Is Section 363 All You Need to Know about Chapter 11? Breaking it Down and Recent Developments Jonathan N. Helfat David W. Morse

Overview The New Chapter 11 Paradigm? 363 Sales replace the Plan of Reorganization—How did we get here? The 363 Sale Process What is it? Why is it so popular? What do you need to know about it? What’s a “credit bid” and how does it work? Chrysler in perspective: What really happened? Your rights under the loan documents when it comes to a sale of the business

Why Are We Talking About 363 Sales? How Did We Get Here? Once upon a time…Companies spent months and years in Chapter 11 Now—30, 60, 90 days—Then, a sale of the business… Why? The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) Too much leverage…

What about the 2005 Amendments Led to This? Utilities protection: Additional adequate assurance for utilities Vendor protection: Additional reclamation claims for vendors Employee protection: Increase in monetary limits on priority claims for wages, etc. Post-petition claims for ad valorem taxes priming secured and administrative claims Accessing value of real estate: Timing for acceptance or rejection of leases Limiting exclusivity period

The Debt Laden Balance Sheet… Access to credit allows weak companies to survive longer Companies arrive in Chapter 11 with more debt Where are the assets to generate liquidity to support the restructure? No reason for secured lenders to take risk to provide liquidity unless certainty of collateral values Scarcity of capital generally Loss of value of real estate and leases

What is a Section 363 Sale? Section 363(b): Chapter 11 Debtor may only sell assets--other than in the ordinary course of business— with approval of the Bankruptcy Court after notice and a hearing Sales can be of any assets or all or substantially all of the assets Highest and best price Good faith: Sale in good faith in an arms’ length transaction

The Section 363 Sale Process Step 1 Debtor markets assets Step 2 Prospective buyers offer LOIs Step 3 First Auction: Debtor selects stalking horse Step 4 Debtor and stalking horse negotiate: Purchase agreement Deal protections Bidding procedures Step 5 Debtor files motion to approve sale and bidding procedures Step 6 20 days later: Court approves bid procedures Step 7 Second Auction: Highest and best Step 8 Order entered to approve sale Step 9 10 days after sale order, if no objections order becomes final and non-appealable, unless waived by court Step 10 Closing

Why a Section 363 Sale? Reason #1: Speed Timing: Faster than a plan process Origins of 363: The “melting ice cube” metaphor 1983 Second Circuit Lionel decision: Is the asset increasing or decreasing in value? Proper business justification Sub rosa plan argument Some courts have problem with speed

Why a Section 363 Sale? Reason #2: Transfer of Executory Contracts Buyers have ability to obtain some contracts and leases and not others Anti-assignment clauses otherwise enforceable, not enforceable in bankruptcy Requirements for Debtor to “assume and assign” Cure any defaults Adequate assurance of future performance

Why a Section 363 Sale? Reason #3: Sale Free and Clear of Liens Section 363 allows sales free and clear of liens with or without consent of lienholder But under Section 363(f) one of following conditions must be satisfied: Applicable non-bankruptcy law permits sale of such property free and clear of interest the lienholder consents The sale price of the property is greater than the “aggregate value of all liens on such property” The interest in the sold property is in a bona fide dispute The lienholder could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of its interest

Why a Section 363 Sale? Other Limitations on Sale Free and Clear Lienholder must receive proper notice of sale Some liabilities cannot be eliminated Environmental liabilities Successor liability for labor and tort claims Assets outside of the United States Assumption of liabilities New caveat of Clear Channel

Reason #4: Finality of Sale--Good Faith Purchaser Protection Court examines conduct of buyer—absence of: Fraud Collusion between buyer and seller Unfair advantage of other bidders Bribes to insiders of debtor Sale order must expressly state: buyer is “good faith purchaser” What are protections? Waiver of automatic 10 day stay period after sale order Statutory “mootness”: Sale cannot be modified or overturned, unless the sale is stayed pending appeal

Trouble in Paradise: Good Faith Purchaser Protection Meets Clear Channel DB Burbank, LLC makes $40 million loan to PW secured by 18 parcels of real estate Borrower defaults DB Burbank starts foreclosure PW files Chapter 11; Chapter 11 trustee appointed DB becomes stalking horse bidder with credit bid equal to its $40 million debt DB is winning bidder; assets sold free and clear of all liens—including junior lien of Clear Channel

The Clear Channel Problem: So What Happened? Clear Channel had objected to sale Bankruptcy Court Overruled objection Denied request for a stay and Sale went forward Credit bid did not result in any cash to bankruptcy estate—Clear Channel receives nothing Sale Order says DB Burbank, LLC is “good faith purchaser” On appeal, Bankruptcy Appellate Panel says: Sale is valid But not “free and clear”: Clear Channel junior lien continues Remands back to Bankruptcy Court

