A Distressed Company and its Secured Lender

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 1

A Distressed Company and its Secured Lender

RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2016premier date: may 6, 2016

Premier Date: MAY 6, 2016

A Distressed Company and its Secured Lender

RESTRUCTURING, INSOLVENCY & TROUBLED COMPANIES 2016


WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS



meet the facultyPANELISTS

Dimitri Karcazes Goldberg KohnHamid Rafatjoo VenableAllen Wilen Eisner Amper

MODERATOR Jonathan Friedland Sugar Felsenthal Grais & Hammer


Practical and entertaining education for business owners and executives, accredited

investors, and their legal and financial advisors. For more information, visit

www.financialpoise.comDISCLAIMER: THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD

NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

http://www.financialpoise.com/


about this webinarMost businesses of any meaningful size in the United States have a line of credit or term loan with a bank or other lender that is supported by a lien on substantially all of the assets of that business. And a secured lender’s agreement with its borrower commonly provides the lender with very strong legal remedies in the event the borrower defaults on the loan (whether the default is a “payment default” or a “covenant default”).

What can a secured lender do upon a borrower’s default? What will a lender actually do upon a borrower’s default? What factors can and should a secured lender consider when deciding what action to take? What can and should a borrower do in this situation?

This webinar discusses the industry norms and practices that secured lenders and advisors to distressed companies tend to follow when dealing with a defaulting borrower. It paints a picture of the path a “workout” may follow, discusses the leverage points that both the secured lender and the borrower may have, and explains the various possible outcomes.

about this series


Companies fail all the time, for all sorts of reasons. Some companies become distressed, or even insolvent, because of mismanagement; others because of fraud; others for myriad other reasons- some intrinsic to the company and some extrinsic.

Regardless of the cause, failing or failed companies create a unique set of issues, risks, and even opportunities for all involved. This area of law and finance has become so specialized that no fewer than five (American Bankruptcy Institute; Association of Insolvency & Restructuring Advisors; Commercial Law League of America; National Association of Federal Equity Receivers; Turnaround Management Association) national organizations exist to help those who specialize in the field to stay up to date on the latest developments, strategies, and tactics in the area.

Join some of the leading experts in World, from among the membership of these organizations, as they discuss- in plain English for the non-expert- the basics and the latest in Restructuring, Insolvency & Troubled Companies.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.

episodes in this series

EPISODE #1 Help, My Business is in Trouble! 2/5/2016

EPISODE #2 Opportunity Amidst Crisis – 3/4/2016Buying Distressed Assets, Claims, and Securities for Fun & Profit

EPISODE #3 What to Expect & Do When Your Customer Becomes Insolvent4/8/2016

EPISODE #4 A Distressed Company and its Secured Lender 5/6/2016

EPISODE #5 Federal Equity Receiverships - 101

6/3/2016 Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo



What’s the Default?

Payment default Technical default

Financial covenant Other covenant Technical but not covenant


The Changing Landscape of Bank Lending- How commercial lending has changed over the past two decades

Commercial loan officers do not have a prolonged apprenticeship so experience is limited; bank acquisitions have resulted in a loss of seasoned lenders

There is more money to lend than there are good loans to make so there is fierce competition for every deal

Lenders and their supervisors generally have compensation incentives tied to performance

There is a decline of the “generalist lender” and a growth of the specialists and niche lenders

Competition from unregulated lenders has increased

Special thanks to Richard Carmody for allowing the reprint of these points


The Changing Landscape of Bank Lending (con’t)

Compliance issues have become much more important Fee income is receiving more emphasis because of the

competitive pressure on interest rates Timing of write-offs and recoveries has become more important

because of effect on stock price and compensation Some borrowers have become “too big to fail” because of effect

on financial performance of lender Secondary markets for troubled loans have exploded


STRATEGIC ALTERNATIVES FOR DISTRESSED BUSINESSES

Chapter 11

Assignment for the Benefit of Creditors

Creditor Compositi

onWorkout Sale by

Debtor


STRATEGIC ALTERNATIVES AGAINST DISTRESSED BUSINESSES

Foreclosure

Receivership

Article 9 Sale


FACTORS THAT AFFECT THE DECISIONFuture of the

business going forward

Size of the company

Relationship with secured

creditors

Number of creditors and the amount

of debt

Cost and length of the

process

Buyer’s risk tolerance


KEY QUESTIONS THAT DRIVE STRATEGY

• Will customers care that debtor is having financial problems?

