Mon 02/12/2024 12:44 PM
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Relevant Document:
Examiner Motion

On Friday evening, Feb. 9, a three-member ad hoc group of senior unsecured noteholders represented by Brown Rudnick filed a motion in the WeWork chapter 11 cases seeking appointment of an examiner and for derivative standing. In order to “preserve the status quo” pending issuance of the examiner’s report, the ad hoc group requests standing to pursue estate-held litigation claims against SoftBank and certain noteholders that “uptiered” their unsecured notes into secured debt via a 2023 notes exchange transaction.

The ad hoc group, comprising Antara Capital, Esopus Creek and HZ Investments, argues that appointment of an examiner “is eminently appropriate under the facts of this case.” The ad hoc group says that the examiner’s primary role would be to probe the flexible office space provider’s prepetition relationship and transactions with SoftBank, which is an equityholder, prepetition secured creditor and DIP lender, as well as the uptier noteholders, including the May 2023 notes exchange transaction that was intended to enhance the company’s liquidity, cut interest expense and extend maturities. “An examiner in this case will be able to present unbiased reporting on WeWork’s relationship with SoftBank, including the circumstances surrounding the transactions characterized as debt financings and which purport to encumber property of the Debtors,” the ad hoc group writes. The ad hoc group also argues that appointment of an examiner is mandatory in light of a recent decision by the U.S. Court of Appeals for the Third Circuit in In re FTX Trading Ltd.

The ad hoc group maintains that “there appear to be strong arguments” in favor of recharacterization, subordination and/or avoidance of both SoftBank’s and the uptier noteholders’ prepetition debt.

With respect to recharacterization, the ad hoc group explains that the prepetition debt issuances to SoftBank “were never intended to carry repayment obligations because they could never be repaid” and that SoftBank was aware that WeWork lacked the liquidity to service the debt. “Recharacterization is intended to elevate substance over form; there is no question that the substance of SoftBank’s financings are of capital contributions, notwithstanding what the parties agreed to call them,” the ad hoc group says. Additionally, the ad hoc group points out that SoftBank’s initial relationship with WeWork was as an equity investor and controlling stockholder and that consequently, “all subsequent advances by SoftBank must be viewed through such relationship, further supporting recharacterization.”

Alternately, the ad hoc group states that “similarly “strong arguments” exist that weigh in favor of equitable subordination of the debt. Specifically, the ad hoc group points to SoftBank’s “inequitable conduct” in providing insider loans to WeWork - an “undercapitalized company” - in support of equitable subordination. “SoftBank’s financing undercapitalized WeWork, particularly with respect to the Notes Exchange Transaction, elicited third parties to make similar contributions, ultimately increasing credit exposure and reducing their dividend.”

The ad hoc group next asserts that SoftBank’s debt holdings, and potentially the uptier noteholders’ debt holdings, could be subject to avoidance as a fraudulent transfer or a preference. “As a result of the Notes Exchange Transactions, holders of $173 million in Unsecured Notes (along with the company’s other general unsecured creditors) were suddenly behind an additional $1.588 billion of secured debt (excluding the letter of credit obligations),” the ad hoc group writes.

As to possible fraudulent transfers within the two-year look-back period prior to the chapter 11 filings, the ad hoc group posits that the notes exchange transaction may have occurred while the debtors were insolvent or left the company with an inability to pay its debts. An examiner could also conclude that the debtors received less than reasonably equivalent value in connection with the transaction given that only part of the newly issued $1.588 billion of secured debt was on account of new money, the ad hoc group suggests. The ad hoc group also opines that the transaction “very clearly benefited SoftBank’s position in the capital structure, such that approximately seven (7) months later, it was in a position to control these cases upon WeWork’s filing.”

The ad hoc group further argues that the uptiering noteholders “had reason to know” that the notes exchange transaction was orchestrated solely to improve SoftBank’s position vis-à-vis the upcoming bankruptcy and to advance their own interests at the expense of other creditors. “In sum, this was a transaction with actual intent to hinder and delay creditors for which they were not ‘good faith’ reasons,” the ad hoc group says. As to potential preference claims, the ad hoc group notes that an examiner could find that, but for the 2023 exchange, “SoftBank would have been entitled to a lower recovery on account of its claims and interests held just prior to the transfer,” thus exposing the transaction to possible avoidance as a preference.

The ad hoc group further outlines potential breach of fiduciary duty claims (as well as related aiding and abetting claims) against SoftBank in its capacity as majority shareholder via SoftBank’s “orchestrating” the 2023 exchange transaction for its own benefit and the Notes Exchange Transaction for its benefit and injuring other stakeholders while doing so. The transaction permitted SoftBank “to uptier its unsecured notes to enjoy a case-controlling position in the bankruptcy case filed 7 months later … [and] was not entirely fair,” the ad group argues.

As to its request for derivative standing, the ad hoc group contends that the motion (and a forthcoming draft complaint, which would also include a count for claim disallowance) demonstrates that the various litigation claims are colorable. The ad hoc group also argues that its Feb. 20 challenge deadline, as agreed to by SoftBank and the consenting noteholders, should be further “extended to permit the examiner the opportunity to present an unbiased reporting of their findings and, depending on those findings, the opportunity for parties in interest, and this Court, to act accordingly.”

A hearing on the ad hoc group’s request is set for March 12 at 10 a.m. ET.
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