I spent the morning listening to presentations on very disparate topics: hedge funds, examining an expert witness and the balance between secured creditors and unsecured creditors. I was not able to capture the full extent of the discussions and in some cases my descriptions below may be a bit cryptic. My intent is not to provide a transcript, but rather to provide a flavoring of issues being discussed at NCBJ.
However, the day began with the 5th annual Berkley-Bernstein 5k race. As usual, I finished near the back of the back. However, there is something perversely fun about seeing the sun come up over the water while gasping for breath with fellow bankruptcy practitioners and judges. Kudos to Berkley-Bernstein for sponsoring this event.
Watching the Hedges Grow: Inside the Mind of Distressed Investors: Ret. Judge James Peck, William Derrough (Moelis & Co.), Bruce Bennett (Jones Day), Mark Brodsky (Aurelius Capital) and Ken Liang (Oak Hill Advisors)
This panel was billed as a chance to get inside the minds of hedge funds. The panel explained that the difference between hedge funds and private equity funds is that hedge funds largely rely on publicly available information, while private equity funds rely on an intense review of internal documents. There are about 350 hedge fund players and they get involved in cases as small as $50-$100 million.
According to Ken Liang, hedge funds look for the fulcrum security. His company believes that converting to equity produces the highest possible return, although they don't mind receiving payment either.
Mark Brodsky said that his firm may look for two or three places in the capital structure to invest and will focus on value created during the chapter 11 and then get out.
Ironically, the panelists said that hedging and short sales are only a small part of their strategy.
Hedge funds may form ad hoc committees when they feel that the agent or indenture trustee for the debt is not adequately representing the issue or when the Creditors' Committee either represents too many constituencies or is dominated by a group that excludes the hedge funds. They added that unrepresented positions gets in trouble more often than not.
According to Ken Liang, hedge funds look for the fulcrum security. His company believes that converting to equity produces the highest possible return, although they don't mind receiving payment either.
Mark Brodsky said that his firm may look for two or three places in the capital structure to invest and will focus on value created during the chapter 11 and then get out.
Ironically, the panelists said that hedging and short sales are only a small part of their strategy.
Hedge funds may form ad hoc committees when they feel that the agent or indenture trustee for the debt is not adequately representing the issue or when the Creditors' Committee either represents too many constituencies or is dominated by a group that excludes the hedge funds. They added that unrepresented positions gets in trouble more often than not.
William Derrough, who is a financial advisor to debtors, said that the challenge is to get a counter-party to talk to. He said that there is a dance of dance of getting the fulcrum security to sit down and talk and to get them restricted from trading so that they can share nonpublic information. This generally involves negotiation over what is confidential and how long the hedge fund should be restricted from trading. The debtor will generally try to say that everything is confidential and secure a long restricted period, while the hedge fund will try for an extremely short period. One of the hedge fund reps said that the case is about trying to reach a deal and that debtors are reluctant to provide information until their hand is forced.
Mark Brodsky pointed out that the schedules and statement of financial affairs provide more information than is required by the SEC. They want to get restricted early, get the information needed and be prepared to negotiate. He also said that, "Because we are good investors, we believe that settlement is good." He said that they frequently find themselves begging people to negotiate with them only to find that no one showed up. He also urged courts to move cases along, stating, "The sooner you get to the courthouse steps, the sooner you settle."
Judge Peck asked the parties whether, in light of the fact that litigation is so expensive, the threat to litigate is a tool. Brodsky said that obtaining decisions costs money and that whether it gets that far is a function of how the case is managed. Liang said that every dollar spent is a dollar taken away from value. He expressed frustration with debtors who seek extensions of exclusivity. He said that he wished they would just file a plan and tee up a value.
Judge Peck commented that the difference between hedge funds and other parties is that they have substantial resources and can pursue a credible fight, causing the other side to cave or engage in an arms race.
Bruce Bennett said that it is important for judges to manage discovery. He acknowledged that discovery disputes are boring, but said that not every dispute requires twenty depositions and that the court can manage disputes over documents so that the process is cheaper.
When asked if hedge funds are good for the process, several panelists pointed to hedge funds as a source of new capital and de-leveraging the balance sheet and pointed out that they are better able to make decisions than banks and insurance companies which face regulatory pressures. Liang said that because hedge funds buy in for less than par, they have more flexibility than banks. Bennett said that they provide a market for distressed debt.
Judge Peck concluded that the world of bankruptcy had changed during his time on the bench. He said that there are now significant pools of capital available to take advantage of research and hard work to obtain solutions that would not have been possible.
All the Courtroom's A Stage: Honing Courtroom Presentation Skills: Circuit Judge Bernice Donald (6th Circuit), Richard Wynne (Jones Day), Timothy Draeglin (FTI Consulting), Shay Agsten (von Briesen & Roper), Stephen Hessler (Kirkland & Ellis), Ori Katz (Sheppard, Mullin, Richter & Hampton) and Demetra Liggins (Thompson & Knight)
This panel provided a demonstration of examining an expert witness. Demetra Liggins "profferred" the testimony of the expert with a presentation that was as much legal argument as expert testimony. The judges (Judge Donald and Richard Wynne) commended her for using the proffer as argument and giving a delivery that was expressive and did not sound like mere reading.
On cross-examination, Shay Agsten (who was making a practice point) made the mistakes of asking open-ended questions on cross, reinforcing the witness's testimony and allowing the witness to evade the questions.
Stephen Ressler on re-direct exceeded the scope of cross without objection and also elicited legal conclusions from a non-lawyer.
On re-cross, Ori Katz did a much better job of pointing the witness to specific points in his report and trying to control the witness. He was aggressive with the witness but made the mistake of giving a smart response to the court when admonished to avoid making a sidebar.