• How is the debtor’s relationship with its key vendors? • Are any vendors irreplaceable as supply sources?• How competitive is the debtor’s business? • What is the liquidation value of the debtor?• What does a buyer want to do?• Are there personal guarantees? • Are related entities not troubled?• What are the tax implications? (e.g. CODI)


FIDUCIARY DUTIES

It is well-settled that directors of solvent Delaware corporations generally owe fiduciary duties to the

corporation and its shareholdersIt is also well-settled that directors of insolvent

corporations owe fiduciary duties to exercise their business judgment in the best interest of the

insolvent corporationHowever, a grey area exists for directors of

corporations that are solvent but operating within the zone of insolvency


A BUYER’S PERSPECTIVE• Buyers like to buy cheap but want to avoid risk• Some options are cheaper but pose more risk• Others are more expensive but pose less risk

What Legal Risks?

Successor liability

Allegations of

fraudulent

transfers


CHAPTER 11 REORGANIZATIONSPetition is filed with the bankruptcy court

(either voluntarily or involuntarily)

The debtor, as the debtor-in-possession, acts as the trustee of the business

Debtor-in-possession financing

Automatic stay

Rejection of certain executory contracts

Fixed priority order


CHAPTER 11 REORGANIZATIONSADVANTAGES

Binds all creditors

Automatic stay

(requires all

creditors to cease collection efforts)

Sales are made free and clear

Rejection of

burdensome

contracts

Certain tax advantage

s


CHAPTER 11 REORGANIZATIONSDISADVANTAGES

Higher cost Longer process

Reporting requiremen

ts

Stigma associated

with bankruptcy


ASSIGNMENT FOR BENEFIT OF CREDITORS

Much like a Chapter 7

Debtor assigns all of its assets to

an independent fiduciary for

creditors

Fiduciary sells all the assets

and distributes proceeds to the creditors

Distribution is generally done in

accordance with the

Bankruptcy Code priority

scheme


ABCs (con’t)

Generally quick and relatively inexpensive means of liquidating a company, especially as compared with Chapter 7Priority of claims is known and generally follows Bankruptcy Code

Unsecured hold-out creditors encouraged to participate since title to assets is transferred

Less risk of “Chapter 5”-like lawsuits


ABCs (con’t)Unlike bankruptcy, title to the assets is not delivered free and clear of all liens (unless done in conjunction with Article 9)

Secured creditors can still foreclose

Assignee is appointed by debtor


RECEIVERSHIPS

• Available in state and federal court

• Receiver is similar to bankruptcy trustee

• Distributions Similar to Bankruptcy Code


RECEIVERSHIPs (con’t)• Single Creditor can seek appointment (versus

standards of section 303 of Bankruptcy Code)

• Greater flexibility within Receivership (less procedural rules and statutory regulations)

• Receivership proceeding can be narrowly tailored in drafting the Receivership Order


CREDITOR COMPOSITION

Sometimes referred to as an out-of-court Chapter 11

Creditor composition is a contract between a debtor

and its creditors

All participating creditors agree to accept certain payments in full satisfaction of their claims


CREDITOR COMPOSITION ADVANTAGES

Will allow the company to work with its creditors to continue

operationsMay maximize going concern value

of the company

Less expensive than Chapter 11

No court or trustee oversight

No Chapter 11 stigma


CREDITOR COMPOSITION DISADVANTAGES

HoldoutsMay impose certain

restrictions on Debtor

Lengthy negotiating process


WORKOUTSSince it may be difficult to obtain consent of nearly all creditors as required for a composition, a

company may opt to seek concessions solely from its financial creditors (bank, equipment lessors, bondholders, etc.)

Generally, Creditor will agree to deferred payments, extended

time of repayment, and/or reduced total amount of

indebtedness.

In exchange, Debtor may be required to sell assets, grant additional collateral, meet

certain operational benchmarks and/or be subject to heightened

financial reporting.

A Workout Agreement will restructure the debt of a particular creditor


WORKOUTS ADVANTAGES

Because consent of all creditors is

not required, generally

easier to put in place

Easier to negotiate

because only one party and

may not require

disclosure of financial

condition to other

creditors


WORKOUTS DISADVANTAGES

Financial creditors are generally secured and may have little incentive to renegotiate terms

Financial creditors may insist on restrictions on activities of the business


Tips for a Successful Workout

Borrower’s counsel will gain lender’s cooperation more readily if he or she is perceived by the lender to be part of the solution rather than part of the problem

During a workout, lender typically wants borrower to have access to effective

legal counsel

If borrower believes lender’s actions have created potential liability for the lender, borrower is faced with a choice because it is doubtful that lender will participate in a workout under threat

Replacement lenders do not come cheap, but borrower may want to pay price to preserve its causes of action.


