Below is our initial take on recent bankruptcy-related developments:
A U.S. bankruptcy judge said the former executives of Toys ‘R’ Us will stand trial for allegedly misleading suppliers about the company’s financial state, then billing the suppliers upwards of $600 million, while the company was in bankruptcy.
S&K Take: Judge Phillips trimmed the Toys ‘R’ Us Trust’s lawsuits against the company’s former directors and officers a bit but left some interesting claims behind. The Trust sought to assert claims related to the procurement of debtor in possession financing, arguing that the Ds and Os knew the company was hopelessly insolvent, but those claims were dismissed based on the court’s findings made at the time (that the DIP was an exercise of the debtors’ prudent business judgment). The court did, however, allow “vendor” claims to proceed – these claims are based on the notion that management misled vendors to induce them to continue extending postpetition credit when the debtors could not ever pay them back. The court also allowed more traditional claims related to prepetition transfers to equity and management to continue. We will be keeping an eye on this, particularly the creative “vendor” claims.
The U.S. Supreme Court agreed to hear Mall of America’s challenge to a lower court’s ruling related to the extent of U.S. bankruptcy law in limiting the appeals of bankruptcy sales.
S&K Take: Bankruptcy law continues its time in the limelight, with the Supreme Court granting certiorari to consider another bankruptcy related issue. This one arises out of the Sears case and relates to the assignment of a Mall of America lease to Transform (the ESL vehicle that bought most Sears’ assets). The question is largely jurisdictional – the Supreme Court will be asked to consider whether the Mall’s appeal of the Bankruptcy Court’s decision allowing the assignment is moot under section 363(m) because the Mall failed to obtain a stay of the assignment order.
A British Virgin Islands court ordered Three Arrows Capital (3AC), a high-profile crypto investor, to liquidate, following sharp downturns and sell-offs in the digital currency market the last several months.
S&K Take: We now turn to the cryptoasset part of our programming, with significant bankruptcy related news in the asset class. First up is originally Singaporean but now BVI crypto fund Three Arrows, which has reportedly filed for liquidation after taking hits on terra coin and luna, among other things. This came despite a rescue loan from Voyager Digital.
Lawyers hired by Celsius are facing resistance to declare Chapter 11 bankruptcy from the crypto lender’s executives.
S&K Take: We continue with Celsius, which has reportedly hired bankruptcy experts to consider a filing. Celsius appears to sport a business model similar to that of Cred, Inc., which filed for bankruptcy in 2020. Cred’s issues largely stemmed from a poor hedging strategy and losses related to corporate malfeasance, while Celsius seems to be related to the downturn in the volatile crypto market. This one will be watched closely by restructuring professionals.
Sam Bankman-Fried, the 30-year-old founder of FTX, explained that some crypto exchanges are doomed to fail, and he has provided companies with billions in credit lines as a means to help stabilize the crypto market and protect customers, even if it results in losses for him.
S&K Take: We end with an interesting perspective on the asset class. There are differing views, with some arguing this is the downfall of a fictitious asset, while others thinking that this is a chance to buy the dip. The middle road would likely be that this is similar to the dot com bust of the early 2000’s, which separated the wheat from the chaff in an overheated market. We aren’t taking a position, but are interested to see what the seemingly inevitable upcoming bankruptcy activity in the industry looks like.