May/June 2015 | 1

TURNAROUND MANAGEMENT ASSOCIATION OHIO

Turnaround TimesVolume 2 | Issue 3 | May/June 2015

TMA is the premier national organization

of professionalsdedicated to

corporate renewaland turnaround management.

May/June2015

In This Issue

Page 2The Pendulum Has

Swung: A Sea Change in Directors’ Fiduciary

Duties Under Delaware Law

Page 42015 Events Schedule

Page 5Avoiding the Bankruptcy Code’s Priority Scheme

Via Structured Dismissal

About TMA

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President’s ReportSally BartonKey Bank

With the unofficial start of summer just behind us in the form of the Memorial Day holiday, we invite you to share in some of our favorite TMA summer events. On Tuesday, June 9th, please join us for the joint TMA/ACG networking event, to be held at the Shoreby Club. This is one of the premier summer spots in Cleveland, and it will provide you with an opportunity to reacquaint yourself with many of your colleagues and those you haven’t seen since last year! Then, on Monday, July 13th, Drew Parobek, with the assistance of Mark Hanak and the staff at Mayfield Country Club, have put together one of the best golf outings around. If you aren’t a golfer, feel free to still come out and join us for some networking at the reception afterwards. We’ll take August off and enjoy the rest of summer before we start our programming back up in September. We hope you’ll be able to join us for one or all of these events.

Special thanks to our sponsors, who continue to support the organization, and to the board and committee chairs who continue to work hard to provide quality programs and events. Feel free to reach out to any of us with ideas for future programs. Hope to see you all throughout the summer!

We invite you

to share in

some of our

favorite TMA

summer events.

Lifetime Achievement and Turnaround/Transaction of the Year Awards

It’s Time!The Ohio TMA is ready to present two awards at this year’s holiday social in December. The first is the Lifetime Achievement award to celebrate the significant achievements of an Ohio TMA member’s career work in the turnaround profession. The second award is for the best submitted Turnaround/Transaction of the Year by Ohio TMA members in 2015. The deadline to submit nominations for both awards is September 30, 2015. We encourage anyone to submit nominations for either award to admin@tmaohio.org. Any questions? Contact Louise Walsh, also at admin@tmaohio.org. Look for a link to the Turnaround/Transaction application materials in future TMA emails.

2 | Turnaround Times

McDonald Hopkins is a business advisory and advocacy law firm with lawyers in six strategic locations – Chicago, Cleveland, Columbus, Detroit, Miami and West Palm Beach. We have a more than 80-year track record of counseling our clients through the most difficult times. Our 140 attorneys are focused on insightful legal solutions that help our clients strategically plan for an increasingly competitive future.

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Ohio TMA Officers

President Sally Barton

Vice President Mark Kozel

Secretary Dan DeMarco

Treasurer Mark Kutylowski

Past President Scott Opincar

Ohio TMA Board Members:

