By Joe Pack, Pack Law
The recent Chapter 11 filing by lighted-wristband maker Hurdl is a powerful indicator of the live event sector’s uncertain future. However, the legal approach to handling its Chapter 11 filing – a fast-tracked, pre-packaged case to effectuate a quick reorganization which traditionally has been exclusively used for large companies – offers a powerful new blueprint that may be applied now in the pandemic to help small and mid-market companies get back on track. This framework can help ensure a much-needed Chapter 11 process is not out of reach for the countless smaller businesses which historically have been the backbone of America’s economy.
Hurdl Inc.’s LED-lit wristbands have been a staple at all types of major public performances and live events, including those of Garth Brooks, Keith Urban,the Dallas Mavericks, deadmau5, Metallica, Ciara, and Walmart. Established in 2016, Hurdl enables brands and artists to identify their audiences and customer bases for post-event communications through SMS-enabled data collection technology that works in tandem with the wristbands.
The company quickly became a dominant player in the industry but, when the pandemic forced the shutdown of live events, Hurdl’s revenues came to a screeching halt and the company was left with two options: reorganize or liquidate. Any hope for future success or recovery to creditors necessitated that the company reorganize and immediately get out from under its approximately $5 million debt load.
With no lenders willing to lend into an insolvent company, the company’s immediate need for financing could only be obtained through bankruptcy court so the loan would come ahead of the other debts, known as “priming.”.
Adopting a process historically used to ensure inexpensive and swift bankruptcy processes for larger companies, Hurdl obtained funding from its current investors and put together a confirmable plan of reorganization before commencing a formal proceeding. Hurdl successfully emerged from its Chapter 11 Case on January 27 – only 37 days passed from the beginning of the Chapter 11 Case to the Bankruptcy Court’s confirmation of Hurdl’s plan of reorganization. U.S. Bankruptcy Judge Shelley Chapman presided over the Chapter 11 Case, Case No. 20-12768 (SCC).
It is important to note that there are two primary reasons the framework implemented in Hurdl’s prepackaged case differs from the typical Chapter 11 prepack:
- In most “debt to equity” cases, the debt extinguished and exchanged for equity is typically already on the debtor’s balance sheet. In Hurdl, the debt converted to equity was mostly the newly obtained “debtor in possession” (or DIP) financing, which is funding to enable a company to administer and fund its bankruptcy case. Stated another way, investors are asked to fund the Chapter 11 case through that financing, and in exchange for that funding, would own the company outright, but with a cleansed balance sheet. It was the DIP Financing that was mostly converted, instead of existing debts, so that investors outside the current debt ownership structure could participate in, and fund, the acquisition. There main two benefits are: more funding for the debtor; and more parties who want to participate in the acquisition at varying levels of funding with varying levels of equity distribution on account of it.
- Second, most well-planned, prepackaged cases smoothly enter and exit bankruptcy because unsecured creditors (typically the class of claims most vocally adverse to a Chapter 11 proposed plan of reorganization) will simply “ride through” or otherwise enjoy significant recoveries on their claims against the bankrupt estate, leaving only holders of bank debt or funded debt taking a material “haircut.” It doesn’t have to be that way. General unsecured creditors in Hurdl only received five cents on every dollar for debts owed to them by Hurdl. With the time invested upfront, finding critical mass in creditor consensus, a nimble legal team on a conservative budget that knew how to draft the relevant documents and assess applicable corporate law, the pieces fell into place.
Based on my experience representing Hurdl in this matter, here’s an overview of the process and some general guidance which may be applied to assist the countless companies finding themselves in a similar predicament as Hurdl and concerned that Chapter 11 is simply out of reach:
- The first step: Find funding. In the case of Hurdl, it was confirmed upfront that several of the current investors were willing to participate in funding a reorganization which would be provided through debtor-in-possession financing (“DIP financing”). Therefore, all that remained was securing enough creditor support to achieve a confirmable Chapter 11 plan, even if “cramdown” was necessary.
- Confirm creditor support. To achieve this, communication and transparency are always critical.It is a matter of rolling up your sleeves, working the phones and reaching out to the critical stakeholders whose votes are necessary to achieve a deal. Sophisticated creditors or those represented by counsel know that a liquidation typically yields a zero cent recovery; therefore, economically rational minds prevail and a deal is easier to achieve than one may think.
- Get the deal in writing. Once thepromises of support are secured, it is critical to get it all in writing. Get everyone’s signatures on an agreement to commit, exactly what they are committing (i.e., support of the plan and the binding of buyers of their claims, if applicable), through the form of what is known in the industry as a restructuring support agreement. Sometimes these are referred to as “lock up” agreements depending on the commitments made.
- File the papers as soon as possible before the company completely runs out of cash or another important milestone passes. Remember that the Bankruptcy Code’s “automatic stay” (which freezes collection actions against the Company to provide it with a “breathing spell” to reorganize) does not kick in until the actual bankruptcy case is formally commenced. As described in its papers filed with the court, Hurdl could no longer “wait it out” (“it,” of course, being the COVID-19 pandemic, its lack of revenue, and mounting creditor collection actions).
- Develop a customized “loan to own” plan of reorganization that provides for the conversion of the vast majority of the company’s debt to equity and a reasonable recovery to creditors that reflects the business’ financial reality.
- Ensure the board is actively engaged and clearly understands what it means to maximize value for all stakeholders, including hiring an outside restructuring financial advisor, if necessary. Everyone involved should be aligned on wanting the company in and out of bankruptcy as quickly as possible if that means maximizing stakeholder recovery.
By this point in the pandemic, it is no secret that the concerts and events industry will continue to get hit hard and that all the fallout has yet to be seen. Companies will need legal counsel who can help them effectively navigate these issues to reposition themselves for success with bespoke solutions, custom-tailored to fit their unique facts and circumstances. Corporate legal counsel and bankruptcy/restructuring attorneys shouldn’t rule out a Chapter 11 filing, particularly as being too expensive when compared to other options, as it can protect their clients’ best interests, and with proper planning, can be executed swiftly and efficiently.
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Hurdl emerged from its Chapter 11 case on Jan 27, 2021. U.S. Bankruptcy Judge Shelley Chapman presided over the Chapter 11 Case, Case No. 20-12768 (SCC).
Joe Pack, founder of Pack Law, is a national corporate restructuring and bankruptcy attorney who represents both debtors and creditors in the country’s most complex and contested bankruptcy cases. He may be reached at joe@packlaw.com.