On March 8, 2011, France's highest court, the Cour de cassation, 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 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.
The decision of the Cour de cassation in connection with the Hold and Dame Safeguard proceedings is the culmination of a 30 month battle in the French courts between Hold and Dame, on the one hand, and Windermere XII FCT, on the other, over the opening of these proceedings. The decision is set to resonate across the French business, financial and legal community, as it will allow a broad cross section of debtors to avail themselves of the Safeguard procedures. Any debtor in distress, ". . . if their difficulties are of a magnitude such that they cannot face them alone . . ." will now be entitled to invoke the French procédure de sauvegarde.
By effectively reinstating the two Safeguard procedures, the Cour de cassation neatly lay to rest 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 confirmed 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).
The decision to reinstate the Safeguard Procedures has far-reaching implications. The Cour de cassation decision comes 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 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 securitisation vehicle, Windermere XII FCT. Windermere XII 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 Windermere XII within the short time frame imposed. Windermere XII then called meetings of its noteholders to consider whether to accelerate the term loan and to take 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.
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 the 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 nullification suggested that most acquisition structures would be unable to avail themselves of Court protection under sauvegarde.
It took another year for the French Supreme Court to release its decision, which 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 decision of the Paris Court of Appeals was cancelled on five grounds, namely:
- To cancel the judgment of the Tribunal opening the Safeguard procedure in favour of Hold, the Paris Court of Appeals held that Hold did not indicate that it was facing difficulties in its leasing or operational business; Hold only alleged that unexpected circumstances made it more expensive to fulfill its contractual obligation to provide an interest cap rate agreement, in place of the cap provided by LBIE. In other words, the Court of Appeals considered that Hold's difficulties only related to the increase in the costs of replacing the LBIE hedging agreements. The Cour de Cassation held that the Court of Appeals ignored the fact that Hold had not only stated that it was impossible to find, in October 2008, a new counterparty for the hedging agreements, but also that the costs of such a hedge, at an estimated amount of 60 to 70 million Euros, was both insurmountable and purely theoretical, in the absence of any actual hedging market at that time.
- The Cour de Cassation held that the Paris Court of Appeals had breached the Safeguard law when it ruled that Dame was not facing any difficulties. It stated that the Court of Appeals ignored Dame's statement that it would not only be deprived from its only asset if Hold defaulted, but that it would also likely risk having to reimburse a shareholder loan, which would have led to its insolvency.
- Perhaps the most interesting aspect of the Court of Appeals decision of February 25, 2010 was that it imposed a qualification on the difficulties that must be suffered by the debtor in order for the debtor to be entitled to the Safeguard procedure: the difficulties had to be "operational" and not merely financial. By cancelling the Court of Appeals decision, the Cour de Cassation established that a debtor need not necessarily suffer from operational difficulties but that these could be of any nature.
- The Cour de Cassation held that, aside from fraud, the opening of a Safeguard Procedure may not be refused to a debtor on the grounds that the debtor may be requesting an opening purely to try and escape from its contractual obligations. In other words, as long as the debtor justifies that it is facing difficulties that it cannot face alone and that these difficulties could cause it to become insolvent, the debtor is entitled to the Safeguard procedure.
- Finally, the Cour de Cassation made the point that a debtor cannot be refused a Safeguard Procedure on the grounds that, as a consequence of the safeguard, its shareholders might be protected from losing control over the debtor. If the debtor is able to demonstrate that it encounters difficulties that it cannot face alone and which can lead it to an insolvency situation, the fact that the safeguard may have a protective effect on its shareholders is irrelevant.