Kelly Burgan

Rob Folland

Dov Y. Frankel

Mike Kaczka

Gus Kallergis

Suzana Koch

John Lalley

Mark Seryak

Steve Skutch

Rob Stefancin

Jerry Stethem

Rick Szekelyi

Chapter Administrator Louise Walsh

Oh no, not another boring fiduciary duties article!While most of us may be (understandably) predisposed to such thinking, instances arise where restructuring professionals cannot simply overlook certain topics based solely on the grounds of tedium. Sometimes a legal opinion emerges whose concepts are important enough that they become required reading. In this instance, that opinion is Quadrant Struc-tured Products Company, Ltd. v. Vertin, issued by Vice Chancellor Laster of the indispens-able Court of Chancery of Delaware. The most striking aspect of the opinion is Laster’s in-delible treatise-like analysis of a director’s fiduciary duties to an insolvent corporation and how significantly such jurisprudence has shifted over the last decade. From the perspective of a director, such changes are most welcome. But for those commissioned with rooting out perceived bad behavior by boards, the opposite is likely true.Fiduciary DutiesDelaware law, like the laws of most other states, provides that the duties owed by a director to a corporation are the duty of care (which implicates the business judgment rule) and the duty of loyalty (which includes a duty to act in good faith). While these duties have been around for decades, the legal interpretation of such duties when the company is insolvent has evolved. Beginning in 2007 with the seminal Supreme Court of Delaware decision, N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, directors of an insolvent company no longer owed a general fiduciary duty to the company’s creditors, but rather to all of the company’s residual claimants. The Quadrant opinion masterfully details this incredible shift starting with Gheewalla. If one has not been a close observer of Delaware jurisprudence over the last few years, it is clear that past conventional wisdom should be disregarded in favor of new legal realities. So why should non-lawyers continue reading this article? Having a working knowledge of fiduciary duties is meaningful for everyone in the restructuring world – trusted counsel advising boards of directors; lenders looking to fund a potentially risky business venture; Chapter 7 trustees or creditors’ committees investigating potential causes of action; in-vestment bankers conducting due diligence; and financial advisors or CROs implement-ing restructuring strategies, to name just a few examples. Because Delaware remains the preeminent state in which to organize a company, the case law interpreting its corporate law is rich and expansive on issues of fiduciary duties for insolvent companies – certainly when compared with the relative dearth of legal analysis about these same issues under Ohio law.Quadrant Structured Products Company, Ltd., v. VertinIn Quadrant, a senior subordinated noteholder filed a lawsuit in 2011 asserting both direct and derivative claims against the directors of a company that sold credit default swaps

The Pendulum Has Swung: A Sea Change in Directors’ Fiduciary Duties Under Delaware LawBy: Michael J. Kaczka, McDonald Hopkins LLC

May/June 2015 | 3

Ohio TMA Corporate Sponsors

Baker Hostetler

Barnes & Thornburg

Brouse McDowell

Calfee

Centrus Group

Creative Consultants Co. LLC

First Business Capital Corp.

Ice Miller LLP

Inglewood Associations

McDonald Hopkins

Phoenix Management Services

Taft Stettinius & Hollister

during the financial crisis. The initial complaint alleged, among other things, that the company was insolvent; that the company’s directors adopted a business strategy of mak-ing speculative investment decisions benefitting its sole shareholder to the detriment of its senior creditors; and that that the directors authorized fraudulent transfers of value from the company to its sole shareholder by paying excessive fees to a related entity and paying down junior notes rather than deferring such fees. Over time, the Delaware Chancery Court (evidenced in other written opinions) dismissed several claims against the directors, in-cluding the one alleging that the board breached its fiduciary duty by engaging in high-risk value maximizing strategies while the company was insolvent. There, the court held that the business judgment rule continued to apply to board decisions after the advent of insolvency, even when such transactions may have a disproportionally beneficial effect for shareholders at the creditors’ expense, so long as the board’s decisions are reasonably intended to maxi-mize the benefit of all the corporation’s residual claimants.In the most recent Quadrant opinion cited above, the Chancery Court was charged with adjudicating a motion for summary judgment to determine whether the creditors had stand-ing to maintain a derivative claim for breach of fiduciary duty if the company had returned to solvency during the intervening period. The court determined that, in order to establish standing to assert derivative claims as a creditor on behalf of a company, such creditor must first plead and later prove that the company was insolvent at the time of the lawsuit using the traditional balance sheet test for determining solvency. This bright-line rule rejects any attempt to impose a continuous insolvency requirement or irretrievable insolvency require-ment as metrics for determining when a creditor has standing to sue derivatively. The Pendulum Swings in Favor of DirectorsWhile the ultimate holding of Quadrant is important in its own right, the analysis of direc-tor fiduciary duties in the event of insolvency is what takes center stage in the opinion. Vice Chancellor Laster crisply details the legal shift in Delaware law since Gheewalla. His own words best explain these changes:

Before Gheewalla and its forerunners, the following principles were frequently as-serted as true:¢ The fiduciary duties owed by directors extended to creditors when the corporation entered the vicinity of insolvency. ¢ Creditors could enforce the fiduciary duties that directors owed them through a direct action for breach of fiduciary duty. ¢ Under the trust fund doctrine, the directors’ fiduciary duties to creditors included an ob-ligation to manage the corporation conservatively as a trust fund for the creditors’ benefit. ¢ Because directors owed fiduciary duties both to creditors and stockholders, direc-tors faced an inherent conflict of interest and would bear the burden of demonstrating that their decisions were entirely fair.¢ Directors could be held liable for continuing to operate an insolvent entity and in-curring greater losses for creditors under a theory known as “deepening insolvency.”

