:56:47.985 - 00:57:00.689

private equity firm owner is the 2nd or junior lien or so you have a real lender a revolver lender with the first debt. And then the second lien is held by the owner, so those guys are in the business of owning assets. They have no problem

00:57:01.020 - 00:57:13.100

filing their own portfolio company into bankruptcy and buying it back by just forgiving the second lien debt. So Jess, you, we were in Friendly's together. That's what we did there. So we, I had a, uh, uh, Sun Capital was the owner of a private equity firm.

00:57:13.110 - 00:57:26.580

They own Friendly's. They put in a large amount of money as second lien debt, but they believe that over time Friendly's could be a positive company and could give them a big return. So Friendly's got filed for bankruptcy and then they credit bid. They said

00:57:26.580 - 00:57:37.695

we're gonna forgive our second lien debt, give us back the business, and so now you have the business free and clear of all the other claims, the trade claims, the pensions, the things like that, but also free of the 1st and 2nd lien debt, so. We

00:57:37.695 - 00:57:51.854

are seeing just a ton of credit bids, but only for people who can take an asset and own it like a private equity firm, well, or a hedge fund. I mean, you, you see Furniture Brands International owns Drexel Broyhill, all these names my wife knows

00:57:51.854 - 00:58:12.510

all about in the furniture industry, but a company that was burdened by being kind of the last in its industry to go offshore and source product and got behind the curve, started to perform poorly, had huge pension liabilities, uh, a big retail footprint

00:58:12.510 - 00:58:29.429

on top of that, Oaktree came along and bought up all the secured debt in that deal and said, I'm gonna provide a dip and I'm gonna be the stalking horse bidder and on day one of that case, that's what arrived and uh they

00:58:29.429 - 00:58:45.469

were ultimately supplanted by another. Ambushed by. That's right, but that tactic is being replayed time and time again. It's a very popular, and to that end, you know, Bill, I know you do a lot of first lien debt and you have 1 lien, second lien,

00:58:45.550 - 00:59:02.419

you have incredit agreements. I know the general provisions in the incredit agreements is they're drag along rights so that if the first lien is voting to approve a 363 sale, you drag along the second lien, is that would be a consideration for you is whether you

00:59:02.419 - 00:59:16.629

do a 363 sale or not because you don't have that same votes necessarily in the plan. And to the rest of the panel, if you've seen that pop up that you can do a 363 sale because of those drag along rights versus not. It

00:59:16.629 - 00:59:31.110

makes it easier, doesn't it? I mean, the fact that you're dealing with most of the secured lien holders at one time and by doing that, even if you took a little bit of diminished value, the fact is that over time if the thing needs

00:59:31.110 - 00:59:42.949

to be sold, you're gonna diminish the value anyway, so you're better off trying to deal with that up front. So if you can get the lenders, the creditors into a pool, you know, I think you're better off doing that. It's just hard to

00:59:42.949 - 00:59:57.149

do. It really depends on the deal and how many many creditors you got and we've had so many that have, you know, 3 2nd lien holders and you always get, you know, 4 or 5 guys that won't go along with nothing, and that's just

00:59:57.560 - 01:00:14.959

absolute war. Was there a way to deal with it better, it would make life easier for everybody. Right. You've got a 363, you're gonna do that. Jim, what's the general process? And I'd like the panel to focus on or at least comment on. You

01:00:14.959 - 01:00:30.919

set up the process, you at one point you talked about, you file a motion, get approval. One of the things I think that is at the top of the conversation is that, OK, if you're doing that 363 process, how long or how short? And then I know

01:00:30.919 - 01:00:46.280

that the judges are being looked at that it's a really short process in a lot of instances. Is that impacted? How do you see that? And is that impacted as to whether you actually ran a process outside the proceeding or before you even got

01:00:46.280 - 01:01:02.370

to the bankruptcy? It's really driven by liquidity, isn't it? It's, you and I were in a case a couple of years ago involving Pike Nursery. And uh you see Pike's stores around town Pike, um, had been sold through a leverage buyout whereby

01:01:02.370 - 01:01:23.679

the sponsor, also a local firm had gone in and after the transaction done a sale lease sale lease back transactions, sore levered the company up. You fast forward to, this would be 2008 2007 where we had a tremendous drought down here. And people

01:01:23.679 - 01:01:35.760

stopped buying plants at Pikes and a big part of their uh sales strategy every year was to sell Christmas trees. Well, they didn't have the liquidity to go buy Christmas trees and if they didn't have Christmas trees, they were basically out of business. So the lender

