March 23 2010
In three different rulings dated February 25 2010 the Paris Court of Appeal issued a final judgment - at least for the time being - in Coeur Défense. This case has been closely scrutinized by practitioners in the securitization and structured finance, banking, real estate financing, business restructuring and insolvency sectors (for further details please see "Recent developments in securitization law").
The rulings are creditor friendly and cancel the judgment which had instigated safeguard proceedings over the asset holding company, SAS Heart of La Défense (which holds the Coeur Défense property ('Hold')), and its parent company, SARL Dame Luxembourg. The court's other two rulings on the safeguard plan and the notification to tenants of the assignment by way of security of the relevant leases were direct consequences of the cancellation of the safeguard proceedings.
Hold acquired the Coeur Défense estate and financed the acquisition by way of securitization, using a fonds commun de titrisation (FCT). Following the September 2008 insolvency of Lehman Brothers International and Lehman Brothers Inc (which were the swap counterparty and guarantor respectively of the hedging arrangements in relation to the financing), Hold was bound to find an acceptable replacement counterparty, according to the financing documentation. The FCT's management company notified Hold that failure to comply with such obligation could trigger a default event under the loan documentation and consequently an accelerated redemption of the loans.
Hold claimed that it could not replace the swap counterparty on acceptable financial terms due to the financial turmoil, and applied together with Dame Luxembourg for protection from its creditor under safeguard proceedings.
At first instance, in November 2008 the Paris Commercial Tribunal granted the opening of safeguard proceedings against the companies on the grounds that they had difficulties which they were unable to overcome and which could lead to a cessation of payments. The FCT challenged this decision, which has now been overturned by the appeal court.
After opening the safeguard proceedings, on September 9 2009 the tribunal approved the safeguard plan proposed by Hold and Dame Luxembourg. The dispute over the safeguard plan was dealt with in the appeal court's second ruling.
Finally, Hold assigned the rent owed by tenants by way of security. Following the opening of the safeguard proceedings, the FCT notified the tenants of the assignment. The tribunal decided that the opening of safeguard proceedings did not prejudice the FCT's rights over the rents. This decision was challenged by Hold and was dealt with in the third ruling.
The appeal court acknowledged that the FCT had grounds to challenge the safeguard proceedings as it had an actual, existing and direct interest at stake which was distinctive from the interests of the creditors as a whole.
The court decided that the cost of hedging did not affect the core business of Hold (ie, the leasing of commercial property). In addition, the core business could be carried out regardless of the identity of Hold's shareholder (ie, acceptance of the enforcement of the share pledge was implied).
The court considered that Hold had filed for safeguard proceedings as it wished to impose a unilateral change to the loan agreement in respect of the hedge agreement, and that safeguard proceedings were a means to force restructuring and an agreement with its creditors.
The rationale behind the instigation of safeguard proceedings was similar in the case of Dame Luxembourg. The court considered that Dame Luxembourg had demonstrated no difficulties which would affect its core business or holding company. The court stated that the commitment of a parent company under the share pledge is limited to the value of the shares it has pledged, and that it can be released from its commitment by giving up its shares to the FCT. Consequently, there are no grounds for opening insolvency proceedings which have been filed for the purpose of frustrating the enforcement of the share pledge and appropriation by the FCT.
As a result, the court decided that the FCT had grounds to challenge the opening of safeguard proceedings and cancelled the proceedings retrospectively.
The two further rulings were a direct consequence of the cancellation of the safeguard proceedings.
The dispute over the safeguard plan was no longer relevant as the companies were no longer involved in safeguard proceedings. Similarly, the disputes over the assignment of receivables by way of security during insolvency proceedings were no longer relevant as the companies were no longer safeguarded. The court decided that the relevant tenants must comply with the obligations of the notifications which they received.
Given the creditor-friendly nature of the court's rulings, they will be welcomed by participants in the real estate and structured finance markets. Removing uncertainty over the use of safeguard proceedings in such transactions as a means to force creditors to consent to a restructuring, and the effectiveness of a transfer of receivables through security assignment, is a cornerstone of the structured finance market.
For further information on this topic please contact Philip Boys at Lovells LLP by telephone (+33 1 53 67 47 47), fax (+33 1 53 67 47 48) or email (email@example.com). The Lovells website can be accessed at www.lovells.com.
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