Below is our initial take on recent bankruptcy-related developments:
Sixteen days before filing for Chapter 11, the Atlanta-based label maker used the bankruptcy code’s “deliberately broad” venue statue as an opportunity to deposit $1 million into New Jersey bank accounts.
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S&K Take: Judge Kaplan handed down a very interesting venue decision in the Multi-Color chapter 11 cases on Monday. Not interesting from a result perspective, but more so from an analysis and commentary perspective. A dissenting ad hoc group and the UST had filed motions to dismiss or transfer the case. Their argument was that the filing entity, MCC-Norwood, lacked the necessary connections to the great state of New Jersey required to establish venue. Interesting facts were that MCC-Norwood had assets other than the bank account opened 16 days prior to the bankruptcy in NJ that was the jurisdictional hook—it also held patents, intercompany receivables, and insurance policies—and that its original petition lists Atlanta as its principal place of business, leaving blank the field for the “[l]ocation of principal assets, if different from the principal place of business.” This was subsequently amended. Despite these hurdles, Judge Kaplan found that NJ was an appropriate venue. The Judge found that section 1408 requires him to answer two questions: 1) what are the debtor’s principal assets? and 2) where were those principal assets located for most of the 180-day period preceding the filing? The Judge did consider the other assets mentioned above but ultimately found that the $1 million plus in a bank account was the debtor’s principal asset, and that was in NJ during the relevant time frame. Not that Judge Kaplan didn’t have misgivings about the circumstances. He noted that “no party can deny that the Norwood [bank] Accounts were opened so that MCC-Norwood could file in this district,” and “[t]o the extent this does not ‘sit right’ with the parties in interest, the Court shares that sentiment”. Ultimately, however, “this is the situation intentionally created by Congress when it elected to broadly draft - and decline to tailor - the venue statute. It is not this Court’s place to ‘close loopholes in legislation.’” So we got loopholes! In any case, still plenty of wood to chop for the debtors, with the second day of a contested DIP hearing on March 23, and confirmation currently slated for March 31 (although we will see what the newly minted UCC has to say about that timeframe).
The Lycra company, best known as the inventor of spandex fabric, filed on Tuesday to cut $1.2 billion in debt.
S&K Take: The Lycra Co. filed a prepack in the SD Tex. on Tuesday. The company seeks to eliminate $1.2 billion in funded debt through a restructuring backed by an RSA. The RSA is supported by 100% of the term loan lenders, and 90% (in amount) of certain other promissory note holders. The plan is to emerge in about 45 days. That plan, however, is being challenged by a minority lender, who opposed the proposed DIP (and had contemplated providing a competing DIP themselves). That objection was denied by Judge Lopez, who approved $50 million of the $75 million on an interim basis. He also conditionally approved the DS and set confirmation for April 24. Judge Lopez did tell the parties, however, that they will need to provide evidence backing value and certain priming consent mechanisms on the DIP at the April 10 final hearing. Seems like a case ripe for settlement but we will see.