The cross-examining lawyers were also advised that when the witness dodged a question to ask it a different way rather than simply repeating the question.
Whose Case Is This Anyway: Should A Chapter 11 Case Be Run Solely for the Benefit of Secured Creditors? Judge Barbara Houser, Ross M. Kwasteniet (Kirkland & Ellis), Jeffrey Pomerantz (Pachulski, Stang, Ziehl & Jones), Damian Schaible (Davis, Polk & Wardlaw) and Jane Lee Vris (Millstein & Co.)
This panel examined the relationship between the secured creditor seeking to control the case, the debtor and the unsecured creditors trying to salvage some value. Topics covered included plan support agreements, floating liens, credit bidding and 363 sales.
In theory, a plan support agreement is a positive thing. Where the debtor and the secured creditor anticipate a filing well in advance, the debtor can look for holes in the creditor's collateral and negotiate a distribution for the unsecured creditors. The process also needs to allow sufficient time for an unsecured creditors committee to be appointed and do due diligence. On the other hand, where the unsecured creditors are cut out or are not given time to get up to speed, a plan support agreement will simply force the committee to fight.
Jane Vris pointed out the danger that a plan support agreement and DIP financing would be intertwined and therefore locked in at an early stage.
Jeffrey Pomerantz referred to plan support agreements that cut out the committee as a "pre-packaged cram-down."
The parties spent considerable time discussing the implications of In re Residential Capital, LLC, 501 B.R. 479 (Bankr. S.D. N.Y. 2013) on floating liens. In this case, the junior secured creditors had blanket liens on the debtor's assets and claimed that the equity in the debtor was subject to their security agreement. Where value is created post-petition through the bankruptcy, this is not value which secures the creditors' pre-petition claims. The panelists discussed whether it is even possible to have a lien upon the goodwill of a company and if so, how a creditor would foreclose this lien under the UCC.
Repeating a recurring theme, Pomerantz said, "If the secured creditor wants to participate in bankruptcy, they need to pay the freight." His point was that if a secured creditor wants to use bankruptcy to realize upon its value, it probably means that the bankruptcy will generate more value than the creditor could have obtained out of court and that this value should be shared with the unsecured creditors.
With regard to the melting ice cube problem, the parties discussed the problem that when an expedited sales process occurs, it may be impossible to fully determine the extent of the secured creditor's lien. Where this occurs, they suggested a hold back to protect against the possibility that part of the secured creditor's claim might be disallowed.
The panelists discussed the problem of DIP orders that preserve the secured creditor's credit bidding rights and therefore prevent the court from modifying them later. However, a creditor can't credit bid on an asset upon which it doesn't hold a lien. Where the extent of the creditor's lien is in dispute, the creditor should be limited to credit bidding the undisputed portion of its lien or waiting until the lien issue has been thoroughly litigated.
Judge Houser had the final word, stating that "for me as a judge, when I'm being told that we have 22 minutes to get this case done, I tend to think that's not true and there needs to be a modicum of due process." She said that she may schedule a status conference to ask how the unsecured creditors will be protected in the process. She said that she didn't want to have a district judge on appeal "thinking I'm a complete idiot."
In theory, a plan support agreement is a positive thing. Where the debtor and the secured creditor anticipate a filing well in advance, the debtor can look for holes in the creditor's collateral and negotiate a distribution for the unsecured creditors. The process also needs to allow sufficient time for an unsecured creditors committee to be appointed and do due diligence. On the other hand, where the unsecured creditors are cut out or are not given time to get up to speed, a plan support agreement will simply force the committee to fight.
Jane Vris pointed out the danger that a plan support agreement and DIP financing would be intertwined and therefore locked in at an early stage.
Jeffrey Pomerantz referred to plan support agreements that cut out the committee as a "pre-packaged cram-down."
The parties spent considerable time discussing the implications of In re Residential Capital, LLC, 501 B.R. 479 (Bankr. S.D. N.Y. 2013) on floating liens. In this case, the junior secured creditors had blanket liens on the debtor's assets and claimed that the equity in the debtor was subject to their security agreement. Where value is created post-petition through the bankruptcy, this is not value which secures the creditors' pre-petition claims. The panelists discussed whether it is even possible to have a lien upon the goodwill of a company and if so, how a creditor would foreclose this lien under the UCC.
Repeating a recurring theme, Pomerantz said, "If the secured creditor wants to participate in bankruptcy, they need to pay the freight." His point was that if a secured creditor wants to use bankruptcy to realize upon its value, it probably means that the bankruptcy will generate more value than the creditor could have obtained out of court and that this value should be shared with the unsecured creditors.
With regard to the melting ice cube problem, the parties discussed the problem that when an expedited sales process occurs, it may be impossible to fully determine the extent of the secured creditor's lien. Where this occurs, they suggested a hold back to protect against the possibility that part of the secured creditor's claim might be disallowed.
The panelists discussed the problem of DIP orders that preserve the secured creditor's credit bidding rights and therefore prevent the court from modifying them later. However, a creditor can't credit bid on an asset upon which it doesn't hold a lien. Where the extent of the creditor's lien is in dispute, the creditor should be limited to credit bidding the undisputed portion of its lien or waiting until the lien issue has been thoroughly litigated.
Judge Houser had the final word, stating that "for me as a judge, when I'm being told that we have 22 minutes to get this case done, I tend to think that's not true and there needs to be a modicum of due process." She said that she may schedule a status conference to ask how the unsecured creditors will be protected in the process. She said that she didn't want to have a district judge on appeal "thinking I'm a complete idiot."
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