Bed Bath & Beyond announced a series of measures to address declining sale performance, as announced by press release and reported by Yahoo! Finance. The company has received commitments for $500 million in additional financing. It also plans to sell up to 12 million additional shares of common stock, close 150 underperforming stores and lay off 20% of its corporate and supply chain staff. The company’s stock, which had surged from $4 a share to north of $28 from “meme trading,” sank following the news, trading at $8-9 a share.

Defaults on leveraged loans hit $6 billion in August, the highest monthly total in almost two years, as reported by the Wall Street Journal. Borrowers in the $1.7 trillion market may be facing the “double whammy” of weaker earning and rising interest rates. One-month LIBOR is predicted to reach 4.07% in May 2023, with similar expectations for SOFR. Barclays predicts that loan defaults, which are about 1% now, could rise to 3.25% or more a year from now.

The American Bankruptcy Institute reports that bankruptcy filings across all chapters increased in August 2022, a 10% increase over August 2021 and a month-over-month increase as well. Chapter 11 filings totalled 466 in August 2022 (up from 257 in July 2022) and subchapter V elections within Chapter 11 totalled 140. Although these numbers are still historically low, they indicate that businesses and individuals are increasingly looking to the bankruptcy system for financial relief.

The Wall Street Journal reports that Sears’ Chapter 11 plan, which was approved in October 2019, will finally go effective following the bankruptcy court’s approval of a $180 million settlement reached with former shareholders and executives of Sears. The unsecured creditors committee had alleged that a hedge fund controlled by Edward Lampert and other Sears shareholders illegally transferred assets valued at $2 billion, including Lands’ End Inc. and some of Sears’ best real estate, to the detriment of creditors. The bankruptcy case, which was filed in 2018, should close in 30-60 days.

Judge David Jones in the Southern District of New York has rejected a request for an official committee of equity holders in Revlon’s chapter 11 proceedings, as reported by Reuters. Debtor’s counsel argued that the equity holders “cannot possibly” prove that they are entitled to a meaningful recovery at this stage of the bankruptcy proceedings, and the company’s lenders argued that recent stock price fluctuations were “untethered to market realities.” Judge Jones found that the cost of appointing a committee, with its expenses being paid from the estate, outweighed its likely value. [Reuters; Aug. 24, 2022]

The first non-bank mortgage lenders are going out of business, a trend that Bloomberg expects will continue as a result of increased interest rates, a sharp decrease in mortgage originations, and non-bank lenders’ reliance on credit lines that can be short term. Independent lenders gained market share following 2008 when banks pulled back from the mortgage industry. The situation is most dire for those lenders that make riskier loans that are not eligible for funding from Fannie Mae and Freddie Mac. [Bloomberg; Aug. 19, 2022]

The Wall Street Journal reports on the uneasy situation retailers find themselves in as they work to offload inventory ahead of the holiday season and yet, at the same time, consumer spending has shifted to essential items such as food and gas due to increasing inflation. Retailers from Walmart to Nordstrom are offering deep discounts to clear out inventory. The picture going forward is uncertain, as the industry anticipates its slowest sales growth in the period between November and January in years. [WSJ; Aug. 28, 2022]

Lumileds filed bankruptcy under Chapter 11 with a prepackaged plan in the Southern District of New York, as reported by Bloomberg. The company’s lenders will take over control of the Netherlands-based lighting manufacturer with a plan that will cut $1.3 billion in debt from the company’s balance sheet and provide the company with $275 million in DIP financing. [Bloomberg; Aug. 29, 2022]

CNBC discusses how July’s inflation data should provide signs that there’s at least some relief in the pipeline for now, with consumer prices being flat for the month.  The trend was mostly led by a fall in energy prices, although it was offset by gains in other items, including a 1.1% monthly rise in food prices.  [CNBC; Aug. 10, 2022]

Bloomberg examines claim trading in crypto bankruptcies, such as Voyager and Celsius, whereby the crypto lenders’ customers (now-creditors) are offered quick cash payouts but at a steep discount.  While claim trading is not uncommon in bankruptcy cases, the trading occurring in crypto bankruptcies is unique in that the creditors are overwhelmingly small, individual account holders and are large in numbers (Voyager has approximately 3.5 million active users and Celsius, 300,000).  [Bloomberg; Aug. 9, 2022] 

