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With 9fin it’s easy to stay on top of news stories like Robertshaw. Find out what else we do on distressed and restructuring here.

The real winner of the Robertshaw adversary proceeding is… Robertshaw and all future distressed debtors who say to their creditors: “I am the captain now.”

Judge Christopher Lopez of the Southern District of Texas oversaw a six-day trial between Invesco, Robertshaw, an ad hoc group of lenders consisting of Bain Capital, Canyon Capital, and Eaton Vance and sponsor One Rock. After taking the matter under advisement, Judge Lopez issued a ruling that Robertshaw breached the credit agreement and the remedy is money damages in the form of a proof of claim. This ruling seemingly allowed everyone to win, but a closer look reveals Invesco’s win was a lot less equal than everyone else’s win — if it could even be called a win.

As part of his decision, Judge Lopez made a number of implicit and explicit rulings. First, the explicit rulings: (1) Robertshaw breached the credit agreement by not using all net proceeds to pay back the term loan (2) the ad hoc lenders did not breach the credit agreement, (3) One Rock did not tortiously interfere with the credit agreement, (4) Robertshaw, the ad hoc group, and One Rock did not breach the implied covenant of good faith and fair dealing, and (5) Invesco is entitled to assert money damages and nothing else.

The consequences of this explicit ruling — which turned on a technicality, namely the capitalization of the word “Subsidiary” (as discussed here) — are that Robertshaw, the ad hoc group, and One Rock get to continue on the path they laid out at the beginning of the bankruptcy without delay, and Invesco gets to file a proof of claim that will likely be out of the money. Therefore, although Invesco technically won on the breach of contract claim, all Invesco really won is a little bit of pride — and even that is limited by Judge Lopez’s description of the firm’s theory of damages which he said is “based on pure speculation.”

The implicit ruling is even more interesting, especially for future distressed companies. Judge Lopez said at the conclusion trial that he is considering broadly the debtors role in these types of LME transactions. In ruling that the only breach was a small breach — Robertshaw prepaying Invesco as a “voluntary prepayment” rather than a “mandatory prepayment” — Judge Lopez suggests that Robertshaw did in fact do everything else right, both under the credit agreement and in the company’s best interests. Josh Tinkelman from Latham & Watkins on behalf of the debtors, testified at trial that his only goal was to find the best transaction within the confines of the credit agreement, that they agreed to the Invesco fourth amendment because they had to, but they were always open to looking for a better transaction. Judge Lopez’s ruling affirms that this approach encapsulates exactly how debtors and their counsel are supposed to behave.

Judge Lopez explained that even if the debtors followed the credit agreement entirely and made the mandatory prepayment using the entirety of the net proceeds to the term loan, Invesco still would no longer be considered a Required Lender. Although Invesco argued that but-for the violation of the credit agreement this bankruptcy would have looked very different, Judge Lopez disagreed and wrote, “There is nothing in the record suggesting that Robertshaw’s board was sure to approve a January 2 filing even if it was a milestone in Amendment No. 4. The record showed that the independent director, Mr. Gold[stein], and the company’s advisors thought it could harm the company. A lender cannot force a company to sign bankruptcy petitions.” Ultimately, this decision suggests that the power remains with the company to use its business judgment to explore and decide on the best transaction to pursue.

Additionally, Judge Lopez’s ruling that the ad hoc lenders did not breach the contract and the equity sponsor did not tortiously interfere support the idea that lenders and sponsors do not owe anything to one another outside the four corners of a contract. Instead, their duty is only to the company to offer any transaction that could help — even if it is at the expense of other creditors. As Judge Lopez wrote, “One Rock had a right under New York law to protect its economic interest in Robertshaw by entering into the December Transactions and not allowing what it believed to be a value-destructive bankruptcy filing. That Robertshaw ended up filing bankruptcy (in part because additional liquidity Robertshaw received is tied up in litigation with Invesco) or that parties understood Robertshaw could potentially file does not change the answer.”

Finally, and perhaps most damning to Invesco, on the issue of bad faith Judge Lopez wrote, “Invesco engaged in acts it now calls bad faith.” Judge Lopez explained that the company and all the parties involved in this trial engaged in liability management transactions, this set the expectation that this type of conduct is reasonably expected, and since the SPCA is “full of blockers and clauses named for other liability management cases” the argument that this breaches the duty of good faith and fair dealing under New York law fails.

There are a couple of takeaways here: First, expect more LMEs. For better or worse lender on lender violence is here to stay. Judge Lopez rightfully pointed out that most credit agreements and indentures we see today include some type of anti liability management transaction language - commonly known as “J-Crew blockers,” when the clauses are intended to prevent drop downs of intellectual property, and “Serta blockers,” when the clauses intend to prevent uptier transactions. At the point where the drafters of these agreements are trying to prevent these types of transactions, the expectation that companies and lenders will try and pursue the transaction is reasonable. Perhaps lenders have gotten too sophisticated for their own good, but LMEs are a staple of the current state of affairs — at least until some group comes up with a new even more aggressive transaction.

Second, most company-lender actions can be governed by a contract, but forcing a bankruptcy cannot — when it comes to filing for bankruptcy the company gets the final say. Bankruptcy is sometimes a necessary tool for a company, and sometimes a strategic tool for a company, but if Judge Lopez’s decision in Robertshaw teaches anything, it is that bankruptcy has real consequences for real people and is a decision for a company, not the lenders to make.

Invesco created amendment number four to force the company to file on Invesco’s terms, and place Invesco as the company’s new owners. To be clear, there was no ill intent towards the company here, Invesco surely believed this was the best choice for the company, and it also would have been beneficial to Invesco win-win. Yet, the company, even after agreeing to the amendment which set a milestone for the company to file for bankruptcy, decided to continue searching for another way to stave off bankruptcy. It is reasonable that Invesco was surprised and felt wronged by the subsequent amendment. However, bankruptcy is too big of a decision to be contracted into, if a company can find value through legal means and has even a chance of preventing a bankruptcy, the decision in Robertshaw says, go for it.

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