This week we revisit with Ted Gavin, Managing Director and Founding Partner of Gavin/Solmonese. Enjoy.

PETITION: You represented the UCC in the Videology Inc. chapter 11 case that filed back in May 2018. Videology is an adtech company that had received a significant amount of venture money and, later on, venture debt. What did you learn about the adtech business, the impact of venture debt on upstart companies, and how might these lessons be applied to bankruptcies in the future?

“Yes, there was venture money, and yes there was venture debt. And sure, maybe that venture debt was more venture money than debt. Here’s the thing about adtech in general and Videology in particular: the value of these businesses is wrapped up in their intellectual property, which generally comes in two forms: a proprietary engine, and the customer lists. If an adtech company isn’t running a proprietary engine, then it’s just a service bureau with aspirations. And customer lists (and, for that matter, the proprietary engine technology) are incredibly portable. This makes for blurred lines with respect to what corporate family member actually “owns” the assets. You can move the IP from company to company, and that can be done for legitimate purposes (if we’re calling the creation of a middleman to create opportunities to upcharge customers by intermediating them from the sale side of the business “legitimate”) or it can be done to frustrate creditors, please noteholders, or any other suspicious or quasi-nefarious purposes. While Videology came to command decent value in a sale, it took a lot of investment to get there. Those proprietary engines cost money to create, develop and prove out – yet they’re still nothing without turning that into a revenue-producing customer list. Someone’s got to foot that bill and, if it’s done with debt, the company will not likely survive long enough to realize a return on the investment because of over-leverage (think of it as a tech company version of the Revel Hotel & Casino – sure, you’ve over-invested in startup, but put it through bankruptcy a couple times to strip off that debt and pretty soon you’ve got yourself a good business!). Generating enough cash to fund ongoing operations and also be able to pay back the cost of development is gonna take a minute. Videology, which commanded a respectable sale value (at least in relation to its stalking horse bid), couldn’t do it.”

PETITION: You also represent the debtor in the Consolidated Infrastructure Group case. This one has some hair on it: breach of contract allegations, de minimis asset value, etc. Was chapter 11 a suitable option for dealing with this company's issues or do you think this case could've been avoided with agreements outside of court? 

“Chapter 11 was the only suitable option. Reasonable people can see the same facts differently. Reasonable people can try and fail to find common ground. But parties who aren’t talking to each other never will find the basis for resolving their issues. If the destruction of the other party is what each party is fighting for, then it’s a war of attrition. And that was the story of CIG. This case wasn’t ever going to find an equitable and consensual resolution outside of a court-supervised process. The exigencies of the case required neutral oversight and a transparent process, and there were years of history to support the premise that it was never going to happen outside of bankruptcy. Once that process was in place, there was a platform for the various parties’ grievances to be heard, and for an open sale process to be run. A sale process in which all the parties are involved can be a de-escalating force once it’s done.”

PETITION: You and the G/S team play a lot in the small to middle market. A lot of the noise these days has been emanating out of big retail and energy: the small and middle markets don't get as much media love. What are you seeing there that is notable as we inch closer to Q4 '19? 

“Lordy – in the last 15 years across the restructuring spectrum we’ve gone from restructurings, to cleaning up the balance sheet with a quick sale, to “screw it we’re just going to liquidate because retail”. Where do we even start? With small and middle-market companies, there exists the opportunity to actually accomplish something that resembles an actual turnaround and reorganization.  Sure, the companies are running on fumes, but so are large company cases because they’ve waiting too long to file. So, with smaller companies, you need less capital to get past the “running on fumes” stage. Smaller cases often present with less of a foregone conclusion, which means there can be more creative solutions. I’ve seen small-market debtor plans that look almost indistinguishable from chapter 13 plans. And, like chapter 13, small-company chapter 11 work can be an interesting and unfamiliar neighborhood.”

PETITION: Cases these days appear to be veering more towards chapter 11 363 sales with liquidating plans. You do a lot of liquidating trust work: what are some things about liquidating trusts that you think need changing? Are there tech solutions out there that can make liquidating plan processes much more efficient to the benefit of creditors?

“Liquidating Trusts are a mixed bag: what appears to be simple can become burdensome and expensive, particularly when there is protracted motion practice to resolve claims. On the other hand, what looks like it will be lengthy and complex can often be made simple by understanding reserves and pushing money out sooner rather than later. But the one constant seems to be the complete lack of transparency and oversight over how the Liquidating Trusts come to be. If a bankruptcy plan is akin to a law, a Liquidating Trust agreement and the subsequent oversight is more like an executive order – it just sort of happens. And Liquidating Trustee work can get unwieldy and complex – particularly with recent case law narrowing what types of claims a Liquidating Trustee can bring, and who can bring claims that a Liquidating Trust will later inherit. As for the one thing that would improve Liquidating Trusts, I say transparency. Constituents should know why their Liquidating Trustee should be their Liquidating Trustee and they should be aware of the whole of the business or pecuniary relationship between the Liquidating Trustee and any other parties in the case. Those relationships aren’t fatal, but they should be disclosed like any other connection in a bankruptcy case.

There are plenty of tech solutions that streamline Liquidating Trustee work. I use one at the moment, and I’ve used most of the others. There are plenty out there; but the bottom line is that if a Liquidating Trustee isn’t using a consolidated claims management and banking platform, they are wasting time and resources on a process they could be having done for free.”

PETITION: Thanks Ted.