Enron Seminar, Spring 2002 Class 3 Understanding Enron’s Deals I

Enron Seminar, Spring 2002 Class 3 Understanding Enron’s Deals I
Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago Copyright © 2002 Randal C. Picker. All Rights Reserved.

Assessing Alternative Structures
As Between the parties? the debtor and other consensual creditors? the debtor and non-consensual creditors? Angles Actual Economic outcomes? Clarity/Transparency? November 15, 2018 Copyright © 2002 Randal C. Picker

Sec. 541. Property of the estate
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: (1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case. (b) Property of the estate does not include - … November 15, 2018 Copyright © 2002 Randal C. Picker

Asset-Based Lending LTV Abbey Grants SI in AR w/public notice
Lends $270MM November 15, 2018 Copyright © 2002 Randal C. Picker

Sales LTV Abbey Sells steel plant in Cleveland Pays $270MM
November 15, 2018 Copyright © 2002 Randal C. Picker

AR Securitization LTV Abbey Sales Fin Grants SI in AR w/public notice
Continuing AR Sales $ Lends $270MM How is this different from the prior transactions? Sales Fin November 15, 2018 Copyright © 2002 Randal C. Picker

Inventory Securitization
LTV Chase Grants SI in Inv/PN Continuing Inv Sales $ Lends $30MM How is this different from the prior transactions? Steel Prod November 15, 2018 Copyright © 2002 Randal C. Picker

Copyright © 2002 Randal C. Picker
Evaluating LTV Property Interest What is the nature of the interest held by LTV in property transferred to Sales Finance and Steel Products? True Sales Were these true sales? How can we tell? November 15, 2018 Copyright © 2002 Randal C. Picker

Sophistry? “Furthermore, there seems to be an element of sophistry to suggest that Debtor does not retain at least an equitable interest in the property that is subject to the interim order.” “Debtor’s business requires it to purchase, melt, mold and cast various metal products. To suggest that Debtor lacks some ownership interest in products that it creates with its own labor, as well as the proceeds to be derived from that labor, is difficult to accept.” “Accordingly, the Court concludes that Debtor has at least some equitable interest in the inventory and receivables, and that this interest is property of the Debtor’s estate. This equitable interest is sufficient to support the entry of the interim cash collateral order.” November 15, 2018 Copyright © 2002 Randal C. Picker

Equity? “Finally, it is readily apparent that granting Abbey National relief from the interim cash collateral order would be highly inequitable.” “The Court is satisfied that the entry of the interim order was necessary to enable Debtor to keep its doors open and continue to meet its obligations to its employees, retirees, customers and creditors.” “Allowing Abbey National to modify the order would allow Abbey National to enforce its state law rights as a secured lender to look to the collateral in satisfaction of this debt.” “This circumstance would put an immediate end to Debtor’s business, would put thousands of people out of work, would deprive 100,000 retirees of needed medical benefits, and would have more far reaching economic effects on the geographic areas where Debtor does business.” November 15, 2018 Copyright © 2002 Randal C. Picker

The Proposed Amendments
Mechanism Additional exclusion from property of the estate in Sec. 541(b) Asset-Backed Securitization Must have class of investment grade securities Limited to financial assets, cash and securities November 15, 2018 Copyright © 2002 Randal C. Picker

Transferred? ‘‘(5) the term ‘transferred’ means the debtor, under a written agreement, represented and warranted that eligible assets were sold, contributed, or otherwise conveyed with the intention of removing them from the estate of the debtor pursuant to subsection (b)(8) (whether or not reference is made to this title or any section hereof), irrespective and without limitation of— (A) whether the debtor directly or indirectly obtained or held an interest in the issuer or in any securities issued by the issuer; (B) whether the debtor had an obligation to repurchase or to service or supervise the servicing of all or any portion of such eligible assets; or (C) the characterization of such sale, contribution, or other conveyance for tax, accounting, regulatory reporting, or other purposes.’’ November 15, 2018 Copyright © 2002 Randal C. Picker

Commentary Respect True Sales True sales that are not otherwise subject to avoidance under the fraudulent transfer provisions should be respected in bankruptcy. This is true whether the sold asset is real estate or a car, securities or accounts receivable. November 15, 2018 Copyright © 2002 Randal C. Picker

Commentary Assessing Whether a True Sale Has Taken Place The problem that arises—and here is where asset securitization comes in—is that for some assets, the basic notion of sale can be quite tricky. In some versions, true sales take place, in others, this is much less obvious, and the essential point here is that the basic notion of sale in these contexts is quite difficult to apply. November 15, 2018 Copyright © 2002 Randal C. Picker

Commentary Managing Uncertainty How should we deal with that uncertainty, that is, the uncertainty about whether the structure of a particular asset securitization is or is not a true sale? Current law appropriately leaves these questions to judges, to be resolved under state law, if and when a particular transaction is challenged. November 15, 2018 Copyright © 2002 Randal C. Picker

Commentary Success of the Market Some uncertainty does exist, but notwithstanding these issues, so far, trillions of dollars of asset-securitization deals have taken place, with only a handful of challenges. November 15, 2018 Copyright © 2002 Randal C. Picker

Commentary Scope of Change Section 912 would overturn a long tradition in commercial law by allowing the mere say so of the debtor to determine how a transaction is characterized. Reject 912 The [organization] thus believes that the statute should remain unchanged and that Congress should await further judicial development before legislating in this important area. November 15, 2018 Copyright © 2002 Randal C. Picker

LJM PPM: Page 1 “Under Mr. Fastow’s management, the Partnership expects to have the opportunity to co-invest with Enron in many of Enron’s new investment activities and the opportunity to acquire existing Enron assets on a highly selective basis. This access to deal flow should provide the Partnership with unusually attractive investment opportunites.” November 15, 2018 Copyright © 2002 Randal C. Picker

LJM2 PPM: Page 3 “LJM2 will be positioned to capitalize on Enron’s need to rapidly access outside capital due to the Principals’ familiarity with Enron’s assets and their understanding of Enron’s objectives, which should facilitate LJM2’s ability to quickly execute transactions. The ability to act quickly is invaluable to Enron and should enhance the flow of opportunities for LJM2.” November 15, 2018 Copyright © 2002 Randal C. Picker

Enron Seminar, Spring 2002 Class 3 Understanding Enron’s Deals I

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Enron Seminar, Spring 2002 Class 3 Understanding Enron’s Deals I

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