Co-authored by Doron P. Kenter.
DISCLAIMER: THE CHARACTERS AND EVENTS PORTRAYED IN THIS BANKRUPTCY BLOG POST ARE FICTITIOUS. ANY SIMILARITY TO EVENTS, REAL PERSONS, OR ENTITIES – LIVING OR DEAD (OR UNDEAD) – IS A HOLIDAY MIRACLE. PLEASE DON’T TAKE THIS POST SERIOUSLY OR CONSTRUE ANY RECOMMENDATIONS MADE HERE AS “REAL” BANKRUPTCY ADVICE. HAPPY HOLIDAYS! SEE YOU IN 2013!
Privileged and Highly Confidential
December 19, 2012
|To:||Santa’s Workshop, Inc.|
|Mrs. S. Claus, Chairwoman|
|Mr. S. Claus, President and Chief Executive Officer|
|Frosty T. Snowman, Chief Financial Officer|
|R. Reindeer, Chief Operations Officer|
|J. Frost, General Counsel|
|From:||David N. Griffiths, Head of Christmas Credit Restructuring*|
|Doron P. Kenter, Head of Hanukkah Happiness**|
|* Admitted in the State of New York and England & Wales. Not Admitted in the North Pole.|
|** Admitted in the State of New York. Not Admitted in the North Pole.|
Ladies & Gentlemen:
We refer to our recent meeting in the North Pole and are pleased to have Santa’s Workshop, Inc. (“Santa’s Workshop,” or the “Company”) as a pro bono client. You have instructed us to provide you with an assessment of outcomes for Santa’s Workshop resulting from the recent notice of default issued by Scrooge Bank N/A (Lapland Branch) (“Scrooge Bank”) on November 24, 2012 (the “Notice of Default”) as indenture trustee of the 2007 series of Christmas Morning Backed Securities (“CMBS”) issued by Santa’s Workshop and collateralized by Christmas, including substantially all of the Christmas presents delivered worldwide to children by Santa’s Workshop on Christmas morning (the “Children’s Collateral”).
Christmas Morning Backed Securities
You have informed us that Santa’s Workshop issued CMBS to provide the Company with additional liquidity to fund the construction of new, automated present building facilities, needed as a result of the increase in the global population of children and the risk of labor stoppages resulting from disputes with your unionized workforce, represented by the Industrious Elves on the Shelves Confederation.
Santa’s Workshop issued the CMBS denominated in children’s sterling smiles (“Sterling Smiles”). The Sterling Smiles raised through the issuance of CMBS were then used to fund the construction of Santa’s Workshop. On a recurring, annual basis, following delivery of the Children’s Collateral, Santa’s Workshop collects Sterling Smiles and repays these to Scrooge Bank.
The Notice of Default was issued by Scrooge Bank as a result of the failure by Santa’s Workshop of the letter writing ratio at section 7.35(b)(2)(a)(iii) (the “Writing Ratio”) of the CMBS indenture dated as of January 30, 2007 (the “Indenture”). The Writing Ratio requires Santa’s Workshop to maintain a ratio of 4:1 of children to the number of letters sent by children to the North Pole requesting presents. As of November 24, 2012, the Writing Ratio stood at 6:1.
Scrooge Bank’s concern with the Writing Ratio is warranted: if enough children don’t write in to Santa’s Workshop requesting presents on Christmas morning, Santa’s Workshop will deliver fewer presents, and Santa’s Workshop will collect fewer Sterling Smiles, resulting in Scrooge Bank’s exposure to a payment default risk on the CMBS.
Under the Indenture, you have a 30-day grace period running from the date of issuance of the Notice of Default to remedy the breach of the Writing Ratio, failing which Scrooge Bank will foreclose and take away the Children’s Collateral. You, therefore, have until the morning of December 24, 2012, to remedy the breach of the Writing Ratio, or Scrooge Bank will foreclose on the Children’s Collateral, meaning that no child, worldwide, will receive a present on Christmas morning.
As requested, we attempted to contact A. Snowman & Co., your financial advisor in connection with the original CMBS transaction, to assist in developing restructuring optionsfor the Company. Unfortunately, A. Snowman & Co. dissolved last year, largely as a result of the global warming crisis.
Though it is our understanding that, with the help of your solicitation agents, Gnomes Care Group, and Kris Kringle Consultants, you have attempted to solicit more letters from children so as to cure the Writing Ratio default, you are considering filing for bankruptcy protection. Off-the-record conversations with Ebenezer Scrooge, the CEO of Scrooge Bank, have indicated that a covenant waiver, while obtainable, would require Santa’s Workshop to cede control of Christmas to Scrooge Bank and the CMBS syndicate, in which the Global Restructuring Incorporated National Corporate Holdings, or GRINCH, has a major holding. Though Santa could take his chances and “triple-dog-dare” Mr. Scrooge to foreclose, you have indicated that the chapter 11 filing option is preferable to allowing Scrooge Bank to foreclose on Christmas.
