Bankruptcy and Business Reorganization

By J. Eric Lockridge

Large and small offshore service companies are turning to the Bankruptcy Code for help with restructuring their balance sheet, and turning to Washington for help with generating more work.

One of the largest offshore service companies in the world, Tidewater, announced this week that it will file a Chapter 11 bankruptcy petition in Delaware on or before May 17, 2017. This is not a surprise to the markets. Tidewater received notice from the New York Stock Exchange in April that it is at risk of being delisted before the end of the year because its average stock price sat below $1.00 per share for too long. Tidewater’s press release announcing the upcoming bankruptcy says the company has secured broad support from secured creditors for a pre-packaged plan that will effectuate a form of debt-for-equity swap. The plan will also reject certain sale-lease back agreements for a portion of Tidewater’s fleet. Expect a fight over lease-rejection damages.

A smaller operator focused on the Gulf of Mexico, GulfMark Offshore, also announced this week that it is planning a Chapter 11 filing. Offshore Support Journal reported that GulfMark Offshore’s most recent SEC filing discloses the company will likely file a Chapter 11 bankruptcy petition on or before May 21, 2017. The company is working with advisors to secure support for a restructuring agreement that will include a backstop commitment from certain note holders and a debt-for-equity swap.

Some in the offshore industry are lobbying the White House and others to extend the “America First” agenda to the offshore-service industry in hopes that might provide a boost. For example, see Harvey Gulf’s recent open letter to President Donald Trump here. Many in the offshore service industry would like to see the current administration enforce regulations requiring proper plugging and abandonment (P&A) of many non-producing or low-producing wells in the Gulf of Mexico’s shallow water. They have to be careful about how loudly they push that agenda, however, or they may alienate the very exploration and production (E&P) companies that would hire them. Many E&P companies would like to see enforcement of those regulations delayed as long as possible, and at least until the price of oil is higher.

Enforcing P&A obligations would likely create thousands of jobs and boost the economy along the Gulf Coast, where President Trump received strong electoral support. The House Majority Whip, Rep. Steve Scalise (R-LA), represents a district along the Louisiana coast that is home to scores of offshore service companies and their vendors, which gives that industry some important clout on Capitol Hill. Delaying enforcement of P&A obligations and/or making them less onerous might be more consistent with a “regulation-roll-back” agenda and with the interests of many E&P companies, several of which have strong ties to the current administration and deep relationships in Congress.

Will Washington take any action to provide some relief for offshore service companies, their employees, vendors, and lenders? How will an increase in Chapter 11 cases for offshore service companies affect the industry and the companies that have (so far) avoided bankruptcy? Kean Miller and many of our clients will keep a close watch as events unfold.

 

other-agreements

By Dean P. Cazenave

When lenders and borrowers want to modify the terms of an existing loan agreement, and the modifications are extensive and will affect many provisions of the agreement, the lender’s lawyer will often choose to draft an “amended and restated agreement” in order to document those modifications. A single amended and restated agreement will often be easier to read than would be the original agreement and a separate amendment (or a series of separate amendments). When they do so for a secured financing, the parties almost always intend that the collateral that secured the original loan agreement continue to secure the obligations under the amended and restated credit agreement;, as a result of a recent decision by the U.S. Court of Appeals for the Sixth Circuit, it is important that the document clearly states that it is not intended as a novation of the obligations under the original loan agreement.

Recently, in Bash v. Textron Financial Corporation (In re Fair Finance Company), 834 F.3d 651 (6th Cir. 2016), the U.S. Court of Appeals for the Sixth Circuit reversed a determination of the District Court for the Northern District of Ohio that an amended and restated loan agreement did not constitute a novation of the original loan agreement. In so doing, the court held, in largely reversing the dismissal of an adversary proceeding arising out of a Chapter 7 bankruptcy case, that the amended and restated loan agreement may actually have constituted (or at least it is ambiguous as to whether it constituted) a novation of the original loan agreement. If the amended and restated loan agreement did in fact constitute a novation, the security interests granted pursuant to the original loan agreement would have terminated at the time that the parties entered into the amended and restated loan agreement. The circuit court, after reversing the district court’s determination, remanded the question to the lower court for further proceedings.

The district court had rejected the novation argument, but the Sixth Circuit reversed, finding that the following provisions of the amended and restated loan agreement created a question of fact as to whether it was the parties’ intent to wholly replace and extinguish (i.e. novate) the original loan agreement and the security interest granted thereunder:

  • The statement that the restated loan agreement was for “valuable consideration, the receipt and sufficiency of which are hereby acknowledged”;
  • The language that the restated loan agreement “constitutes the entire agreement of Borrowers and Lender relative to the subject matter” thereof and would “supersede any and all prior oral or written agreements relating to the subject matter”; and
  • The re-grant of the security interest under the restated loan agreement.

