On January 19, 2012, the Versailles' Court of Appeals 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 pre-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. This judgment follows the decision handed down on March 8, 2011 by France's highest court, the Cour de cassation (see Gibson Dunn’s Alert dated March 17, 2011).
The decision of the Versailles Court of Appeals in connection with the Hold and Dame Safeguard proceedings is the culmination of more than four years of litigation in French courts between Hold and Dame (represented by Gibson, Dunn & Crutcher), and Windermere XII FCT over the availability of safeguard proceedings. Together with the March 8, 2011 judgment, the decision is set to resonate across the French business, financial and legal community, as it signals that a broad cross section of debtors may be entitled to avail themselves of the Safeguard procedures. Any debtor in distress, " …if their difficulties are of such a magnitude that they cannot face them alone..." will now be entitled to invoke the French procédure de sauvegarde.
The Cour de Cassation confirmed in March 2011 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). By doing so, it neatly settled 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 referred the matter to the Versailles Court of Appeals for factual issues that it did not examine.
The Versailles Court of Appeals confirmed that Dame, while registered in Luxembourg, could ask for protection in French Courts. It also confirmed that Hold and Dame Safeguard proceedings were properly opened in 2008.
These decisions have far-reaching implications. They come 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, which was established as a property holding company by a group of investors including Lehman Brothers, 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 securitization vehicle, Windermere XII FCT. The securitization vehicle 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 Lehman Brothers International Europe (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 the securitization vehicle within the short time frame imposed. The securitization vehicle then called meetings of its noteholders to consider the option of accelerating the term loan and taking enforcement proceedings. These steps, if taken, would have led to the insolvency of Hold and Dame, and the likely sale of the Coeur Défense 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 their 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 nullifications on these grounds suggested that most acquisition structures would be unable to avail themselves of Court protection under sauvegarde.
On March 8, 2011, France's highest court, the Cour de cassation, 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 Cour de Cassation referred the matter to the Versailles Court of Appeals for factual issues that the Cour de cassation did not examine, pursuant to French procedural rules.
The Decision of the Versailles Court of Appeals
It took almost another year for the Versailles Court of Appeals to release its decision, confirming the Safeguard proceedings. The confirmation is based on three grounds, namely:
- Regarding Dame's right to ask for protection in French court: On the grounds of Article 3.1 of EC Regulation no. 1346/2000 of May 2000 regarding insolvency proceedings, the Court - after a careful review of material factors ascertainable by third parties submitted to its appreciation - held that the center of main interest (CoMI) of Dame was situated in Paris (and not in Luxembourg where its registered office was located). It did so on the grounds that Dame was a holding company, without any employee or business in Luxembourg where it did not realize any turnover. In addition, Dame had acted and executed legally binding documents for the sole purposes of incorporating Hold (a French company), participating in the acquisition of a property located in France and granting security interests subject to French law. This decision is in line with the most recent EU case law on CoMI issues (Eurofood IFSC of May 2, 2006, C-341/04; Interedil of October 20, 2011, C-369/09).
- Regarding Hold's Safeguard proceedings: The Court confirmed that Hold faced a "serious and tangible threat" that the loan would be accelerated which would have constituted a difficulty that it could not overcome. In particular at a time where Hold had "no real possibility to subscribe by itself (…) a new hedge within the imposed timeline and for a cost that would match its available funds". Hold was, thus, facing difficulties which it could not overcome and which could lead it to insolvency.
- Regarding Dame's Safeguard proceedings: The Court confirmed that the loss of its only asset (by way of enforcement of the pledge granted over the Hold shares) would have led to Dame's insolvency would not have had any resources to repay the shareholder loan extended to it.