01:01:35.760 - 01:01:54.189

in that particular case provided a dip facility that allowed for them to go out and buy Christmas trees but said I want out of this case by, I think it was, very end of January, right? I wanna, I wanna put a very limited timeline on it,

01:01:54.580 - 01:02:10.750

and the dip loan facility really governed the bid procedures that we filed in the case because we had to we had to work around the covenants in the dip to set up when bids were due, when we were going to have an auction when a

01:02:10.750 - 01:02:27.830

closing could occur in that and you know may not be as rapid a process as that one was, but in most cases that is a typical process. That you see that the dip lender who's generally an existing lender? I don't see many

01:02:27.830 - 01:02:46.439

priming dips nowadays. Have you seen one at all? It's a long time since I saw one, but the dip lender will dictate the process by the timing that they place on it, which is in turn generally driven by liquidity of the, using

01:02:46.439 - 01:03:05.199

the ice example, and I know Neil's used this term before, was there a stalking horse that helped drive the process too, you know. Uh, stalking horses are great. They create certainty. They create a floor bid, obviously, but they're not absolutely necessary in a

01:03:05.199 - 01:03:19.510

process. It really just depends on the, the dynamics. There's not if you're an investment banker, there's nothing worse than an auction of none. Nobody comes to your party. Uh, you know, second prize goes to an auction of one where you just have that stalking

01:03:19.510 - 01:03:32.350

horse and you can't attract somebody else. Oftentimes you find yourself saying, Well, why did we give this stalking horse all these protections if nobody else will come, come to bid? Well, perhaps you did too good a job on on teeing up that stalking horse and getting

01:03:32.350 - 01:03:46.699

maximum value out of them. Obviously you want to have multiple parties coming to an auction. Uh, the beauty of a 363 process where you do have multiple parties bidding is you in effect have a second bite at the apple. You didn't have to to get maximum

01:03:46.699 - 01:04:01.500

value with a stalking horse. You're able now to have that floor bid and then have people come and bid against that and everybody has to show up at your auction fully financed, prepared to close on the same contract or something very similar to the stalking horse

01:04:01.500 - 01:04:19.280

and so it allows you to really focus on creating competition for that asset. So, you know, here's a key question. You're in the sale because I know that at least every judge I've been before, when you start the process, the question comes up as, who's paying

01:04:19.280 - 01:04:37.639

for it? Bankruptcy, as they say, is not cheap. Um, and so the question when you start a 363 sale process is I've had judges even in that state say, well, how are you going to secure this? I know Judge Carey out of, uh, Delaware at

01:04:37.639 - 01:04:53.479

least started out one time saying, you gotta make sure you cover the admin claims, and I'd like to have a tip for the unsecured. He subsequently changed his perspective because the companies were in worse shape than he had thought coming through his bench and he,

01:04:53.580 - 01:05:10.629

he adopted the leave no trace rule which just covered the administrative claims. So one of the questions I throw out here, uh, to Neil and like Greg, because I know Greg had to really face this with Hostess, who pays for all this? Fulcrum security if you

01:05:10.629 - 01:05:23.530

believe in absolute priority. Well, this is a great law review article. So if anyone's looking for an article, there's a doctrine called pay to play. It's not in the bankruptcy code. It's not a statute. It's all judge made and lawyer made up, and we have a

01:05:23.530 - 01:05:35.110

situation in bankruptcy. And by the way, there's only one or two written decisions. There's no appellate decisions, no Supreme Court, so it's great for lawyer review article, but the, the issue comes up as follows you have a bankruptcy case and you're gonna have a sale of

01:05:35.110 - 01:05:51.090

substantially all the assets. But the likely proceeds are not enough to pay the secured creditor in full, the person who's number one on the on the priority list, so there's not enough money to pay the administrative costs of running the bankruptcy and there's not enough money

01:05:51.090 - 01:06:09.050

to pay anybody who's left behind. So, um, if you're gonna open up the court, the federal court machinery for the secured creditor to liquidate its collateral for its sole benefit. Maybe the secured creditor should pay for the entire cost of this sale. OK, now it's not

01:06:09.050 - 01:06:20.290

quite that easy. I'm making it a little we don't have a lot of time on this, but that's basically the argument. So what judges have been saying is, wait a second, Mr. secured creditor, you want to use my federal court imprimatur of your bankruptcy sale look

