March 17, 2011
On March 8, 2011, France’s highest court, the Cour de cassation, confirmed that CMBS borrower, Heart of la Défense SAS (Hold), and its Luxembourg parent company, Dame Luxembourg Sarl (Dame), were entitled to Court protection in France under Safeguard Proceedings (sauvegarde). Safeguard is a French bankruptcy process that resembles the U.S. Chapter 11 debtor-in-possession procedures, used most recently (and notably) in connection with the bankruptcies of General Motors and Lehman Brothers.
The decision of the Cour de cassation in connection with the Hold and Dame Safeguard proceedings is the culmination of a 30 month battle in the French courts between Hold and Dame, on the one hand, and Windermere XII FCT, on the other, over the opening of these proceedings. The decision is set to resonate across the French business, financial and legal community, as it will allow a broad cross section of debtors to avail themselves of the Safeguard procedures. Any debtor in distress, “. . . if their difficulties are of a magnitude such that they cannot face them alone . . .” will now be entitled to invoke the French procédure de sauvegarde.
By effectively reinstating the two Safeguard procedures, the Cour de cassation neatly lay to rest the long-standing debate — raised by both scholars and practitioners — over the scope and extent of the application of the Safeguard procedures. The Cour de Cassation confirmed that the French procédure de sauvegarde is open to any debtor confronted with difficulties, regardless of their nature and regardless of whether the debtor is an operational or a holding company or a special purpose vehicle (SPV).
The decision to reinstate the Safeguard Procedures has far-reaching implications. The Cour de cassation decision comes at a particularly sensitive point in time where the upcoming refinancing needs of borrowers (commonly referred to as the “wall of debt” given its magnitude) is expected to lead to substantial debt restructuring in the coming months and years.
In July 2007, Hold purchased the largest office tower in Europe, the Coeur Défense property, for €2.1 billion, partly financed via a €1.6 billion term loan, due July 2012. The term loan was then transferred to a securitisation vehicle, Windermere XII FCT. Windermere XII issued notes to institutional investors and banks to raise the funds necessary to acquire the term loan. Interest rate hedging for the term loan was provided by LBIE, a subsidiary of Lehman Brothers.
The collapse of Lehman Brothers on September 15, 2008 caused LBIE to lose its credit rating. This triggered a default under the term loan, which required the hedging counterparty to maintain a minimum credit rating throughout the life of the term loan. As a result of the worldwide financial turmoil occurring at that time, Hold and Dame were unable to substitute alternative hedge providers satisfactory to Windermere XII within the short time frame imposed. Windermere XII then called meetings of its noteholders to consider whether to accelerate the term loan and to take enforcement proceedings. These steps, if taken, would have led to the insolvency of Hold and Dame, and the likely sale of the Coeur Defense property, at a time when commercial property values were plummeting across the globe.
To prevent the expected insolvency of Hold and Dame, the two entities applied to the Paris Tribunal of Commerce to open Safeguard Procedures. The Tribunal ruled, on November 3, 2008, that Hold and Dame were entitled to the protection of the Safeguard Proceedings which entailed (among other things) a stay of any proceedings against Hold or Dame by the creditors.
On September 9, 2009, the Paris Tribunal of Commerce then adopted Safeguard Plans for Hold and Dame enabling a de facto restructuring of the term loan.
On February 25, 2010 the Paris Court of Appeals decided to nullify the opening of the Safeguard procedures, mainly on the ground that the two entities did not face difficulties of an operational nature. The Paris Court of Appeals made a similar ruling on the same day in the so-called “Mansford” case, another real estate acquisition structured financing.
The nullification suggested that most acquisition structures would be unable to avail themselves of Court protection under sauvegarde.
It took another year for the French Supreme Court to release its decision, which overturned the Paris Court of Appeals. The Supreme Court confirmed that holding companies or SPVs, even when suffering from financial (as opposed to operational) difficulties only, may benefit from the protection of a Safeguard procedure. The decision of the Paris Court of Appeals was cancelled on five grounds, namely:
Gibson Dunn partners Jean-Philippe Robé and Benoît Fleury advised Heart of La Defense and Dame Luxembourg in Paris, with assistance from partners Wayne McArdle and Greg Campbell in London.
Gibson Dunn’s European Restructuring Group provides advice to creditors, debtors, insolvency trustees and administrators and other interested parties on a wide range of insolvency related matters. For assistance, please contact the Gibson Dunn lawyer with whom you work or any of the following:
Benoît Fleury (+33 1 56 43 13 00, email@example.com)
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