After Gheewalla, none of these assertions remain true. In their place is a different regime in which the following principles are true:

¢ There is no legally recognized “zone of insolvency” with implications for fiduciary duty claims. The only transition point that affects fiduciary duty analysis is insolven-cy itself. ¢ Regardless of whether a corporation is solvent or insolvent, creditors cannot bring direct claims for breach of fiduciary duty. After a corporation becomes insolvent, creditors gain standing to assert claims derivatively for breach of fiduciary duty.

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¢ The directors of an insolvent firm do not owe any particular duties to creditors. They continue to owe fidu-ciary duties to the corporation for the benefit of all of its residual claimants, a category which now includes credi-tors. They do not have a duty to shut down the insolvent firm and marshal its assets for distribution to creditors, although they may make a business judgment that this is indeed the best route to maximize the firm’s value. ¢ Directors can, as a matter of business judgment, fa-vor certain non-insider creditors over others of similar priority without breaching their fiduciary duties. ¢ Delaware does not recognize the theory of “deep-ening insolvency.” Directors cannot be held liable for continuing to operate an insolvent entity in the good faith belief that they may achieve profitability, even if their decisions ultimately lead to greater losses for creditors. ¢ When directors of an insolvent corporation make decisions that increase or decrease the value of the firm as a whole and affect providers of capital differently only due to their relative priority in the capital stack, directors do not face a conflict of interest simply because they own common stock or owe duties to large common stockholders. Just as in a solvent corporation, common stock ownership standing alone does not give rise to a conflict of interest. The business judgment rule protects decisions that affect participants in the capital structure in accordance with the priority of their claims.

Practical Impact The analysis from the Quadrant decision really contextualiz-es the extent of a creditor’s claim against directors for breach

of fiduciary duty to an insolvent company. Such a claim is no longer an easily invoked theory that a creditor can assert directly when a company approaches insolvency. Causes of action for breaches of fiduciary duty are substantially weak-ened because directors should worry less about an inherent conflict between their duties to creditors and their duties to stockholders. Most importantly, Delaware law now mitigates the threat of a creditor obtaining a remedy that could force a liquidation of a firm that otherwise might have the ability to continue to operate and return to solvency.A creditor’s claim for breach of fiduciary duty is currently more closely aligned with the interests of the company as a whole since such claim only arises derivatively once the company actually has become insolvent. Directors are free to enjoy the default protections of the business judgment rule no longer fettered by any inherent conflict between duties to creditors and duties to stockholders. In short, Delaware law now suggests that a creditor has the best opportunity for suc-cess on a breach of fiduciary duty claim in situations where directors engaged in self-dealing and other bad faith transfers or did not exercise reasonable prudence in making business decisions.One must ask whether this evolution of Delaware law spells any material shift in how Ohio law will be interpreted on these issues. While that answer is unclear, in the few relative-ly recent opinions interpreting a director’s fiduciary duties of an insolvent company under Ohio law, the courts appeared to agree with the jurisprudence of market-moving Delaware. Indeed, the Ohio decisions on the topic favorably apply the Gheewalla opinion. Given the clear direction outlined in Quadrant, it would be surprising to see Ohio jurisprudence move markedly in the opposite direction in the coming years.

June 9 Joint TMA/ACG Shoreby Event.

July 13 Annual TMA Golf Classic Mayfield Country Club, including NOW elements.

September 10 Anatomy of a Health Care Restructuring Location and time TBD.

October 15 TMA/CMBA Educational Workshop.

November 12 Subject, time and location TBD.

December 9 TMA/CMBA Holiday evening event Westin Hotel downtown.

NOTE: The dates and subjects listed in this tentative 2015 calendar are subject to change to accommodate speaker’s availability, facility availability, verification of availability of other organizations in the case of joint events, and current events which might pre-empt this current schedule. The schedule will be updated as necessary.