Reuters reports on a prepackaged Chapter 11 case filed in the Bankruptcy Court for the District of Delaware by OSG Group, a billing and marketing firm that operates in 19 countries.  The company, with the support of its creditors, has proposed a restructuring plan that would cut $134 million in debt and allow the company to emerge from bankruptcy by end of August.  [Reuters; Aug. 8, 2022]  

Reuters reports that Coinbase’s shares rose more than 16% last week after the cryptocurrency exchange announced its partnership with BlackRock, the world’s largest asset manager. Under the agreement, Coinbase’s institutional trading platform Prime, which services hedge funds, corporate treasuries and other financial institutions, will provide crypto trading and custody services to Coinbase’s institutional clients using Aladdin, BlackRock’s suite of software that helps institutional investors manage their portfolios. The announcement sparked a much needed upswing in Coinbase’s shares, which were down over 60% this year due to the sharp drops in crypto asset prices as investors steered away from the asset class among recession concerns. [Reuters; August 4, 2022]

According to Law360, Whole Foods recently settled a lawsuit brought by an assignee for the benefit of creditors following a mediation held in late July 2022. Asset Recovery Associates LLC filed the breach of contract action as assignee for yogurt manufacturer AtlantaFresh Artisan Creamery LLC. The suit alleged that AtlantaFresh was driven into insolvency when the grocery giant terminated a seven-year contract to purchase 30,000 gallons of milk per week in 2017. The U.S. District Court for the Northern District of Georgia previously declined to dismiss the case, disagreeing with Whole Foods’ argument that Asset Recovery lacked standing under Georgia law as an assignee for the benefit of creditors of the limited liability company assignor. [Law360; August 2, 2022]

Per the Wall Street Journal, Voyager Digital Holdings Inc., a cryptocurrency brokerage firm, is set to return the $270 million cash-in-hand that it held when it filed for bankruptcy in July 2022. The U.S. Bankruptcy Court for the Southern District of New York ruled last week that Voyager had provided sufficient cause to amend the automatic stay to allow customers to access the custodial account holding their funds. The $270 million represents a small portion of investor assets. Voyager is one of several crypto companies that recently filed for chapter 11 after a “run on the bank” by customers requesting withdrawals en masse due to a massive dip in cryptocurrency prices. Voyager is currently undergoing a sale process, which it intends to conclude in September, and has already received several proposals. [WSJ; August 5, 2022]

According to The Wall Street Journal, Teva Pharmaceutical Industries Ltd. has reached a national settlement agreement worth nearly $5 billion, including about $3.7 billion in cash, to resolve thousands of lawsuits over its alleged role in the opioid crisis.  The plaintiffs’ executive committee, which represents local and state governments and Native American tribes, reported that the $3.7 billion includes about $650,000 earmarked in previously settled cases.  The abatement funds will be spread over 13 years, with Teva also carrying the option of donating $1.2 billion worth of a generic version of its overdose drug—Narcan—for the next decade or an agreed upon equivalent in cash.  Once documentation is finalized, a sufficient number of plaintiffs will need to sign on to the deal, which would end the vast majority of opioid litigation.  The proposed settlement is the latest move by a company seeking to resolve the costly litigation.  [WSJ; July 26, 2022]

Bankrupt cryptocurrency platform Voyager Digital has challenged a proposed Chapter 11 plan from FTX.com and Alameda Ventures Ltd., as reported by Law360, arguing that the AlamedaFTX group’s plan provides a “lowball bid” that seeks to liquidate Voyager’s digital assets.  Specifically, Voyager asserts that the AlamedaFTX proposal would not provide as much value as the stand-alone Chapter 11 plan the debtor filed alongside its bankruptcy petition earlier this month and might serve to chill bidding, as it was made via press release and not through the bidding procedures proposed by Voyager.  It’s a lowball bid dressed up as a white knight rescue,” Voyager said in its response.  Voyager, which purportedly once held more than $5.9 billion in cryptocurrency assets, filed for Chapter 11 protection on July 5th in the face of plummeting crypto values.  Bids made pursuant to Voyager’s bid procedures are due by August 26th, while AlamedaFTX said it would be able to sign a sale agreement by July 30th, with a target close of August 17th.  [Law360; July 25, 2022]