“NAKED” SALE BY DEBTORDebtor sells its assets, generally to a secured lender, or to a third party (potentially to its own

shareholders) with the consent of the secured lender.

Advantages• Quick and relatively inexpensive method of liquidating a

business• May also serve as a quick method for the sale of a

company as a going concern

Disadvantages• Requires consent of all lienholders• Treatment and impact of unsecured creditors.• Possibility of being deemed a fraudulent transfer• Breach of fiduciary duty concerns for board of directors

of debtor


ARTICLE 9 SALES• Fast and inexpensive way to sell secured creditor’s collateral• UCC permits secured creditor to take possession of collateral and, without removing

collateral from debtor’s premises, dispose of it• Sale must be commercially reasonable• Secured creditor may purchase collateral at a public sale but not at a private sale unless

collateral has public market where the price can be readily ascertained• When the rules are followed, all of Debtor’s rights in collateral are transferred and

subordinate security interests are discharged. • A good faith purchaser for value takes title free and clear even when secured party fails

to strictly comply with the statutes


“Friendly Foreclosures”

Insolvent borrower + all assets liened + ready buyer = “friendly foreclosure” ? Lender will want to make sure price being paid reasonably equivalent value of assets,

certainly more than the lender could expect from a foreclosure and lender liquidation sale. Other principal concern for lender is that the borrower and the purchaser are truly arms-

length May also avoid “Bulk Sales” law (in those jurisdictions that have not repealed Article 6 of

the UCC) o Foreclosing lender can sell assets without giving notice to borrower’s creditors because

lender is not a person subject to the Bulk Sales Act. The lender is not regularly engaged in selling the goods being sold


“Friendly Foreclosures”- Process

Once lender has satisfied itself on the price and the independence of the purchaser and seller, lender will engage in an exchange of correspondence wherein the lender will declare a default, accelerate the loan and demand payment

In response, borrower will advise lender that it cannot repay the loan Lender will then foreclose pursuant to its rights in the loan documents and

the Uniform Commercial Code Borrower will waive its rights to notice of the private sale, and lender will

take control of the assets and sell them (usually without moving them) to purchaser who will receive lender’s bill of sale with warranty of title resulting from the foreclosure


Avoiding Lender Liability - The Ten Commandments for Lenders

In 1986, Helen Davis Chaitman writing in The Secured Lender (November/December issue) proposed a list of ten commandments for lenders involved in workout situations. Richard Carmody amplified them, and we thank both.

Do Not Make a Sudden Move • Unless absolutely necessary, give a borrower reasonable notice of your intent to terminate

a lending relationship • Watch out for declaring a default under a “general insecurity clause” in a note (must be

reasonably insecure)• Demand notes may not really be such if inconsistent provisions added• Document and substantiate the reasons for calling the loan

Do Not Tell a Lie or a Half-Truth –

This applies to credit inquiries and also to negotiations with the borrower; if you want to exit the relationship, tell the borrower up front


The Ten Commandments for Lenders (con’t)

Honor Your Commitments • This applies to making loans and to working out loans. Stand by the terms of your loan

documents• Commitments to make loans (or working out loans) or to take (or refrain from taking) other

actions – the barest of writings has been held to be a commitment• If still negotiating, put a specific and explicit disclaimer in correspondence; do not soften

language to make more agreeable to potential borrower

Do Not Run Your Borrower’s Business • Your liability can stretch to borrower and its creditors, including payroll taxes owed to the IRS • Too much control can make you a fiduciary, a principal, or a joint venture; decide how much

control you really need • Potential liability to creditors of borrower if you “prop up” borrower to maximize your

recovery while borrower purchases on credit• Do not control the board of directors and be extremely careful about having a banker serve

as a director. Exercise of voting power can make you an insider under Bankruptcy Code



Do Not Use Third Parties to Bail Out of a Bad Loan Insist on full disclosure to third parties because your desire to exit loan can be used against you

Keep Your Files Clean of Extraneous Comments

• This also applies to your e-mail traffic within office • Disgruntled bank employees could deliver documents to a borrower• Make sure memos (and e-mail) are business like

Have a Workout Officer Take Over Troubled Loans

• Personality problems can lead to cover-ups of bad situations or vindictive attitudes and action by the original loan officer

• Need objective view of officer dedicated to maximizing recovery while minimizing liability