01:06:20.290 - 01:06:31.889

what your collateral. You're the only one getting a penny. I want you to pay for all the costs that arise from the petition. Date the bank petition date until and now there's a big fight about what that date is until the sale closes until you know

01:06:31.889 - 01:06:44.379

you, you can there's a a lot a lot of spectrum there that you can fight over but it's called the pay to play doctrine. It changes literally every case. It's the, I've written a couple of articles on it. A law review article would be good. My article's

01:06:44.379 - 01:06:55.989

already out of date. It's a year old and what happens is judges say things on the transcript at the oddest times. At the first day hearings, at the hearing to approve the dip order at all and they'll say something like off the record, you know, I

01:06:55.989 - 01:07:08.449

don't want a situation where we don't have enough money we're administratively insolvent, and I think and now all of a sudden some some statements some judge said in a transcript becomes the new law of pay to play. It's the strangest thing, especially in Delaware, which it's,

01:07:08.469 - 01:07:19.584

it's just insane how fast this goes around but here's some, here's some of the issues and here's how it's currently, as far as I understand it, working out, so you have a secured creditor who wants the company to sell all the assets the secured creditor

01:07:19.584 - 01:07:31.574

is the only one who's gonna get a dime. That one's pretty easy, right? The secured creditor, as opposed to credit bidding and just forgiving its debt, the secured creditor needs to write a check to the debtor to fund all of the costs of running the case

01:07:31.574 - 01:07:43.939

at least until that sale closes, right? That's got to be the minimum, OK? and everyone agrees with that. But what happens if the secured creditor is also an insider, so you have a private equity firm that put in money as a second lien debt. You're gonna

01:07:43.939 - 01:07:55.610

sell all the assets, the fulcrum security, we love that word, that means where the money runs out, the first lender is gonna be paid in full. The second lien, the insider, that's where the money runs out. So the only two people you get paid, the first

01:07:55.610 - 01:08:05.715

lien or and the second lien or is gonna get a penny. The insider, are we gonna open the bankruptcy court and let an insider use it for the sole benefit of the insider, the guy who brought you here in the first place? Well, guess what? The

01:08:05.715 - 01:08:19.365

courts say sure our doors are open. Come on in as long as the insider pays for all the costs from the petition date through the end leave no trace, create no no new creditor and so we have a lot of cases now where lenders are are

01:08:19.375 - 01:08:32.330

are being compelled to pay as the as the ticket or the insider or how about if you have a secured creditor who goes out to a competitor and says why don't you buy it? So now you have a stalking horse bidder. Well, it's now we're really

01:08:32.330 - 01:08:42.629

talking about is for the stalking horse's benefit. Maybe the stalking horse should pay for it. So it's a complicated issue. We have a lot of case law out there, but the pay to play doctrine as we sit here today is somebody has to

01:08:42.629 - 01:08:58.205

pay for 100% of the administrative claims from the petition date all the way through until the sale closes and the court approves it. In some jurisdictions, courts are also requiring after the sale is over. You know there's 60, 90 days, 120 days of clean up in

01:08:58.205 - 01:09:10.765

the bankruptcy case. Someone's got to pay for that as well. So my in my court, lower, you know, bankruptcy judge and wherever you are, you also have to pay whoever it is, the inside of the horse or the lender. Someone's also got to throw in a

01:09:10.765 - 01:09:24.620

little extra pot we call it a wind down fund or a or a pot is a is a common term, throw a pot there for post sale expenses that may come up to close the bankruptcy case. Alright, so that's a complicated it's an

01:09:24.620 - 01:09:39.180

incredibly complicated issue. One of the issues is 503B9 claims there's a section of the bankruptcy code that says any creditor who delivers goods to the company in the ordinary course of business within and I forget what it is, 20 days before the petition, even though

01:09:39.180 - 01:09:52.414

he delivered goods pre-bankruptcy, we're gonna pretend that he delivered his goods post bankruptcy and he has what's called an administrative. Claim he jumps from the general unsecured pot, the people who don't tend not to get anything and they're low on the priority to one of the

01:09:52.414 - 01:10:05.813

highest priorities even though he delivered the goods and incurred the debt pre he's now a post creditor. So under the pay to play rule where a judge says you've got to pay all the admin claims, Mr. lender or insider, well, does that include pre-petition claims that