Discount home-goods retailer Tuesday Morning is exploring restructuring options, including its potential second bankruptcy filing in less than two years, according to Bloomberg.  While the company has reportedly agreed to new debt financing deals to provide for much-needed breathing room, restructuring talks are in the early stages and could materially change in the coming months as the company fights against sustained inflationary pressures, inventory surplus, and supply-chain disruptions.  [Bloomberg; July 20, 2022]

Shareholders in the Revlon bankruptcy have asked that an official committee of equityholders, not affiliated with the debtor-retailer’s majority owner Ron Perelman, be appointed in the case.  According to The Wall Street Journal, a group of minority shareholders sent a letter to the US Trustee on July 13th requesting the formation of an official equityholders committee, asserting that shareholders are now in the money, as Revlon’s stock price has nearly tripled since the company filed for bankruptcy a month ago to close at $5.40 on Tuesday, July 12.  According to the minority shareholder group’s July 13 letter, the elevated stock price suggests that shareholders “are poised to retain material value at the conclusion of Revlon’s bankruptcy.”  The shareholders hope to participate in a court hearing this week regarding its formation request.  [WSJ; July 13, 2022]

The retail sector continues to be under watch for potential distress, as reported by Law360.  The industry, which benefited from healthy consumer cash levels and stimulus funding during the pandemic, is now butting up against a “perfect storm” of unfavorable market conditions, as inflation continues to affect consumer spending habits, ballooning prices impact demand for certain goods, retailers contend with bloated inventory levels, and supply chains clash with uncertain production and labor markets abroad.  Experts advise retailers, lenders, landlords and manufacturers to closely monitor the changing global economic climate and its impact on consumer spending and retail operations across the sector.  [Law360; July 15, 2022]

According to The New York Times, Scandinavian airline SAS has filed for bankruptcy protection in the US to help cut debt after wage talks between the company and its pilots collapsed and pilots went on strike in early July.  While the company intends to continue flying through its chapter 11 process, court papers warn that the pilot’s strike could cause the cancellation of nearly half its flights—as the strike is reportedly costing the company $10 million to $13 million per day.  SAS is in discussions with potential lenders who could provide $700 million in debtor-in-possession and exit financing to support operations through and immediately after the chapter 11 process.  The company expects to emerge from bankruptcy in nine to 12 months. [NYT; July 5, 2022]

Cryptocurrency lender Celsius Network LLC filed for bankruptcy protection Wednesday, a month after halting withdrawals in the wake of a collapse in digital currency prices.  According to The Wall Street Journal, the filing follows weeks of market speculation about Celsius following its freezing of withdrawals, swaps, and transfers last month.  Celsius suffered a $17.8 billion reduction in asset values since March 30th—of which, $12.3 billion was due to the depreciation of crypto assets.  During a virtual hearing on Monday, attorneys for the company sought to allay the concerns of its customers, indicating that the company intended to reorganize its business and that customers wouldn’t be forced to take regular fiat currency as a recovery on their claims.  Investors and practitioners alike are keeping a close eye on the filing, as the case will present several legal questions that will need to be addressed before a plan can be formulated, chief among them the question of who holds title over the various crypto coin assets held in Celsius accounts.  [WSJ; July 13, 2022]

The Wall Street Journal reports that corporate chapter 11 filings are increasing, reflecting market concern over market volatility, interest rate hikes, and a potential economic slowdown. Many expect default rates to increase this year, though perhaps by not as much as one would expect given the current economic headwinds, based on many companies having taken advantage of the relatively lax lending terms over the past year or two to extend their debt maturities past 2024.  [WSJ; July 1, 2022]

According to Markets Insider, the crypto industry is feeling the ripple effect from the sell-off earlier this year. [Markets Insider; July 5, 2022]. Crypto lenders are pausing withdrawals, trading, and deposits due to liquidity concerns. Relatedly, Business Insider reports on the recent chapter 11 filing by top cryptocurrency broker Voyager Digital in the Southern District of New York. [Business Insider; July 6, 2022]

