Delaware Bankruptcy Litigation : Delaware Bankruptcy Lawyer & Attorney : Fox Rothschild Law Firm : Financial Restructuring & Bankruptcy Litigation

Objectives in Bankruptcy

In the months leading up to its bankruptcy,  Norwood successfully refinanced a revolving credit facility, however, it was unable to refinance its mezzanine debt through a high yield offering.  Once Norwood realized that it could not fully refinance its debt, it began discussions relating to the sale of assets under section 363 of the Bankruptcy Code.  To effectuate a 363 sale, Norwood approached its lenders and a potential purchaser to see if someone would agree to serve as the stalking horse bidder during the sale of assets. 

According to Norwood's Declaration, Norwood ultimately entered into an asset purchase agreement with Promotional Holdings, LLC.  Under the agreement, the buyer agreed to purchase Norwood for $132.5 million. By filing bankruptcy, Norwood seeks to either sell its assets to Promotional Holdings, LLC, or find a better offer through a chapter 11 auction. 

Norwood's Financials

Upon filing for bankruptcy, Norwood filed a motion seeking approval of debtor in possession financing.  Pursuant to the motion, Norwood seeks authority to obtain a $30 million postpetition revolving credit facility.  Norwood needs debtor in possession financing in order to maintain supplier relationships, pay employees and meet other obligations.  As reflected in its bankruptcy petition, Norwood lists the following companies as holding the five largest unsecured claims:

• Unisource Worldwide  ... $931,000
• UPS ... $807,000
• Titleist ... $667,000
• GPE ... $358,000
• Callaway Golf ... $259,000

This bankruptcy proceeding is before the Honorable Peter J. Walsh, former Chief Judge of the Delaware Bankruptcy Court. 

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Jason Cornell is a bankruptcy attorney at the law firm Fox Rothschild LLP in Wilmington, Delaware. If you have questions regarding this, or any other Delaware legal proceeding, you may contact Jason at (302) 427-5512 or jcornell@foxrothschild.com.

Creditors often question the logic of granting the stalking horse bidder a break-up fee when there are so few assets available in a bankruptcy estate.  The Third Circuit in O'Brien looked at why break-up fees are used in bankruptcy and non-bankruptcy acquisitions.  Such fees "provide a prospective acquirer with some assurance that it will be compensated for the time and expense it has spent in putting together its offer if the transaction is not completed for some reason."  Additionally, the court recognized that break-up fees may encourage a bidder to do due diligence, as well as compensate the bidder for lost costs.

The Third Circuit in O'Brien considered the Bankruptcy Court's use of nine factors the Bankruptcy Court thought were relevant in determining whether to grant a break-up.  Such factors included whether the parties who negotiated the fee might be "tainted by self-dealing", whether the fee encouraged bidding, or whether the fee was reasonable relative to the purchase price.  However, instead of adopting the factors identified by the Bankruptcy Court, the Third Circuit looked instead at whether the record supported the Bankruptcy Court's decision that awarding Calpine the break-up fee was not necessary to preserve the value of the debtor's estate.  The Court's analysis tied directly to 11 U.S.C. section 503(b)(1)(A), requiring that administrative expenses provide benefit to the debtor's estate. 

Using section 503(b) as the test, break-up fees are found to benefit the bankruptcy estate if the fee promotes more competitive bidding.  The clearest of example of a fee providing benefit to the estate is where the fee induces a stalking horse bidder to bid, and the debtor can show that without such a fee, bidding on the debtor's assets would have been reduced.  Another benefit arises due to the break-up fee's ability to motivate a stalking horse bidder to research the value of the debtor's assets and submit a bid that serves as a minimum bid, which other bidders will exceed.

In O'Brien, the court affirmed the order of the District Court, finding that the record below supported the finding that the break-up fee to Calpine was not a necessary expense of the bankruptcy estate.  In reaching its decision, the court found that bidding might have been even more competitive in the O'Brien bankruptcy had the Bankruptcy Court ruled definitively that Calpine was not entitled to a break-up fee.  O'Brien is helpful for its simplicity - break-up fees are looked at using an analysis similar to a motion for allowance of administrative claim.  Parties that can show how the fee preserves the value of the estate are more likely to prevail. 

As stated in its Complaint,  NetVersant seeks injunctive relief against its suppliers and contractors in order to prevent them from commencing "enforcement actions [that] will destroy the value of the Debtors' business and its ability to continue as a going concern."  On December 10, 2008,  the Bankruptcy Court entered the Order for Preliminary Injunction.  The Order provides NetVersant with injunctive relief through February 10, 2009.

On the same day that it filed for bankruptcy, NetVersant also filed a Motion Authorizing the Sale of Substantially All of Their Assets (the "Sale Motion"). Read the NetVersant Sale Motion here.  According to pleadings filed in NetVersant's adversary action,  NetVersant sought injunctive relief against its suppliers and subcontractors to preserve the value of its assets so they could be sold under the Sale Motion.  The Sale Motion is currently scheduled for a hearing on December 19, 2008. 

Events Leading to Bankruptcy

NWL began experiencing declining sales approximately one year ago. Like with many retail bankruptcies, consumers began buying less in the Fall of 2007 due to rising commodity prices, rising interest rates and less disposable income. NWL’s problems worsened in 2008 when credit became tight. With less cash available, NWL could not maintain appropriate inventory levels, which further depressed sales.

NWL started looking for potential buyers of the business as far back as December, 2006. Despite its efforts, NWL has been unable to locate either a buyer, infusion of cash, or additional loans. Faced with such constraints, NWL sought “financial flexibility” by filing for bankruptcy (read the National Wholesale Liquidators Bankruptcy Declaration here).

The Agreement to Sell or Liquidate

Pursuant to NWL’s agreement with its lenders, it must either sell or liquidate its business by November 26, 2008. Under the agreement, NWL received $7,000,000 in interim financing NWL to cover various expenses during bankruptcy. Such expenses include paying landlords, employees and other parties essential to maintaining NWL’s business while it finds a buyer or achieves an orderly liquidation.

Issues Important to Landlords

In the days ahead, we will know whether NWL found a buyer or was forced to liquidate. NWL’s landlords are one of the many creditor constituencies who have an interest in the outcome. If NWL finds a buyer, its landlords will want to know whether their leases are being assumed and assigned to a third party, or rejected. If assumed, landlords will want to insure any defaults under theirs leases are properly cured. Alternatively, those landlords with rejected leases will want to properly file rejection damage claims.

The NWL bankruptcy was assigned to the Honorable Mary F. Walrath, a former Chief Judge of the Delaware Bankruptcy Court.