Credit offers gone bad: Town Sports pre-petition lenders sue

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Fallout has continued since the bankruptcy sale in November 2020 of Town Sports assets to a new entity backed, in part, by an ad hoc group of Town Sports pre-petition lenders. A separate group of pre-petition lenders who were not involved in the sale filed a lawsuit in May against the ad hoc group and the administrative agent of the lenders’ union, alleging that the actions of the ad hoc group had rendered the “essentially worthless” non-participating group secured loans. “”[1] The case, which is still in its early stages, demonstrates the importance of properly documenting a multi-party transaction and also provides another recent example of “lender-to-lender” violence.

Town Sports, owner and operator of health and fitness clubs across the United States, filed for bankruptcy in September 2020 following the COVID-19 pandemic and related government shutdown orders (Town Sports litigation with the New York Attorney General in connection with his bankruptcy case has been discussed in previous articles available here and here). Several years before the filing, a syndicate of lenders had provided Town Sports with a senior secured credit facility. Following Town Sports’ bankruptcy filing, an ad hoc group of this syndicate proposed to partner with Tacit Capital in a joint transaction to buy the assets and operations of Town Sports in the event of bankruptcy: Tacit agreed to pay $ 47.5 million in cash for 80% of the capital of the “NewCo” entity that would own the assets of Town Sports; the ad hoc group of lenders agreed that the syndicate of lenders would credit the offer with $ 80 million of secured debt before the petition in exchange for 20% equity; and Newco would issue $ 35 million in new debt to the ad hoc group and other lenders in the pre-petition syndicate. The Town Sports bankruptcy court approved the sale in November 2020.

Soon after, however, difficulties arose. First, Tacit withdrew from the transaction, transferring its rights to Peak Credit LLC. Second, the ad hoc group accused Peak of failing to provide the $ 47.5 million in capital needed to fund the new company, after closing, and of not allowing the new company to issue the $ 35 million in capital. additional debt required. On this basis, the ad hoc group sought to withhold its $ 80 million credit offer and urgently decided to ban the sale they had devised. The Debtors and Unsecured Creditors Committee objected, noting that the terms of the sale had already been approved and that, if the ad hoc group had any issues with Peak Credit, as a co-buyer, those issues should be settled directly between the group hoc advertiser and Peak Credit. The bankruptcy court accepted and rejected the ad hoc group’s request to prohibit the sale on November 30, 2020. The sale was closed on the same day.

A few months later, on May 25, 2021, two lenders who had been part of the prepetition syndicate, but who had not joined the ad hoc group of lenders who had negotiated the sale of the bankruptcy, sued the ad hoc group, alleging that the group’s actions violated the prior credit agreement and rendered all prior loans “essentially worthless”. The lenders also sued the administrative agent for breach of the pre-existing credit agreement, alleging that the agent had not terminated the actions of the ad hoc group.

At first, the dissident lenders asserted that the ad hoc group was not entitled to credit an offer since they were only “required lenders” under the current credit agreement and a commitment to credit an offer required the consent of all lenders. The lenders also alleged that the ad hoc group had “not obtained any binding and enforceable commitments from Tacit or NewCo regarding the new debt instruments or the capital injection of $ 47.5 million into NewCo”, with the “only support” for the alleged agreement between the ad hoc group and Tacitus being “an exchange of electronic mails between the parties referring to figures in brackets”. The plaintiff creditors allege that the ad hoc group’s breach of the pre-demand credit agreement combined with the ad hoc group’s failure to secure binding agreements from Tacit cost lenders tens of millions of dollars because lenders were forced to swap 80 million A 20% stake in NewCo which, without the full amount of the equity injection initially promised by Tacit of $ 47.5 million, was only worth $ 45,000 at 29 December 2020.

On July 19, 2021, the ad hoc group filed a letter with the United States District Court for the Southern District of New York in which it requested a pre-petition conference and argued that the lenders’ complaint included a number of fatal defects. The ad hoc group argues that the breach of contract claims relate to agreements and issues already heard and resolved by the Delaware bankruptcy court in the Town Sports bankruptcy case. For this reason, the ad hoc group argues that lenders’ claims are time barred by issuance and exclusion of claims. Further, the ad hoc group argues that, in any event, jurisdiction should be transferred to the Delaware Bankruptcy Court as the lenders are represented there and appeared at every stage of the Town Sports bankruptcy case.

The Town Sports litigation suggests the potential dangers of pursuing a bankruptcy deal when the commitments and mechanics of the deal are not fully documented. By approving the proposed sale, the bankruptcy court approved and implemented the original agreement between the ad hoc group, Tacit and Town Sports. However, assuming the claims of the lender claimants are proven, the ad hoc group found itself without recourse against Tacit (and Peak Credit as Tacit’s successor) because the ad hoc group did not give itself the opportunity. to withdraw from the agreement if the other parties have not been able to meet its obligations (for example, by expressly linking its obligations to offer credit at closing to the financing of Tacit’s equity contribution ). The case also provides another example of so-called “lender-against-lender violence” with borrowers teaming up with some, but not all, lenders on the same credit facility to make a deal – and lender groups. then attacking each other when the going goes wrong. It is a matter that deserves to be watched.

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