As the J.C. Penney bankruptcy heads toward a hearing next week on its planned sale, the conflict between the retailer’s majority and minority lender groups has still not abated.
The company, which filed for Chapter 11 in Texas bankruptcy court in May, is heading toward a sale to landlords Simon Property Group, Brookfield Property and its majority first-lien lenders. But the process by which the sale and Chapter 11 confirmation process is playing out is at the center of a fight with the minority first-lien lender group, and the subject of ongoing coverage in recent weeks.
The retailer and majority first-lien lenders have mapped out a process in which the company’s assets — separated into an operating company to be taken over by Simon and Brookfield, and a property business to be controlled by the majority lender group — would be the subject of a sale hearing scheduled for Nov. 2.
Separately, there would be a Chapter 11 confirmation process that would play out over hearings later in November.
The minority lender group has objected to certain aspects of the sale, arguing that the majority group crafted an arrangement that prioritizes its recoveries at the expense of other creditors.
The minority group, which put in its own bid in competition with the majority lenders, has argued that Penney’s proposed transaction should be split so that Simon and Brookfield can move ahead with their portion of the deal while the lenders compete over the rest of the deal and address it in the context of the plan confirmation hearing.
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Penney’s and the first-lien lender group have repeatedly told the court that the deal can’t be split that way, and that its components depend on each other.
The conflict, some version of which plays out in many bankruptcies, shows how competing interests in a Chapter 11 can clash in a process in which many groups of creditors are often asked to accept reduced recoveries, attorneys said.
“Somebody is out of the money, and somebody is in the money…and objections [can be] a means of trying to extract value for that particular constituency,” said Joel Shapiro, partner at Blank Rome LLP, who isn’t involved in the Penney’s case and spoke broadly.
The question of having components of a sale approved in conjunction with a Chapter 11 plan, or separate from it, has implications for creditors. When considering a Chapter 11 plan, the court has to consider what is called a “best interest of creditors” test, in which the company proposing the plan would need to show that the result is better for creditors than what the creditors would get if the company were liquidated.
At a hearing on Monday, J.C. Penney attorney Joshua Sussberg of Kirkland & Ellis LLP told the court that “no one can seriously question or challenge that [a going-concern sale] is more valuable than liquidation.”
But creditor groups sometimes seek to address asset sales in conjunction with a Chapter 11 plan confirmation process, rather than just a separate sale process, because they believe they’ll be better protected by the rules of the bankruptcy code, bankruptcy attorneys said.
“It’s an argument for whether you can sell outside the [Chapter 11] plan before minority lenders [arguably] have a chance to put their ducks in a row for their competing bid, which they’re telling the judge will bring more value to the table, or do it under a plan which [they argue] would give them more time and would ensure that the protections of the bankruptcy plan are satisfied,” said Patrick Collins, bankruptcy and restructuring partner at Farrell Fritz P.C., who is not involved in the case and spoke generally.
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