Yahoo Finance reports that U.S. consumers’ travel spending has slowed given the cost of summer travel, which is expected to be 25 to 50% more expensive than last year. Describing the high airfare and gas prices as a “no-win situation” for consumers, analysts predict a travel slowdown as the summer progresses despite consumers having spent much of the past two years cooped up during the pandemic. [Yahoo!; July 5, 2022]

Reuters reports that the Office of the U.S. Trustee filed an amicus brief with the Third Circuit Court of Appeals, urging the court to dismiss the New Jersey bankruptcy case filed by the Johnson & Johnson subsidiary, LTL Management. The U.S. Trustee described LTL’s bankruptcy filing as “a weapon against tort claimants rather than a good-faith means of reorganization.” [Reuters; July 1, 2022]

Mayer Brown partners Aaron Gavant and Sean T. Scott and associate Danielle A. Corn recently published an article for Mayer Brown’s Perspectives & Events portal on the June 6, 2022, United States Supreme Court decision that resolved a circuit split and invalidated a 2017 statute that increased U.S. Trustee fees in 48 states—but not Alabama or North Carolina—as unconstitutional under the uniformity requirement of the Constitution’s Bankruptcy Clause. 

The full article is available here.

Background

In a recent opinion issued in LCM XXII Ltd. v. Serta Simmons Bedding, LLC, No. 21-CV-3987, 2022 WL 953109 (S.D.N.Y. Mar. 29, 2022), US District Judge Katherine Failla of the Southern District of New York denied defendant Serta Simmons Bedding, LLC’s (“Serta”) motion to dismiss an action challenging its June 2020 non-pro rata uptier exchange transaction, thereby allowing the non-participating, minority lenders whose loans became subordinated to those of the participating, majority lenders to continue to pursue claims against Serta for breach of contract and breach of the implied covenant of good faith and fair dealing.  Specifically, the court rejected Serta’s assertion that its uptier exchange transaction was expressly permitted under the underlying credit agreement because the court found the term “open market exchange” as used in the credit agreement to be susceptible to more than one reasonable interpretation and, thus, ambiguous.  Accordingly, the court found no basis to dismiss the plaintiffs’ claims at the pleading stage.

The court’s reasoning in Serta is a partial victory for non-participating, minority lenders in a distressed debt market that has seen an uptick in uptier exchange transactions and subsequent litigation, commonly referred to by many in the industry as “lender-on-lender violence.”  See, e.g.Audax Credit Opportunities Offshore Ltd., et al. v. TMK Hawk Parent, Corp., et al., 150 N.Y.S. 3d 894 (N.Y. Sup. Ct. 2021) (denying defendant’s motion to dismiss breach of contract claims relating to Trimark’s September 2020 uptier exchange); Compl., ICG Global Loan Fund I DAC v. Boardriders, Inc., No. 655175/20 (N.Y. Sup. Ct. filed Oct. 9, 2020) (challenging Boardriders’ September 2020 priming financing transaction by alleging that the transaction purportedly “unfairly favors” the controlling and allegedly conflicted equity sponsor and certain of the company’s first lien lenders to the detriment of the excluded, nonparticipating first lien lenders).  Indeed, Judge Failla’s Serta ruling is likely to influence a potential challenge by the minority, non-participating lenders relating to Incora’s recent non-pro rata uptier exchange transaction.  Press Release, Incora, Incora Completes Comprehensive Recapitalization (Mar. 29, 2022), https://www.globenewswire.com/en/news-release/2022/03/29.html

The Serta Uptier Exchange Transaction

In June 2020, Serta entered into a transaction (the “Transaction”) with a majority of its existing first lien and second lien lenders (the “Participating Lenders”)—not including plaintiff LCM funds who held approximately $7.4 million of Serta’s first lien loans—that created two new tranches of debt, both of which ranked ahead of Serta’s existing first-lien loans:  (i) a $200 million new-money financing; and (ii) an exchange tranche comprised of $875 million of loans created through an exchange of the Participating Lenders’ first- and second-lien loans. As part of the Transaction, Serta obtained the approval of the Participating Lenders to amend the underlying loan documents, including the first lien term loan agreement (the “Loan Agreement”), toallow Serta to incur the priming loans.  The plaintiff minority lenders were not privy to the negotiations and their consent to the amendments was not sought by Serta.  Following the Transaction, the Participating Lenders held over $1.075 billion of super-priority loans with rights senior to those of the non-participating, formerly first-lien lenders, including plaintiffs.