We continue to assess the implications for Santa’s Workshop of a chapter 11 filing and your concerns that “Christmas as usual” be maintained after the chapter 11 filing. As you are no doubt aware, the laws of the North Pole are drawn from the world’s most developed legal systems, and in the bankruptcy context, the North Pole’s primary restructuring code is drawn from the United States Bankruptcy Code. Preliminary research indicates the following primary considerations will apply to a chapter 11 filing in the North Pole:
Employee Issues: It is our understanding that Santa’s Workshop employs approximately 43,000 elves, most of whom perform skilled labor in the Company’s primary manufacturing facility. Your workforce is primarily comprised of hourly, unionized elves covered by a collective bargaining agreement with the Industrious Elves on the Shelves Confederation. Five percent of the workforce has abandoned Santa’s Workshop in the past three months to undertake more lucrative positions baking latkes for the children who celebrate Hanukkah. To the extent you are able to resolve any union concerns amicably and expeditiously, you will be able to avoid any further interference with this year’s prime toymaking season.
Management: You have indicated that Santa’s Workshop is in danger of losing its valued senior vice president of presents, Good K. Wenceslas, who has already received a number of offers from the Easter Bunny and the Tooth Fairy. You have indicated that Mr. Wenceslas is critical to the efficient delivery of toys on December 25, 2012 to children near and far. Although the Bankruptcy Code forbids “key employee retention plans,” to the extent Mr. Wenceslas’s compensation is tied to objective performance indicators such as the quantity and quality of presents being delivered to children and is in keeping with the Company’s “Christmas as usual,” that will increase the likelihood of successfully retaining Mr. Wenceslas during the chapter 11 case.
Santa’s Sleigh: Our diligence indicates that Santa’s Workshop does not own the Gnomestream Kringle 3000 (“Santa’s Sleigh”), but rather leases it from Northpole Occidental Electric Limited (“NOEL”). During the bankruptcy, Santa’s Workshop will need to determine whether to assume or reject the lease for Santa’s Sleigh; however, barring other relief afforded by the North Pole bankruptcy court, Santa should be able to continue to use Santa’s Sleigh on December 25.
Utilities: Upon the commencement of Santa’s Workshop’s chapter 11 case, the Company’s utility providers will likely demand up to two months’ security deposit as adequate assurance pursuant to section 366 of the Bankruptcy Code. Given the cash strain that such demands could post on the Company, we will reach out to our contacts at J. Maccabee Enterprises, who have previously offered a holiday special of “eight nights of power for the price of one.”
Charitable Contributions: Santa’s Workshop is in the habit of making charitable contributions (for example, a Christmas turkey for the Cratchit family, Christmas shoes for a poor child, a set of wings for Clarence the angel, a hula hoop for Alvin, or a pair of ice skates for the bishop’s wife). These charitable contributions likely would not be subject to avoidance as fraudulent transfers, as they would likely be covered by the exception for charitable contributions pursuant to section 548(a)(2) of the Bankruptcy Code.
Notice: We should make every effort to notice as many parties as possible of the Company’s chapter 11 filing. Because mailing individual notices to every party in interest (e.g., every child on the planet) may be difficult, we also should consider publishing notice in publications likely to be seen by children or their parents, such as major international newspapers, local newspapers, Wal-Mart’s Black Friday circular, during The Hobbit’s credits, and on the new Justin Bieber album.
Mrs. Claus has already instructed us to relocate to the North Pole until Christmas has been saved, and not to return to New York until then. In light of the extensive travel that Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donner, Blitzen and Rudolph will be undertaking shortly, we have already booked economy seats on the redeye Polar Express tonight and look forward to working with you to successfully save Christmas.
/s/ David Griffiths /s/ Doron Kenter
David N. Griffiths, Esq. Doron P. Kenter, Esq.
11 USC Sec. 366
Sec. 366. Utility service
(a) Except as provided in subsections (b) and (c) of this section, a utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.
(b) Such utility may alter, refuse, or discontinue service if neither the trustee nor the debtor, within 20 days after the date of the order for relief, furnishes adequate assurance of payment, in the form of a deposit or other security, for service after such date. On request of a party in interest and after notice and a hearing, the court may order reasonable modification of the amount of the deposit or other security necessary to provide adequate assurance of payment.
(c)(1)(A) For purposes of this subsection, the term "assurance of payment" means -
(ii) a letter of credit;
(iii) a certificate of deposit;
(iv) a surety bond;
(v) a prepayment of utility consumption; or
(vi) another form of security that is mutually agreed on between the utility and the debtor or the trustee.
(2) Subject to paragraphs (3) and (4), with respect to a case filed under chapter 11, a utility referred to in subsection (a) may alter, refuse, or discontinue utility service, if during the 30-day period beginning on the date of the filing of the petition, the utility does not receive from the debtor or the trustee adequate assurance of payment for utility service that is satisfactory to the utility.
(3)(A) On request of a party in interest and after notice and a hearing, the court may order modification of the amount of an assurance of payment under paragraph (2).
(B) In making a determination under this paragraph whether an assurance of payment is adequate, the court may not consider –
(ii) the payment by the debtor of charges for utility service in a timely manner before the date of the filing of the petition; or
(iii) the availability of an administrative expense priority.
11 USC Sec. 548
Sec. 548. Fraudulent transfers and obligations
(a)(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which -
(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.