2015 Schedule

May/June 2015 | 5

In a recent decision, the U.S. Court of Appeals for the Third Circuit ruled that, under certain circumstances, a structured dismissal of a Chapter 11 case may be permissible even if the distributions to be made pursuant to such dismissal do not comply with the distribution scheme set forth in the Bankruptcy Code (See In re Jevic Holding Corp., et al, Case No. 14-1465, --F.3d --, 2015 WL 2403443--3d Cir. May 21, 2015). Unlike a standard vanilla dismissal that typically reinstates the pre-petition state of affairs, a structured dismissal of-ten includes additional provisions, such as releases, rules for claims administration, and distribution schemes. These structured dismissals have become popular as a vehicle for resolving issues that cannot be dealt with properly in the con-text of a Chapter 11 plan, while at the same time avoiding the sometimes disastrous result of a conversion to a case under Chapter 7 of the Bankruptcy Code. However, as set forth in the Court’s ruling in Jevic, unique circumstances may be required before this door can be opened. BackgroundJevic was a trucking company headquartered in New Jersey. After its business began to decline, a subsidiary of Sun Cap-ital Partners acquired Jevic in a leveraged buyout financed by a group of lenders led by CIT Group. Jevic continued to flounder and, on May 19, 2008, ceased all business operations and notified its employees of their pending termination. The next day, Jevic and its related entities filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.The Chapter 11 filings resulted in two significant lawsuits. First, a group of Jevic’s terminated truck drivers filed a class action against Jevic and Sun alleging violations of federal and state Worker Adjustment and Retraining Notification (WARN) Acts. Second, the Official Committee of Unsecured Creditors brought a fraudulent conveyance action against Sun and CIT, claiming the leveraged buyout had hastened Jevic’s demise by saddling it with debts that it couldn’t possibly repay.In March 2012, the Committee, Jevic, Sun, CIT and the driv-ers met in an attempt to resolve the Committee’s suit against Sun and CIT. By that time, Jevic’s remaining assets were limited to (i) $1.7 million in cash, and (ii) the Committee’s pending action against Sun and CIT. From the outset, it was

clear to everyone that if the case was converted to Chapter 7 (i) Sun would get all the cash (as it was subject to Sun’s lien), (ii) the lawsuit against Sun and CIT would ultimately fail due to a lack of funds to finance the litigation, (iii) other constituents would end up with nothing. At the same time, Sun and CIT were looking to make the lawsuit against them disappear. The negotiations yielded a settlement that was approved by all parties, except for the drivers. The settlement provided for: (i) mutual releases among the parties, (ii) CIT to pay $2 million to the estates to cover professional fees and other administrative expenses, (iii) Sun would assign its lien on the remain $1.7 million to a trust, which would pay certain tax claims, with funds remaining to be distributed pro rata to holders of general unsecured claims, and (iv) dismissal of the Chapter 11 cases. Interestingly, the settlement did not provide for any payment to the drivers, who held an estimated claim of $12.4 million, of which $8.3 million was a priority wage claim under the Bankruptcy Code.The drivers and the United States Trustee objected to the pro-posed settlement and dismissal largely because, by allowing for payment on general unsecured claims and ignoring the drivers’ priority wage claim, the proposed settlement distrib-uted property of the estate in a manner that was inconsistent with the distribution scheme set forth in the bankruptcy code. The bankruptcy court acknowledged there was no specific section of the code that provided for the structured dismissal scheme embodied in the proposed settlement. However, the bankruptcy court pointed out that (i) similar relief had been approved by other courts, and (ii) the dire circumstances faced by the Jevic debtors warranted the relief requested be-cause, absent such relief, there was “no realistic prospect” of a meaningful distribution to any party aside from the secured creditors. In overruling the objection, the bankruptcy court observed that a confirmable Chapter 11 plan was not in the offing, the secured creditors would not do the deal in Chapter 7, and that a Chapter 7 would fail as there would be no cash available to pursue the litigation against Sun and CIT. The drivers appealed the ruling to the United States District Court for the District of Delaware, which affirmed. The drivers subsequently sought review by that court.Ruling by Court of AppealsThe district court began by considering whether structured dismissals are ever permissible under the Bankruptcy Code. The drivers asserted that there are only three avenues for exit

Avoiding the Bankruptcy Code’s Priority Scheme Via Structured Dismissal: Lessons Learned from In re Jevic Holding Corp, et al.By Dov Y. Frankel, Taft Stettinius & Hollister LLP