01:10:05.813 - 01:10:21.000

because Congress said so or admin claims or real admin claims? It's a big issue that. I was gonna ask you about that because I ran into a circumstance in Delaware on the first day hearing to approve a dip. The question was I'll approve your

01:10:21.000 - 01:10:39.089

sale process, but tell me how you're gonna get all the admin claims paid and in that one they were fairly significant 503B9 claims and that judge was his definition of admin claims included the 503B9 claims. That's most judges said no, and it's going so fast again

01:10:39.089 - 01:10:51.040

my article's out of, stale already. Most judges now have changed their mind and say it does include the 503B9 claims today. But one of the things I've tried, Jess, if people wanna take notes and steal one of my ideas here, one of the

01:10:51.040 - 01:11:02.959

things I've tried this is being taped OK, uh oh, is that the first day hearing when the judge says, you know, that dip budget does it also include payment for all of the 503B9 claims to be paid in full out of this sale or out of

01:11:02.959 - 01:11:16.995

the dip lender or from somewhere? I'll often say to the judge, well, no it doesn't, but the debtor also has $15 million or $10 million of preference claims out there and we'll make sure that the preference claims get dedicated to the 503B9 claims. So a preference

01:11:16.995 - 01:11:28.149

claim is claims the debtor has for payments it made within 90 days prior to the bankruptcy. And oftentimes, you know, if there's 15 million of those you sue people for those and you settle it I don't know 10-12, just I don't know what you what you

01:11:28.149 - 01:11:38.495

see down here 15 cents a dollar you're gonna recover some money on that. So what I've been saying to judges is I don't have to pay them now, do I? I've just got to make something for them. So I as the secured lender, or I as

01:11:38.495 - 01:11:50.334

the debtor's counsel, I'm gonna carve out the lien to the dip blender. It won't attach to the preference claims so that when the preference money comes in a year or two later, there'll be some pot of unencumbered money for the 503B9 claims. I'm starting to see

01:11:50.334 - 01:12:04.399

a little success with that, Jess, but, uh, I have gotten yelled at a couple times. Great, how did you handle all that in Hostess because if you start in with an environment, I mean, uh, uh, enterprise claims around 400 million, I know that

01:12:04.399 - 01:12:22.680

the 4th lien debt was in exceedingly in excess of that. Yeah, it's, uh, it's a nasty, nasty mess, Jess. Still unresolved. Yeah, I was gonna say, you can follow it in Judge Drane's court, up in White Plains and see what happens. I mean,

01:12:22.799 - 01:12:39.430

I will tell you that, as Neil just pointed out, it is sort of fraught with a lot of, you know, equity issues. Equitable issues in terms of who should pay and who should do what. Hostess was, I think, a very unique case because

01:12:39.799 - 01:12:54.000

well not necessarily because of the structure. We had 1 lien debt we had 3 lien debt. I don't, I guess the second liens got shot somewhere before I got there, and then you had 4th lien debt and then you had sort of unsecured

01:12:54.000 - 01:13:08.430

beyond that. The holders of the 4th lien are in large part different than the holders of the 1st lien and the 3rd lien. Uh, where we are now in the case is that we are winding down pursuant to a wind down budget, and in

01:13:08.430 - 01:13:26.220

effect then, and we're now paying against fourth lien claims, uh, recoveries to them. So in effect they're paying because the wind down budget includes the administrative costs to, you know, continue to pursue whatever collateral is out there which, which we're doing. And it will also

01:13:26.220 - 01:13:38.259

likely then include some kind of stub period at the end in order to get tax returns done and and all the other things you have to do to sort of comply, and we've beat that issue to death over the past two months as to exactly

01:13:38.259 - 01:13:51.439

what do you have to do to comply because obviously the holders want you to do as little as possible, uh, the directors and officers have to make sure that they do enough so that they don't have liability at any point in that process.

