On February 6, 2016, Lynn Tilton’s Patriarch Partners XV, LLC filed a notice of withdrawal of its involuntary chapter 11 petitions filed against Zohar CDO 2003-1, Ltd. and affiliated entities (“Zohar I”). Patriarch has maintained that it filed the petitions in order to protect itself and other junior creditors in Zohar I from allegedly damaging activities by bond insurer MBIA, the senior creditor. Zohar I defaulted at maturity of the senior bonds in November 2015 and MBIA subsequently made the payments.
Patriarch’s withdrawal of the petitions followed an evidentiary hearing held on February 1, during which valuation experts from Patriarch and MBIA offered testimony regarding Patriarch’s proposed restructuring plan whereby proceeds from the sales of certain underlying portfolio companies (largely controlled by Patriarch) would be allocated to pay MBIA’s senior notes in full over approximately three years. The testimony of the valuation experts indicated that information to allow for a thorough valuation analysis had not been made available. In response, the court urged the parties to work together in order to ascertain the value of the portfolio companies and adjourned the hearing based on an agreement in principle to select an individual to serve as an independent fiduciary and collateral manager for Zohar I and sister CDOs, Zohar II and Zohar III.
On February 5, Patriarch announced its resignation as collateral manager for Zohar I, as well as Zohar II and Zohar III, in order to “avoid any further financial distress to the underlying portfolio companies.” Patriarch filed its notice of withdrawal of the involuntary petitions against Zohar I the following day.
Despite Patriarch’s withdrawal of the involuntary petitions, the action against Zohar I may have industry-wide implications, as the court did not need to rule whether enforcement of the non-petition provision (including by specific performance) should be granted as Zohar I sought in its motion to dismiss. The lack of a ruling in the case leaves open whether contract parties can expect to obtain specific performance of non-petition provisions. Going forward, market participants should consider whether to modify typical non-petition clauses to make clear that they are intended as a waiver of the right to bring a proceeding in bankruptcy that is enforceable by specific performance and injunctive relief.
Grant Buerstetta is a partner at Blank Rome LLP and member of the New York City Bar Association’s Structured Finance Committee. Ritika R. Kapadia is an associate at Blank Rome LLP. The other members of the Committee are Patrick D. Dolan, Chair, Mark Adelson, Howard Altarescu, Robert Steven Anderson, Vincent Basulto, Kira Brereton, Lewis Cohen, John M. Costello, Jr., John J. Dedyo, Christopher J. DiAngelo, Afsar Farman-Farmaian, Karen Fiorentino, Shuoqiu Gu, Christopher Haas, Bryan Hall, Marsha Henry, Greg Kahn, Jamie Kocis, Jason H. P. Kravitt, Steve Levitan, Gregory T. Limoncelli, George P. Lindsay, Alexander G. Malyshev, Jerry R. Marlatt, Lorraine Masssaro, Richard L. Mertl, Willard S. Moore, Dina J. Moskowitz, David Z. Nirenberg, Christopher J. Papajohn, Steve Plake, Lauris G. L. Rall, Brian D. Rance, Richard J. Reilly, Jr., Y. Jeffrey Rotblat, Paul R. St. Lawrence, Adam Singer, Craig Stein, Jeffrey Stern (Chair from 2011-14), Gregory D. Walker, Craig A. Wolson (Founder and Chair from 2004-08), Jordan Yarett, and Boris Ziser. Any analysis and opinions expressed in this post are those of Mr. Buerstetta and Ms. Kapadia.
securitizationflash 