Confer With Workout Counsel • An early review of your situation and documents can be critical • You need an “emergency room” lawyer, not an “obstetrician” who insists on enforcing

documents as written. Lawyer should be firm but not excessively confrontational. Situation may require change to lawyer with different style

Think Carefully Before Pursuing a Deficiency

Judgment proof debtors have nothing to lose by asserting counterclaims that are identified by counsel who would never have been involved but for a lender’s lawsuit

Do Not Be Arrogant • Lenders are not protected species• Put yourself in borrower’s position (are you being fair?) (is your action absolutely necessary

to protect the bank)

More About The Faculty: JONATHAN FRIEDLAND

[email protected] Friedland is a partner with Sugar Felsenthal Grais & Hammer LLP. He regularly represents parties in the purchase and sale of businesses and counsels businesses and their owners in their everyday affairs. Jonathan is also a nationally recognized expert in matters related to financially distressed companies.

Jonathan holds the highest possible rating from Martindale-Hubbell (AV® Preeminent™) and AVVO (10/10), has been repeatedly recognized as an Illinois “superlawyer” in the areas of Business/Corporate Law and Bankruptcy & Creditor/Debtor Rights, and has received several other similar distinctions. He is licensed to in Arizona, Illinois, New Jersey and New York.

Jonathan has been profiled, interviewed, and/or quoted in numerous publications, including Buyouts Magazine; Smart Business Magazine; The M&A Journal; Inside Counsel; LAW360; Business Week.com; The Bankruptcy Strategist; Dow Jones Daily Bankruptcy Review; Bankruptcy Court Decisions; Dow Jones LBO Wire; and The Daily Deal. He has authored three books and more than a hundred articles, and has spoken on more than 100 panels.

Jonathan is also the founder and chairman of DailyDAC, LLC, d/b/a Financial Poise™, an on-line provider of continuing education, information, and business intelligence for business owners, investors, and their trusted advisors. Jonathan graduated from the State University of New York at Albany, magna cum laude, in 1991 after three years of study and from the University of Pennsylvania Law School in 1994. He clerked for a federal judge before entering private practice, spent several years teaching MBA candidates as an Adjunct Professor of Strategic Management at the University of Chicago Booth School of Business, and was the 2006 Clayton Center for Entrepreneurial Law Visiting Professor of Business Law at the University of Tennessee College of Law. Jonathan was a partner with Kirkland & Ellis LLP before joining SugarFGH.


More About The Faculty: D


DIMITRI [email protected]

Dimitri Karcazes is a principal in the Bankruptcy & Creditors’ Rights Group at Goldberg Kohn. Mr. Karcazes primarily represents lenders in the protection and enforcement of creditors’ rights and is involved in all aspects of commercial workouts and bankruptcies, including restructurings, reorganizations, sales and liquidations, as well as out-of-court workouts and assignments for the benefit of creditors. He has considerable experience with high-yield, distressed debt, intercreditor and subordinated debt matters. He has handled transactions and cases throughout the United States and in Canada, Mexico and the European Union. Mr. Karcazes has been recognized as a Rising Star by Super Lawyers. He was named by Chambers USA 2014 as a leading lawyer in the United States in Bankruptcy/Restructuring.

A frequent speaker and panelist on bankruptcy and commercial finance issues in the United States and abroad, Mr. Karcazes has presented to organizations which include the American Bar Association, American Bankruptcy Institute, Chicago Bar Association, Commercial Finance Association, Risk Management Association, INSOL Europe, and the Turnaround Management Association, on such topics as DIP financing and the use of cash collateral, second lien financing/intercreditor agreements, cross-border ABL lending and workouts and 363 sales from a secured creditor perspective.


HAMID [email protected]

Mr. Rafatjoo represents clients in complex transactions and reorganizations throughout the United States. He counsels companies and individuals in a variety of industries, including healthcare, retail, manufacturing, entertainment, real estate development, building contractors and hospitality. In addition, Mr. Rafatjoo advises corporate clients on a wide array of matters including business formation and corporate restructuring, debt and equity transactions and workouts, acquisitions and sales, and structuring and amending key contracts. He has extensive experience assisting clients across a broad spectrum of legal issues relating to corporate transactions, shareholder disputes, and litigation management. Mr. Rafatjoo is recognized as an aggressive results-oriented practitioner. He has also served as the court appointed Chapter 11 trustee in various cases in the Central District of California.