01:13:51.770 - 01:14:02.689

And then, and then where you get sort of philosophical or equitable questions is then, well, gee, if the first lien and the 3rd lien got paid in full and the 4th lien is not gonna get paid in full, why shouldn't the 1st and 3rd lien

01:14:02.689 - 01:14:15.910

pay the administrative costs? They made, they got everything in interest. I think got a release already so don't call. I'm not talking about yours, but that's not how it works. We don't like no, I understand you don't like how that works, but I just think,

01:14:15.959 - 01:14:29.279

you know, that that is a fair, a fair question to raise, and it is one that does get raised, and, and we're right in the middle of that and and then you're left with the other piece that you mentioned on the agenda which I find fascinating

01:14:29.279 - 01:14:43.950

because I'm learning about all this, I think for the first time, which is, well, what do you do at the end. Like, do you, you know, do you have some sort of a liquidating plan? Do you have a structured dismissal? Do you have what's called a

01:14:43.950 - 01:14:56.830

straight dismissal and there's an awful lot of negotiating going on between the US trustee's office and and our counsel about exactly what do you do when you get to that end point where you've paid everything out and then you still have this entity that has to

01:14:56.830 - 01:15:11.589

get its tax returns done and it has to do X, Y and Z and I and all I'm learning about that is that there's not very much guidance out there on a a universal basis and that it tends to be very, trusty

01:15:11.950 - 01:15:30.299

regions. That's a good point to go to the kind of, uh, the next areas which is what do you do if you've completed a sale and you've got all basically the assets, all are substantial. Other than, and when I'm saying all the substantial, I'm not talking

01:15:30.299 - 01:15:48.540

about preference claims or litigation claims because we've all seen, you know, litigation trusts set up, people can pursue those. But you've really gotten the, the operating businesses have now been sold, assets or an enterprise, whatever you did it, gone. How do you then deal with the

01:15:48.540 - 01:16:03.060

case? It is still there, and you touched on a topic on a dismissal. You know, three options that come to mind is do you do a liquidating plan? Do you do a conversion? Do you do what's referred to in the trade as a structured dismissal? Yeah,

01:16:03.220 - 01:16:17.770

I'd like, you know, your, the panel's perspective maybe I can get a free answer from y'all and I won't have to pay for it because and I wanna give you a different twist to it so it's more, more usable by me. So, so assume that

01:16:17.770 - 01:16:35.979

you have litigation or actions at the end of the case to try to recover some sort of collateral and assume that if you dismiss you lose those in other words, you only have those as a debtor in possession in that court process and therefore you

01:16:35.979 - 01:16:49.459

know, you can't just say, well, I'm gonna dismiss this way or I'm gonna go, you know, with some kind of structured dismissal because that value is left untapped or is waived so that's a great point. A preference claim only exists in bankruptcy. It's a federal bankruptcy

01:16:49.459 - 01:17:02.740

code section that says a debtor in bankruptcy can sue people that it paid money to 90 days beforehand. And there's all sorts of conditions, but if you dismiss the bankruptcy case, there's no state court equivalent. So if you dismiss the bankruptcy case, you can lose a

01:17:02.740 - 01:17:13.740

valuable assets. So the debtor has sold all of its operating business. It got a check from the buyer's sitting there in the account so all the debtor has now is a check and some lawsuits. So what you're saying is you have a situation that if you

01:17:13.740 - 01:17:26.669

just now you have to do something to close up the case. If you simply dismiss the bankruptcy case and distribute that check, you lose those preference lawsuits. So that, so you're not gonna dismiss in that situation. I can tell you that um

01:17:26.669 - 01:17:39.944

of Jess's three suggestions converting to Chapter 7 and giving this to a Chapter 7 trustee and and walking away, letting letting him deal with it, that's one way to go structured dismissal or a liquidating plan. One of those options I think is no longer available, which

01:17:39.944 - 01:17:54.745

is the structured dismissal. There were a few cases where after a sale we then said, Well, our job is done. We use 363. We're very clever we paid for all the expenses through today, but we don't really need to do anything else. Let's just close the

01:17:54.745 - 01:18:08.490

bankruptcy case and have it dismissed. And all chaos ensues. All hell breaks out when you do that. You've got a lot of unpaid creditors who are stayed by the automatic stay and you have a federal court that oversees it. When you dismiss the bankruptcy case, everyone's

01:18:08.490 - 01:18:22.853

rights revert back to state court and you got a lot of angry unpaid creditors and all over the country people are filing lawsuits against entities that have no assets or they have some assets some psrt of that check and how do you figure out which subsidiary

01:18:22.853 - 01:18:42.132

gets how much of the process? All hell broke out. So the US trustees are not allowing, at least in cases where where my firms representing the debtor, they are saying you're not doing a dismissal cases that's what happens when you convert who's still around

01:18:42.132 - 01:18:58.795

in the 11, the debtors, lawyers, the debtors, professionals, whatever, uh, person who the debtor designated to be the last fiduciary or chief restructuring officer or somebody, the business person who's left, the creditors committee, all those people disappear they get in essence automatically terminated and fired, and