Court Permits Claims for Breach of Contract and Lack of Good Faith and Fair Dealing
to Proceed to Discovery

Following the consummation of the Transaction, on May 4, 2021, the plaintiff minority lenders commenced an action alleging, among other things, that Serta breached the Loan Agreement in three primary ways when it engaged in the Transaction and ratified the amendments.  First, plaintiffs alleged that the Transaction effectuated a debt exchange that did not qualify as an “open market purchase” authorized under section 9.05(g) of the Loan Agreement.  Second, plaintiffs claimed that Serta violated their “sacred right” to receive pro rata payments under section 9.02(b)(A) by not seeking their consent prior to entering into the Transaction and amending the Loan Agreement, which allowed a select subset of first lien and second lien lenders to leapfrog plaintiffs’ priority rights.  Third, plaintiffs alleged that Serta breached the implied duty of good faith and fair dealing by depriving the plaintiffs of their senior secured position in Serta’s debt stack.

Plaintiffs’ Breach of Contract Claim Allowed to Proceed Because the Agreement Did Not
            Clearly Permit the Transaction
.

The parties dispute whether the Transaction was expressly permitted by section 9.05(g) of the Loan Agreement.  Generally, section 9.05(g) allows first lien lenders to assign their rights under the Agreement to Serta or its affiliates on a non-pro rata basis through either a Dutch Auction or an “open-market purchase” for the purpose of retiring the first lien loans.  Serta claims that the Transaction qualifies as an open-market purchase of the Participating Lenders’ loans under section 9.05(g) of the Agreement.  The plaintiffs contend that no aspect of the Transaction occurred in the open market since Serta negotiated in private only with a select subset of lenders and arrived at a price not set by open-market forces. 

In rejecting Serta’s view, at least for purposes of a motion to dismiss, the court found that the term “open market purchase” was ambiguous and thus did not expressly allow the Transaction.  To the contrary, the court reasoned that the Transaction did not take place in what is conventionally understood as an “open market” because it was negotiated in private and closed to a number of possible participants—i.e., the minority, non-participating lenders. Accepting the factual assertions in the complaint as true, Serta and the Participating Lenders agreed on pricing that served to induce the lenders to enter into the amendments allowing the Transactions—and not by pricing driven by conventional market dynamics.   The court disagreed with Serta’s argument that “open market purchase” could only be equated with fair market value, i.e., the price obtained in an arm’s-length negotiation between a willing buyer and seller.  The Court also did not find it determinative that the exchange followed a competitive process among many lender groups—a fact proffered by Serta.  Instead, the court also found plausible the plaintiffs’ definition that an open market  could reasonably be defined to mean a market in which “any buyer or seller may trade and in which prices and product availability are determined by free competition.”  Because the court found that the term “open market” was ambiguous, the court held that plaintiffs sufficiently alleged a breach of section 9.05(g) of the Agreement for that cause of action to survive a motion to dismiss and proceed to discovery.

Plaintiffs’ Claims for Breach of the Implied Covenant of Good Faith and Fair Dealing
            Allowed to Proceed as an Alternative Theory of Recovery
.

In the alternative to their express breach-of-contract claim, plaintiffs allege that Serta breached the implied covenant of good faith and fair dealing.  Under New York law, a duty of good faith and fair dealing is implied in every contract, to the effect that neither party “shall do anything which has the effect of destroying or injuring the right of the other party to receive the fruits of the contract.”  Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d 400, 407 (2d Cir. 2006).  Further, the implied covenant includes promises that a “reasonable person in the position of the promise would be justified in understanding were included” in the contact and, when the contact involves the exercise of discretion, a promise “not to act arbitrarily or irrationally in exercising that discretion.”  Dalton v. Educ. Testing Serv., 87 N.Y.2d 384, 389 (1995).  Thus, a claim for breach of the covenant of good faith and fair dealing may only be brought where one party’s conduct, without breaching the terms of the contract in a literal or technical sense, nonetheless deprived the other party of the benefit of the bargain.  See CSI Inv. Partners II, L.P. v. Cendant Corp., 507 F. Supp. 2d 384, 425 (S.D.N.Y. 2007).  