The Clear Channel Problem: So What Does this Mean? Intercreditor Agreement any one? New tool for junior lienholders? Delay closing until appeals are settled? Provisions in purchase agreements to protect purchasers Lower purchase price Present the evidence: Need 1 of 5 ways to satisfy 363(f) to allow lien release Clear Channel decision not binding outside 9th Circuit

Why a 363 Sale? Other Reasons No fraudulent transfer liability risk No bulk transfer liability Ability to bind non-consenting stockholders Less diligence on liabilities since sold free and clear Ability to credit bid

Consent to the Sale and Credit Bidding: What is Credit Bidding? Section 363(k) Secured creditor right to bid at 363 sale Offset claim against purchase price Credit bids using senior secured claims are like cash bids Bid total face amount of claim Impact on “highest and best” requirement Results in transfer of collateral to Lender in exercise of remedies by Lender

Key Points for the Secured Lender in a 363 Sale: You May Not Get it All! Estate cannot be left “administratively insolvent” Assignment and assumption of contracts Other creditors to be paid Funding of business from filing to sale Transfer of trademark licenses

Chrysler: What Really Happened? April 30: Chrysler and 24 subs file Chapter 11 May 1: Debtor engage financial consulting and advisory firms and investment bankers May 1: Debtors seek approval for an expedited hearing on motion to approve bidding procedures and schedule sale hearing May 31: Bankruptcy Court renders opinion approving the Debtors’ motion seeking authority to sell substantially all of its assets

Chrysler: What Happened to the Sale Proceeds? $10 billion first lien facility provided by syndicate of lenders $2 billion second lien facility provided by Daimler Financial and Cerberus $4 billion third lien facility provided by US Treasury $4.96 billion DIP financing provided by US Treasury and Export Development Canada

Chrysler: So What is the Issue? Equity owners of “New Chrysler” VEBA owns 55% US Treasury owns 8% Export Development Canada owns 2% Fiat owns 20% What rights would these parties have had in a plan? Bankruptcy Court and secured lenders have no say over who owns the purchaser

The “Real” Issue: What are Your Rights under the Loan Documents? Consent to Sale Credit Bid

Your Rights under the Loan Documents: Background Origins of syndicated loan structure Appointment of Agent Agent’s discretionary rights Rights of individual Lenders to enforce rights Amendments and Waivers Forgive principal Extend maturity Release all or substantially all of collateral or guarantees

Rights under the Loan Documents: The Beal Case New York Court of Appeals March 2007 Parent gives a “keep-well” agreement Agent and Lenders with 95.5% of debt enter into settlement agreement Settlement agreement includes forbearance from calling on keep-well agreement Beal holds out—starts unilateral action to collect payment under keep-well agreement

The Beal Case: NY Court of Appeals Says… “Collective Enforcement Mechanism” For Beal: Keep-well agreement says it is for the benefit of and shall be enforceable by the Agent and each Lender Credit Agreement says no amendment, modification or waiver so as to release the Sponsors under the Keep-Well Agreement…without the consent of all Lenders For Agent and Other Lenders: Credit Agreement says, if any Event of Default occurs…Agent, upon direction of Required Lenders…shall exercise any or all rights and remedies…, including recover judgment on the Keep-Well Agreement Credit Agreement authorizes Agent to act on behalf of Lenders and to exercise powers delegated to it

Consent to Sale: Enforcement Provisions Chrysler (May 31, 2009) Each lender designated Agent to act as such lender’s agent in exercising powers delegated to Agent During default, Agent has power to take any Collateral Enforcement Actions including to realize upon the Collateral No secured party will take any Collateral Enforcement Action without consent of Agent Metaldyne (August 12, 2009) Each lender appoints Agent to take such action on its behalf as are delegated to the Agent by terms of the Loan Documents Agent may exercise all rights afforded a secured party, including the right to sell or otherwise dispose of the Collateral

Amendment Provisions v. Enforcement Provisions Dissenting lenders argue that credit agreement says no waivers or amendments to release all or substantially all of Collateral without the written consent of all lenders Courts say: Transfer of purchased assets does not require any amendment or waiver Loan documents authorize Agent to consent to sale without need to amend or modify the loan documents Chrysler: “Restricting enforcement to a single agent to engage in unified action for the interest of a group of lenders, based upon a majority vote, avoids chaos and prevents a single lender from being preferred over others”.

What about Credit Bidding? GWLS Holdings All first lien lenders except Grace Bay consent to sale of all assets under Section 363 and purchase with credit bid Grace Bay: Credit Agreement says: All Lenders must consent to release of substantially all of the collateral Agent: Security Agreement authorizes Agent to exercise rights and remedies under applicable law Court says: Right to exercise rights and remedies under applicable law includes credit bid under Section 363(k) Exercise of remedies is not amendment or waiver based on Security Agreement

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