01:18:58.795 - 01:19:12.220

an independent Chapter 7 trustee who knows nothing about the case gets appointed and you say to this person here, it's all yours. OK, and then this person has to try to figure out what to do. Well, that is one way to go, and Chapter 7 trustees,

01:19:12.229 - 01:19:21.910

that's what they do. They get a lot of cases, no asset cases where they walk into stuff blind and they're they're usually actually pretty good at that. But um I don't think that's a great way to go Jess because now you have someone who looks at

01:19:21.910 - 01:19:34.990

the case and says wow look that secured creditor was involved that's a big pocket look at that big private equity firm they're a big pocket uh look at these law firms they have insurance maybe I'll investigate. I'll take some depositions maybe I'll sue somebody. So why

01:19:34.990 - 01:19:46.540

would you want to if we're involved, that the panelists, if we're involved in 1, why would we want to hand off what's left to a Chapter 7 trustee? So I don't think that's a great option. It is an option. And you certainly meet your fiduciary duties

01:19:46.540 - 01:19:56.899

by handing it off to a Chapter 7 trustee, but I'm a big fan of the liquidating plan and so what you do is you got this pot of money and you go to court and you ask for a plan of liquidation to be approved and you

01:19:56.899 - 01:20:08.620

say, here's how I'm going to distribute the check that the buyer gave me and one of the things you can do in an 11 plan that you can't do in a dismissal or a 7 is get releases of all the people who worked on the case

01:20:08.620 - 01:20:23.379

and of the buyer of the lender so most people I see now who are stalking horse bidders or secured lenders credit bidding, they are leaving a little bit of money around for the post sale stuff and what they want to happen during that post sale period

01:20:23.379 - 01:20:34.660

is for a liquidating plan to be approved and so that they get themselves a general release. Now it's not just a release from the debtor, right? It's all of the debtor's creditors are deemed to also release you. It's a very wonderful thing if you can pull

01:20:34.660 - 01:20:46.140

it off, but I think that the liquidating plan, therefore, because of the third party release can actually be something that's beneficial now it costs money and you got to convince a buyer to cough up extra cash. You can't credit bid it you have to write a

01:20:46.140 - 01:21:00.319

check, but if you can do it, you can get a release so I'm sort of a fan of the liquidating 11 plan rather than conversion, and I don't think you can do a structured dismissal anymore. I would share that. Neil, and to your question,

01:21:00.419 - 01:21:18.169

I would, I'd go over the three options with the, uh, liquidine plan. And I'd put out there a few other reasons, especially if you're the purchaser, uh, that's bought the assets. Most of these deals you'll have a working capital adjustment. You don't want, at least my

01:21:18.169 - 01:21:36.089

experience would be, you don't want to be dealing with a trustee if you haven't resolved your working capital adjustment. You don't want to be dealing with a trustee. Um, if they're still assets. To be transferred. I mean, from the same point, I know you have a,

01:21:36.100 - 01:21:50.100

if you're dealing with a telecom company, sometimes if you, you don't have all the regulatory approvals, you may close on an 80% of the deal. You got 20% of the state still having to transfer the license. Well, you'd like to still be dealing with the

01:21:50.100 - 01:22:04.740

trust, I mean, the party that you negotiate with, not with a trustee, so. Those are other reasons why I would at least say you want to do the liquidating plan. Obviously if you can find somebody that's going to fund that plan, which

01:22:04.740 - 01:22:22.149

is it's always the cost. The question is who's gonna pony up for the cost if there's no money for administrative claims. And then the buyers are multiple buyers and they're long gone. Then you have the issue. Yes, so one of the tests

01:22:22.149 - 01:22:36.109

for getting a plan approved is that you have to put on evidence to show that you're paying all administrative claims 100 cents on the dollar in cash. So your buyer, whoever it is, has to put in a pot of money that's gonna pay all

01:22:36.109 - 01:22:50.100

the admin claims in full. So what happens, uh, what I'm seeing is sometimes a buyer will buy the asset and they'll say, let's say they put an $1 million as the pot. What happens though is unfortunately stuff comes out of the woodwork and things that you

01:22:50.100 - 01:23:05.850

didn't foresee an unforeseen IRS claim, a fight with the PBG something, and that pot starts shrinking and shrinking and shrinking and shrinking. Now as you're getting towards confirmation of your liquidating plan, the pot doesn't look like it's gonna be enough. There are no cases that I