In allowing the plaintiffs’ lack of good faith and fair dealing claim to proceed, the court held that plaintiffs had sufficiently pled, among other things, that:  (i) plaintiffs expressly bargained for “first-lien, priority, pro rata rights,” which rights were subverted by Serta’s creation of a new tranche of debt with priority rights senior to the plaintiffs; (ii) Serta engaged in furtive negotiations with a select few creditors, manipulated the Loan Agreement to subordinate the plaintiffs’ debt without their knowledge, and struck a deal at plaintiffs’ expense; (iii) the manner in which Serta exercised its contractual power to amend the Loan Agreement constituted bad faith because the economic reality of the Transaction indicated an intent to harm a subset of first lien lenders by subordinating their loans; and (iv) to the extent the Loan Agreement permitted Serta to effectuate the Transaction, Serta offered the new priming loans to only a subset of first lien lenders, rather to all of them on a pro rata basis.  Accordingly, assuming arguendo that the court ultimately finds the Transaction to be a permissible “open market purchase” under the Agreement, the court concluded that plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing could survive.  Thus, the court allowed the claim for breach of the implied covenant of good faith and fair dealing to proceed.

Potential Implications

The court’s reasoning in Serta is a victory – for now – for disgruntled lenders excluded from their borrower’s non-pro rata uptier exchange transaction, even where the underlying loan documents arguably permit such exchange.  As discovery proceeds, the Serta case bears close watching as a bellwether for how claims relating to such transactions may withstand summary judgment or be resolved at trial.

Reuters reports that the New Jersey bankruptcy judge overseeing the bankruptcy proceedings of Johnson & Johnson subsidiary LTL Management will allowing certain talc tort cases against Johnson & Johnson to proceed while LTL Management proceeds in bankruptcy. Specifically, Judge Michael Kaplan has stated that he may allow some of the 38,000 lawsuits against Johnson & Johnson to continue, despite LTL’s bankruptcy, which lawsuits allege that the company’s talc products caused cancer. Previous decisions in the LTL bankruptcy proceedings found that the automatic stay applicable in that case immediately paused all legal proceedings against both LTL itself and Johnson & Johnson, per Section 362 of the Bankruptcy Code.

On June 15th, the Wall Street Journal reported on the Federal Reserve’s decision to raise interest rates by 0.75 percentage points, the largest one-time increase since 1994. Such move raises the Federal Reserve’s benchmark federal funds rate to a range between 1.5% and 1.75%. Federal Reserve Chairman Jerome Powell stated that the bank’s ultimate goal is to reduce inflation to 2% based on which experts predict the Fed to further raise rates further to as high as 3% by later this year. Chairman Powell also warned that it is becoming increasingly unlikely that the economy will achieve a “soft landing” (i.e., avoiding a recession while the Fed nonetheless continues to raise interest rates). The Federal Reserve has indicated that it is seeking to reduce the amount of market volatility that could persist until inflation is curbed and to restore price stability.

Bloomberg reports on June 14th that EV-Truck startup Electric Last Mile has filed for Chapter 7 bankruptcy relief in the District of Delaware Bankruptcy Court. The filing marks the first bankruptcy by an electric-vehicle startup, that went public via a SPAC transaction.  The startup’s founders had planned to import electric delivery vans from China and assemble them in Indiana but had to resign in February amid accusations of improper stock purchases before the SPAC merger. The company listed $100 million assets and $100 million liabilities in its petition. Unlike a typical chapter 11 filing, the filing of a chapter 7 petition will provide a path towards liquidation, rather than reorganization, of the company.

On June 15th, Bloomberg Law reported that drug manufacturer Mallinckrodt Plc. is finally close to exiting Chapter 11 protection. The company filed its chapter 11 petition in October 2020, in the District of Delaware and had already spent $100 million by 2020 in fighting opioid-related lawsuits. Since entering bankruptcy, the Company was further accused of price gouging and proffering questionable third party releases in its plan of reorganization. Nonetheless, the Bankruptcy Court confirmed a plan which will allow the Debtor to slash a considerable amount of its debt amount.