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from Chapter 11: (i) a confirmed plan of reorganization, (ii) conversion to a Chapter 7 liquidation, or (iii) simple dismiss-al without any strings attached. The court acknowledged that the drivers were correct in their assertion that the Bankrupt-cy Code does not expressly authorize structured dismissals. However, the court explained that, in their understanding, structured dismissals are simply dismissals that follow the entry of other orders by the court (such as orders approv-ing settlements, granting releases etc.) that remain in effect following dismissal. Further, inasmuch as the Bankruptcy Code authorizes a court to alter the effect of dismissal “for cause,” it does not require that a dismissal be simply a hard reset of the pre-petition status quo. Consequently, the district court held that “absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion process, a bankruptcy court has discretion to order [a structured dismiss-al].”The Jevic court went on to consider the question of “whether [pre-plan] settlements in the context of structured dismiss-als may ever skip a class of objecting creditors in favor of more junior creditors.” The drivers asserted that the Bank-ruptcy Code applies to any and all distributions of estate property under Chapter 11. Consequently, they argued, the Bankruptcy Court lacked the requisite authority to approve a settlement that passed over the drivers’ wage claim in order to pay tax claims and claims of general unsecured creditors. While acknowledging that case law exists that would seem to support the drivers’ position, the court pointed out that those cases were not dispositive because each of them spoke in the context of plans of reorganization, not settlements. See, e.g., TMT Trailer Ferry v. Anderson, 390 U.S. 414 (1967); SEC v. American Trailer Rentals, 379 U.S. 594 (1965); see also In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir. 2005).The Jevic court then examined how its sister courts had dealt with this issue. In Matter of AWECO, Inc., the 5th Circuit Court of Appeals rejected a settlement that would have transferred estate assets to an unsecured creditor despite the existence of senior claims. Matter of AWECO, 725 F.2d 293,

295-96 (5th Cir. 1984). The AWECO court held that the “fair and equitable” standard applies to settlements, and “fair and equitable” means compliant with the priority system. The Je-vic court was uncomfortable with this rigid approach, favor-ing instead the more flexible approach taken by the Second Circuit in In re Iridium Operating, LLC. See, In re Iridium Operating, LLC, 478 F.3d 452 (2nd Cir. 2007). The Iridium court held that “whether a particular settlement’s distribution scheme complies with the Code’s priority scheme must be the most important factor to consider when determining if a settlement is ‘fair and equitable’ under Rule 9019,” but a non-compliant settlement could be approved when “the remaining factors weigh heavily in favor of approving a settlement[.]” In taking the Iridium approach, the Jevic court agreed that compliance with the Code priorities will usually be dispos-itive of whether a proposed settlement is fair and equitable. Consequently the court held that bankruptcy courts may approve settlements that deviate from the priority scheme of the Bankruptcy Code only if they have “specific and credi-ble grounds to justify [the] derivation.” In re Jevic Holding Corp., 2015 WL 2403443.The court then examined whether such specific and credible grounds were present in the case before them. Admitting that it was a close call, the court concluded that the Bankruptcy Court had sufficient grounds to approve the settlement and structured dismissal of the Jevic cases. The court found that the settlement and structured dismissal was “the least bad alternative since there was ‘no prospect’ of a plan being con-firmed and conversion to Chapter 7 would have resulted in the secured creditors taking all that remained of the estate in ‘short order[.]’’ the Court affirmed.Practice PointerThe Jevic decision confirms that, in the Third Circuit, a struc-tured dismissal, even one that includes a distribution scheme contrary to Section 507 of the Bankruptcy Code, is a tool that may be available to bankruptcy practitioners when confirm-ing a plan or conversion to Chapter 7 are not viable options. The opinion also provides a road map for the factual findings necessary to obtain the desired relief.

May/June 2015 | 7

TMA nextGen’s Loan Workouts 101: A Panel Discussion on Loans Gone Wrong

Tuesday, June 16, 2015 12:00 – 1:30 p.m.

BakerHostetler | PNC Center 1900 East 9th Street, Suite 3200

Cleveland, OH 44114

Panelists:

Joe Esmont, BakerHostetler, moderator Tom Wearsch, BakerHostetler

Tom Pratt, Applied Business Strategies Bob Burns, KeyBank

Register here

nextGen Members*: $0 (use promo code CF7) Non-nextGen Members: $15. Non-members are welcome!

*TMA members who are under 35 or who have practiced for fewer than 10 years qualify for nextGen pricing. Anyone who qualifies for nextGen can join TMA for $150,

50% off the standard price.