01:23:05.850 - 01:23:18.770

know of where the person who's funding the case has said I'm gonna sign a guarantee of all admin claims no matter what. They put a maximum cap and so now what do you do? I haven't seen quite what the answer is, but I suspect you're

01:23:18.770 - 01:23:37.069

gonna convert to 7 unless you get someone to put in new money, but that's, that's a new issue, and a new horror show that we'll be seeing soon. Before we get to kind of the last, just close, any of you think of terms

01:23:37.069 - 01:23:58.020

where a plan, and it may well be a sale within the plan would be better than actually doing the 363 sale? Uh, is it better for transfer taxes or, as you point out, for leases or tax issues, are they, would they be any significant drivers that

01:23:58.020 - 01:24:16.470

would flip you to doing a plan versus a 363 sale? Or just something to consider to make sure you then evaluate all options before you go down the sale process. Well, I think we've discussed whether a 363 sale is better than out of court.

01:24:16.569 - 01:24:30.729

So now you're saying you're in bankruptcy, which is better at 363 or a plan. So everything that we said before that you could do in a 363 sale, all those wonderful things assuming and signing contracts over anti-assignment clauses, selling free and clear of liens, all those

01:24:30.729 - 01:24:44.009

other things you can do those in a plan too. So all of those benefits you can do them as a 363 sale or as a plan. The problem I find with a plan is that a plan requires that you first put together a disclosure statement telling

01:24:44.009 - 01:24:56.569

creditors about the case and the and the transaction and you have to get the disclosure statement approved then you gotta send out the approved disclosure statement, a proposed plan of the organization, plus a ballot to every creditor who can vote. Creditors get to vote, then you

01:24:56.569 - 01:25:11.326

have to have a second hearing. You have to put on evidence there and get your plan approved. And unfortunately the bankruptcy code sections 1123, 1125, 1129, which govern plans, the legal test to get a bankruptcy plan approved is incredibly complicated. The legal test to get a

01:25:11.326 - 01:25:25.782

363 sale is incredibly simple best interests of the creditors, and then you have to maybe mumble something about the process and the price were fair and you say in the debtor's business. Judgment, Your Honor, we had a public auction, so the process and we had investment

01:25:25.782 - 01:25:38.642

bankers and the buyer, uh, you know, we had 16 bids and everyone raised their bids. It takes, you know, 15 minutes to get a 363 sale approved if you're doing your job right. A plan of reorganization is a very complicated legal test. So from the lawyer's

01:25:38.642 - 01:25:52.109

side, I'd be interested what the business guys have to say, but from the lawyer side I think a 363 sale is probably better in most instances if you have a third party buyer because there's so much less risk, it's so much faster. It takes

01:25:52.109 - 01:26:04.589

30 days for a disclosure statement, 30 days for a plan at best, so it could be 90 to 120 days to get a plan and disclosure statement approved. And if I'm a buyer, why do I want creditors voting on the sale? That's the last thing I

01:26:04.589 - 01:26:15.540

want. I just want to give my check and run away with the assets. So I'm a big fan of the 363 sale being better than the plan. However, there are some advantages to a plan that you mentioned that the, the there are certain taxes you can

01:26:15.540 - 01:26:31.520

get out of and there's certain, uh, NOLs, net operating losses that can be preserved under a plan that cannot be preserved under 3. Yeah, so there are some benefits. So if you have a tre if one of your assets is you have a long history of

01:26:31.520 - 01:26:54.830

multi-million dollars of losses and you want to preserve those losses, sometimes the plan's better, but uh that's pretty complicated to pull off. To wrap up, before, before you wrap, just why not avoid all of this nonsense and do an Article 9 sale. You asking that I'm

01:26:54.830 - 01:27:09.520

asking, I'm asking you that number 17 on your list? Wait a minute, I'm the moderator. I don't see that question here. We, we like that too, just to weigh in from this side. Uh, you want to take that first bill or you want me to

01:27:09.520 - 01:27:27.080

try it out? My answer would be, I like the certainty associated with 363 sale and the fact that it's covered off by a, um, court order and it's the best way to get title to all those assets, and there's no question at the end of the

01:27:27.080 - 01:27:45.399

day, whether you did it in a commercially reasonable manner. Well. Free and clear liabilities is trumps pretty much everything. Well, aside from that, the Article 9 of the UCC, um, has different procedures and time limits to foreclose on intellectual property on inventory. It doesn't even cover