Mr. Rafatjoo holds an AV® Preeminent Peer Rating, Martindale-Hubbell's highest recognition for ethical standards and legal ability. He has also been named a "Super Lawyer" every year since 2007 in a peer survey conducted by Law & Politics and the publishers of Los Angeles magazine, an honor bestowed on only 5% of Southern California attorneys. Mr. Rafatjoo has been ranked by the preeminent publication Chambers USA since 2012 for his work in the field of Bankruptcy/Restructuring in California.

He is a former Assistant Editor of the Norton Bankruptcy Law and Practice and former contributing author of the Wiley Bankruptcy Law Update.


mailto:[email protected]



ALLEN [email protected]

Allen Wilen is a Partner in the firm’s Bankruptcy and Restructuring Group and has nearly 20 years of experience. His extensive experience with bankruptcy, forensic accounting, corporate finance, and representing debtors, unsecured creditors and secured creditors in bankruptcy proceedings and out-of-court restructurings. In addition, he has spent considerable time in the areas of business operations, fraud investigation, contract damages and business valuation. He has also served as a liquidating Trustee and Disbursing Agent on multiple occasions.Allen has been an integral part of forensic investigations leading to the criminal convictions of numerous individuals for crimes including bank and wire fraud, check kiting, and bankruptcy fraud. He has worked with numerous creditor committees and is known as a solutions-oriented bankruptcy professional. He also has extensive experience working with situations involving logistics and distribution, health care, entertainment and light manufacturing.Allen is the Treasurer of the New Jersey (NJ) Chapter of the Turnaround Management Association (TMA). He is a member of the American Institute of Certified Public Accountants (AICPA) and New Jersey (NJ) Society of Certified Public Accountants (NJSCPA). He is also a member of the Association of Insolvency and Restructuring Advisors (AIRA) and American Bankruptcy Institute (ABI). Previously, he was a director of Lawrenceville Re LTD, a Bermuda reinsurer.

BMC Group’s SmartRoom™ is an award-winning virtual data room to manage M&A due diligence, financial transactions, and legal documents, and for sharing confidential corporate information in an ultra-secure online workspace. The solution offers simple, intuitive navigation with greater support at a lower cost.

Visit www.bmcgroup.com45

http://www.bmcgroup.com/

Visit www.eisneramper.comEisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-service advisory and accounting firm, and is among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, litigation services, consulting, private business services, employee

benefit plan audits, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-registered and provides services to more than 200 public companies and to thousands of entities spanning the hedge, private equity, brokerage and insurance

space in the financial services marketplace. As companies grow we help them reach their goals every step of the way. With offices in New York (NY), New Jersey (NJ), Pennsylvania (PA), California (CA), and the Cayman Islands, and as an independent member of Allinial

Global, EisnerAmper serves clients worldwide.

46

http://www.eisneramper.com/


www.financialpoisewebinars.com

http://www.financialpoisewebinars.com/


50,000 +Weekly

newslettersubscribers

15,000 +website Visitors

per month

10,000 +webinar

attendees per year

business owners & executives

Attorneys Accountants Bankers Business brokers Consultants Commercial lenders debt traders Developers Entrepreneurs

high net worth investors

48


http://www.accreditedinvestormarkets.com/

http://commercialbankruptcyalternatives.com/

http://commercialbankruptcyinvestor.com/

http://commercialbankruptcylitigation.com/

http://www.businesstransitionandexitplanning.com/

http://www.chamberwise.org/

http://www.dailydac.com/


50,000+ WEEKLY NEWSLETTER SUBSCRIBERS15,000+ MONTHLY WEBSITE VISITORS10,000+ YEARLY WEBINAR ATTENDEES

PODCASTS, E-BOOKS AND MORE

educating various constituents

about risks & rewards involving financially

distressed businesses

educating investors

about optionsbeyond

publicly traded securities

educating business owners

& executives



http://www.dailydac.com/

http://commercialbankruptcylitigation.com/

http://commercialbankruptcyalternatives.com/

http://www.commercialbankruptcyinvestor.com/

http://www.businesstransitionandexitplanning.com/



http://www.aimkts.com/




About Financial Poise™ DailyDAC, LLC, d/b/a Financial Poise™ provides continuing education to business owners and executives, investors, and their respective trusted

advisors. Its websites, webinars, and books provide Plain English, sometimes entertaining, explanations about legal, financial, and other

subjects of interest to these audiences.


The ChamberWise™ Education Consortium is a resource for Chambers of Commerce to provide its members with valuable

member benefits by offering relevant business education webinars; and generate revenue for the Chamber as well.

www.chamberwise.org



Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.