It is cause for concern that all of the provisions the Sixth Circuit found were evidence of a novation in In re Fair Finance Company are regularly found in amended and restated loan documents throughout the broader loan market.

Significantly, the Sixth Circuit distinguished this case from In re TOUSA, Inc., where a district court ruled that the execution of an amended and restated agreement did not constitute a novation. The amended and restated agreement in TOUSA contained an explicit statement that the parties intended that the security interest and liens granted in the original security agreement would continue in full force and effect. The district court in TOUSA explained that notwithstanding the general language in the amended and restated agreement that all prior agreements were being restated in their entirety, the specific terms the parties agreed to must be given effect.

While one may question the sufficiency of the evidence that the Court relied on in finding that the parties may have intended to effect a novation, the lesson that a lawyer drafting an amended and restated financing agreement should draw from this decision is the importance of clearly and expressly stating the parties’ intent that the amended and restated agreement not constitute a novation. When drafting an amended and restated financing agreement, a lawyer should include an express statement that the agreement is not intended to constitute a novation or a termination of the obligations under the original agreement, and in the context of a secured financing, that the security interests created pursuant to the original agreement are intended to continue and to secure the obligations under the amended and restated agreement.

By J. Eric Lockridge and Benjamin M. Anderson

The U.S. Fifth Circuit Court of Appeals dealt a blow to secured creditors in a recent opinion affirming a successful “cramdown” reorganization plan in a commercial real estate (“CRE”) case. See In re Village at Camp Bowie I, L.P., — F.3d — (5th Cir. Feb. 26, 2013), 2013 WL 690497. The panel opinion in Bowie allowed a debtor in CRE bankruptcy case to intentionally delay paying trade debt that it had cash available to pay and to classify those trade creditors as “impaired” under Chapter 11 – thus giving a class of friendly creditors the ability to vote for the debtor’s plan of reorganization. The court expressly rejected the argument that “artificially impaired” creditors that a debtor could pay in full, like the trade creditors in Bowie, should not be allowed to vote on a Chapter 11 plan. The result in Bowie was a confirmed plan based on the vote of unsecured creditors owed $60,000 over the objection of the fully secured creditor owed $32 million.

In Bowie, the debtor financed the acquisition and development of land in Fort Worth (the “Property”) with equity capital and short-term promissory notes (the “Notes”). The Notes were secured by a first mortgage on the Property. The debtor’s development of offices and retail did not do as well as planned. After a series of modification agreements and forbearance agreements to extend the due dates for the Notes, the then-current holder of the Notes initiated foreclosure proceedings on the Property. The debtor filed its petition for relief under Chapter 11 of the Bankruptcy Code one day before the scheduled foreclosure sale, which stayed the foreclosure proceedings.
 

Continue Reading “Artificially Impaired” Creditors Can Vote on Chapter 11 Plans in the Fifth Circuit

By J. Eric Lockridge

A recent opinion from the United States Bankruptcy Court in Baton Rouge, Louisiana shows that even experienced lenders and developers may not always understand how Louisiana’s Private Works Act applies to their project, and how much leverage a properly filed notice of contract can provide to a general contractor.  Tuscany Reserve, LLC (“LLC”) was formed by sophisticated developers for the purpose of developing a new apartment complex in Baton Rouge. LLC obtained acquisition and construction financing from a bank (1st Bank), which properly recorded its mortgage on the project before work commenced. LLC hired “Contractor” to build the complex; Contractor recorded its notice of contract in the parish mortgage records.  As often happens, a dispute developed between LLC and Contractor regarding the work performed and lack of payment.  Contractor stopped work and filed a lien on the property under the Louisiana Private Works Act for $1.17 million.  Contractor eventually agreed to cancel its lien in exchange for a promissory note and guarantees from LLC’s principals and collateral provided by an LLC affiliate.  Once the lien was cancelled, 1st Bank funded two draw requests on the construction loan.  LLC needed more money for the project and turned to a new lender (2nd Bank) for additional financing.   2nd Bank secured its loan with a collateral mortgage on the immovable property for the project; there were no liens in the property records when 2nd Bank recorded its mortgage.  The relationship between LLC and Contractor soon soured, again, and Contractor filed two liens on the project, one for the original claim amount, plus interest, and another for $250,000.00.  Contractor sued LLC and its principals on the matured promissory note, and also sued LLC based on its rights under the recorded construction contract and the Louisiana Private Works Act. LLC eventually filed for chapter 11 bankruptcy in the Middle District of Louisiana.

