On February 28, 2013, the Versailles Court of Appeals adopted two new Safeguard Plans for CMBS borrower, Heart of la Défense SAS (HOLD), and its Luxembourg parent company, Dame Luxembourg SARL (Dame). By doing so, it confirmed that HOLD and Dame, even though they are holding companies or SPVs, can benefit from Safeguard Plans in order to restructure their indebtedness.

These decisions follow the path of the January 19, 2012 judgments of the same Court which confirmed that HOLD and Dame were entitled to Court protection in France under Safeguard Proceedings (procedures de sauvegarde), regardless of the nature of their difficulties and regardless of whether they were an operational or a holding company or a special purpose vehicle (SPV). Safeguard is a French pre-bankruptcy process that resembles the U.S. Chapter 11 debtor-in-possession procedures. These January 19, 2012 and February 28, 2013 Versailles Court of Appeals decisions were issued subsequent to a precedent landmark setting ruling handed down on March 8, 2011 by France's highest court, the Cour de cassation (see our alert dated March 17, 2011).

Background

In July 2007, HOLD 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, 2013 or 2014. The term loan was then transferred to a securitization vehicle. 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 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 Defense property, at a time when commercial property values were plummeting across the globe.

Safeguard Procedures

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 Procedures 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 of the Safeguard Procedures 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 it did not examine, pursuant to French procedural rules. The Versailles Court of Appeals confirmed, in January 2012, that Dame, while registered in Luxembourg, could ask for protection in French Courts. It also confirmed that HOLD and Dame Safeguard proceedings were correctly opened.

The February 28, 2013 Decisions of the Versailles Court of Appeals

The Versailles Court of Appeals issued two landmark decisions on February 28, 2013. In the first decision, the Versailles Court of Appeals ruled, among other things, that the assignment by the debtor to the lender of its revenues (rents) as security pursuant to a specific (so-called Dailly) assignment remains enforceable even after the opening of a Safeguard Procedure. In other words, the securitization vehicle, in its capacity as HOLD's lender, will collect rents directly from the tenants. This means that this Dailly assignment is a security which resists French insolvency proceedings. As explained below, the second decision issued by the Versailles Court of Appeals provides, however, for principles through which the Court made compatible the effectiveness of the Dailly assignments and the adoption of a Safeguard Plan.

In the second February 28, 2013 decision, the Versailles Court of Appeals stated that since HOLD and Dame Luxembourg had been in Safeguard for more than four years and that their Safeguard Plans had been suspended for more than three years, it had to reach a decision using the evidence brought to its knowledge without trying to elaborate with the parties new (presumably consensual) plans. The Safeguard Plans adopted by the Court for both HOLD and Dame are largely based upon the principles of the original Safeguard Plans, namely, that HOLD is granted until July 2014 to either refinance or dispose of the Coeur Défense property.

  • The Court took the view that the contractual conditions to extend the maturity of the term loan from July 2012 to 2013 or 2014 were not enforceable against a debtor under Safeguard Procedures. As a consequence, it confirmed that the maturity had correctly been set by the Paris Tribunal of Commerce to July 10, 2014.
  • The Court ruled that payment of the principal need not occur under the Safeguard Plans prior to such maturity date. As a consequence, the Court considered that only contractual interest is payable during the Safeguard Plan.
  • The Court also considered that contractual late payment or penalty interest is not applicable. Consequently any late payment interest previously collected by the lender belongs to HOLD's estate.
  • The Court also ruled that contractual provisions of the term loan (including events of defaults, acceleration, covenants) are suspended during performance of a Safeguard Plan. Once a Safeguard Plan has been approved and as long as it is complied with, the debtor need only abide by the terms of the Safeguard Plan (and not with the loan documentation) and lenders are only entitled to receive amounts provided under such plan. This is the first time this principle has been expressed by French courts in such a clear-cut manner.
  • The Court then ruled that, despite the fact that rents will be collected by HOLD's lender (the securitization vehicle), this does not affect HOLD's revenues. As such, rents collected by the securitization vehicle will be used to pay amounts owed under the Safeguard Plans. The Court also acknowledged the securitization vehicle's commitment to pay HOLD's operating expenses related to the Coeur Défense property out of the rents collected. The Court has therefore been cautious in setting rules enabling the effectiveness of the Dailly assignments to be compatible with the adoption of a Safeguard Plan.
  • The Versailles Court of Appeals also provided that HOLD may sell the Coeur Défense property and that Dame may sell the HOLD shares, starting September 2013.

After more than four years of judicial procedures and 16 court decisions (including landmark rulings from the Cour de cassation decisions), the Versailles Court of Appeals has issued two very important decisions providing for principles which will have a significant effect over the drafting of all future Safeguard Plans.

Their combined effect is that HOLD and Dame Luxembourg will be in Safeguard until July 2014; that in the meantime, they have full control over their assets; and that management will decide on the most appropriate means to exit their Safeguard Procedure through a sale or refinancing.