01:27:45.399 - 01:27:58.470

real estate. So if you have an asset that's an operating business that has IP and real estate, you can't even use Article 9, or if you can somehow pull it off, you've got to do 3 different Article 9 sales in 3 different jurisdictions with 3. What's

01:27:58.470 - 01:28:11.270

more complicated, yeah, from my perspective, more of the work in the wood gets chopped prior to deciding whether you're selling or not because I think that's where, you know, and if you're an attorney and you're advising the company or the board, it's then gonna all

01:28:11.270 - 01:28:24.709

be about process. It's all gonna be about what process did you undertake to determine whether a sale made sense, whether that was the best alternative, you know, before you ever kind of can get to sort of those agreements as a mechanism 363 is generally

01:28:24.709 - 01:28:43.290

a better mechanism. Yeah, my thing to answer to that, I think too that if you look at and we've often will see in the legal advertisement sections of the Wall Street Journal, you'll see Article 9 sales being advertised. I think if you really read into those

01:28:43.290 - 01:28:59.310

things closely, just about all the ones I know that I have actually stepped up and done or when I look at the ones that are in that are being noticed, it's usually you're foreclosing on some type of either a stock or membership interest, which is, you

01:28:59.310 - 01:29:15.620

know, from that standpoint, if that's your collateral, you're taking it subject to all the liabilities anyway. So there's not something that really gets cleaned a lot or cleansed a lot by 363 sale. And, uh, outside of that, if I'm gonna, to me, the better alternative for

01:29:15.620 - 01:29:29.620

an Article 9 is to actually go seek a state court receiver and let the receiver go through that process for liquidation if that's what you really want to pull off. In my personal experience, practically speaking, it's generally limited to small businesses. It's not something, you know,

01:29:29.660 - 01:29:45.220

the benefit of having the free and clear sale and you've got a federal judge's approval of the transaction that has a lot of value, but it's nothing in a 363 context, let alone a plan context, to run up a million dollars in in costs associated

01:29:45.220 - 01:30:06.129

with the whole process and in many cases much beyond that and Article 9 can provide for a cheaper avenue, but again, the more complex, the bigger the business practically speaking, it's almost impossible. We covered the points. The question I put to the panel as we

01:30:06.129 - 01:30:26.029

conclude is, at least based on what we've gone through. I'd say that over the last 3 or 4 years what we're still seeing in the marketplace as to how loans are being structured, who's buying into these loans, and to your point, Jim, just the plethora

01:30:26.029 - 01:30:44.950

of capital that's available, is your perspective, are your perspectives that these 363 sales will continue or or there's a chance we might get back in certain instances to what might be called a more, uh, traditional, uh, plan or reorganization process? My own view is I think

01:30:44.950 - 01:31:00.750

we're just going to continue to see more and more 363 sales. I think in a great many venues I had this conversation with Judge Walrath in Delaware on another panel late last year and basically the court has become a market clearing mechanism

01:31:00.750 - 01:31:18.049

through 363 and I'm again of the belief that a lot of the, certainly the balance sheet restructuring, gets done long before you get to bankruptcy by virtue of trading. So if you need a mechanism to implement the trade to clear the trade, 363 is great for

01:31:18.049 - 01:31:39.839

that. It's less expensive. I think that the overarching objective of Chapter 11, which I believe is is rehabilitation or at least the opportunity to rehabilitate, can still be effectively accomplished through 363. The rehabilitation just happens after the fact, not so much before the fact is

01:31:39.839 - 01:31:58.620

in a POR context. You may have a different perspective. I think if anything, uh, because many of these deals have traded so many times now and the leverage is up, enterprise value is probably down the market's flat, you're probably gonna see more and more of

01:31:58.620 - 01:32:15.399

it. There's less equity to, uh, to trade off. It's gonna be companies are gonna, our lenders certainly are gonna react quicker than they have. This is an opportunity if anyone has questions that we're willing to take questions and. And we can ultimately wrap things up.

01:32:15.509 - 01:32:34.950

I think we kind of keep it on the time that we were allotted for the afternoon. Does anyone have any questions? Break sooner than later, right? But then that wraps up the program and we certainly appreciate, uh, all of you participating and being here today. Thank

01:32:34.950 - 01:32:36.270

you very much. Thank you.