Continue Reading Lenders and Developers Need to Understand How Louisiana’s Private Works Act Applies to Their Projects

By J. Eric Lockridge

Does a tenant’s failure to expressly assume a commercial lease within 120 days of filing bankruptcy give its landlord the right to immediate possession of the leased premises? Yes, according to several recent court decisions. The bankrupt tenant’s landlord is entitled to immediate possession of the leased premises, without going through the time and expense of moving to lift the automatic stay and pursuing an eviction in state court, or commencing an adversary proceeding in the bankruptcy court.

Continue Reading Landlord Entitled to Immediate Possession of Possession of Premises

By Eric Lockridge

The judge overseeing Chrysler LLC’s bankruptcy entered an order on June 1, 2009 approving Chrysler’s motion seeking permission to sell substantially all of its assets to a new company.  The procedure by which this sale was accomplished, and by which a similar sale in the GM bankruptcy will likely be accomplished, is known in the bankruptcy and finance worlds as a “363 Sale,” after the relevant provision of the U.S. Bankruptcy Code.

(For those well-versed in 363 Sales, see Stephen Sather’s thoughtful post about practical and ethical concerns with the Chrysler sale here. )

Continue Reading 363 Sales of Assets in Bankruptcy – Chrysler and Beyond

By Eric Lockridge

The number of businesses seeking bankruptcy protection hit its highest level in more than two years in March, as the recession sends more companies into financial crisis, according to a story today in the Dow Jones Daily Bankruptcy Review. The 7,843 commercial bankruptcy filings in March 2009 represent a 23.2% jump from the 6,365 filings the previous month. It’s also the highest monthly total of business filings since at least 2006, according to Automated Access to Court Electronic Records, or AACER.

Other data from AACER, a private firm that tracks bankruptcy filings, shows a 52.4% increase in business bankruptcy filings during Q1 of 2009 over the number of filings in Q1 of 2008. One expert predicts a record number of public companies to file bankruptcy this year.

Read the entire story here.

By J. Eric Lockridge

In the current economy, corporate officers and directors face an increased risk of derivative suits and other litigation against them from frustrated shareholders and other stakeholders in a corporation. Should officers and directors also be concerned about claims brought against them by their company’s creditors? The answer may depend on what state’s law applies to the creditors’ claims.

Continue Reading “Zone of Insolvency” Claims Against Officers and Directors Still Alive (and Well?) Outside of Delaware

by J. Eric Lockridge

In today’s distressed retail market, the possibility of a tenant’s bankruptcy is a top concern for managers and owners of retail centers. Owners of commercial office buildings in many parts of the country are becoming increasingly concerned about tenant bankruptcies, too. Landlords need to know the options available when a tenant files for bankruptcy and should anticipate a tenant/debtor’s likely maneuvers in bankruptcy. This article provides a summary of relevant law and key strategic considerations to help landlords minimize losses and protect their interests when a tenant files bankruptcy.

Leases & “Executory Contracts”

Section 365 of the Bankruptcy Code allows a debtor (i.e., an entity that has filed for bankruptcy) to either assume or reject an executory contract or unexpired lease. This way, a debtor may decide to assume any valuable contracts and reject any burdensome ones. If a bankruptcy tenant decides to assume an unexpired lease, the lease will remain in effect through and after completion of a Chapter 11 reorganization. Assuming the lease does not mean the tenant gets to stay in the space free of charge. The tenant must cure any outstanding defaults and perform all pending obligations in the lease.
 

Continue Reading Preparing for a Tenant’s Bankruptcy – the Landlord’s Perspective

By J. Eric Lockridge

Chapter 11 bankruptcies are on the rise, and many expect that trend to continue. In the third quarter of 2008 there were 70% more Chapter 11 filings than in the third quarter of 2007, according to Automated Access to Court Electronic Records, a company that tracks bankruptcy statistics.

Experts are predicting a record number of corporate bankruptcies – from large public companies to small local-only businesses – in 2009, and possibly beyond. With corporate bankruptcies becoming more common, businesses leaders across all industries are wondering: What exactly is a Chapter 11 bankruptcy, and how does it affect my business when a customer/vendor/competitor files for bankruptcy? This post and future posts on the Louisiana Law Blog are intended to help you understand the Chapter 11 process and answer some of your business bankruptcy questions.

Continue Reading How Does Chapter 11 Affect My Business When a Customer, Competitor or Vendor Files for Bankruptcy?