Court Opinion Review: Fossil’s UK Two-Step, First Brands’ Glorious Mess, Village Roadshow Tests Trust in Hollywood, and Dr. Phil Goes to Chapter 7 Conversion Therapy

Octus’ Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to comment on and discuss emerging trends in the bankruptcy world. Our opinions are not necessarily those of Octus as a whole. Today, we consider Fossil apparently manufacturing venue in England, the path ahead in First Brands, an interesting decision on contract assignment in Village Roadshow and the end of chapter 11 for Dr. Phil’s Merit Street Media.

Our English Cousin

Weren’t we supposed to be Making America Great Again? What happened to the country that exercised its soft power, founded on industrial genius and the financial gravity of Wall Street, to enrich us all and make us the most prosperous people in human history? Since January 2025, that power has eroded away, leaving us with a second-rate future, eclipsed by those more nimble, less regulated and more innovative.

I am talking, of course, about U.S. dominance of extremely expensive mega-bankruptcy proceedings, and the end of the system that made it possible for even ink-stained wretches writing about bankruptcy hearings – not even practicing! – to afford weekend sports cars and private school tuition. Suddenly it all feels so fragile, thanks to the kooks in Delaware and New York that abandoned the race to the bottom and the Fifth Circuit suffocating the “creative” minds on the complex panel in Houston.

Other countries are accustomed to their home-grown companies pulling hilariously transparent relocation schemes just to file chapter 11 in Harris County, Texas, wherever the hell that is. Our judges even felt free to red-pencil foreign courts’ insolvency judgments in supposedly “ancillary” chapter 15 proceedings, foreign law be damned. Now: We are the Sweden. Shudder.

Since Dec. 31, 2024 – the fateful day when the Fifth Circuit issued its Serta Simmons opinion – nothing has made any sense. The world has been turned upside down. The latest insult: the “U.K. Two-Step” filed by Delaware-incorporated, Texas-headquartered and Nasdaq-traded Fossil Inc. in England, of all places.

The U.K. Two-Step is essentially the inverse of the Jervois maneuver we discussed back in April. In that case, an Australian company with zero connections to the United States formed a new entity, Jervois Texas LLC, and caused it to guarantee all of the company’s debt to anchor a chapter 11 filing in Houston. Judge Christopher Lopez confirmed the Jervois Global debtors’ plan, overruling objections from shareholders that the debtors cooked up Houston venue in bad faith.

Those were the days! Here’s How We Live Now: In August, Fossil, a U.S. company that made American chests swell with pride by selling the cheapest possible Chinese-made watches you can plausibly give a new graduate without them visibly wincing, created a new U.K. affiliate, Fossil (UK) Global Services Ltd., and caused it to guarantee the parent’s bonds so the whole company could restructure via a U.K. proceeding.

In the ultimate insult, the company and majority noteholders also agreed to change the governing law in the indenture to English law from New York law in order to bolster their U.K. bona fides. Sacrilege.

In August, Fossil filed an 8-K launching an exchange offer for its 7% senior notes due 2026. The exchange was anchored by HG Vora Capital and Nantahala Capital, which held approximately 59% of the notes. The big problem for the company: Approximately 25% of the notes were held by retail investors, who are much less likely to agree to a coercive exchange because they might not fully understand that they are being coerced.

Fossil warned that if holders of fewer than 90% of the notes participated in the exchange, “the company may implement the restructuring of its Unsecured Notes through a proceeding pursuant to the Companies Act 2006 of England and Wales, such that no Unsecured Notes will remain outstanding following conclusion of the UK proceeding.”

Must have seemed a little odd at the time, but Fossil clearly feared that the exchange would fail to hit the threshold, and it was right. By the Oct. 7 exchange offer deadline, only 71.95% of the notes had been tendered, forcing the company to file a Part 26A proceeding for the new U.K. entity on Oct. 9. Not coincidentally, that’s the date of Octus’ first Fossil intel to get the “Europe” tag; we have covered the company under “Americas” since 2020.

The proposed plan looks achingly familiar to U.S. bankruptcy pros: Noteholders would have the option to participate in $32.5 million in new financing backstopped by the original exchange supporters, HG Vora and Nantahala, who would receive a 5% backstop fee and a consent fee equal to a pro rata share of $1 million paid in new notes. That’s right: It’s an In-Court LME, with big holders getting uptiered thanks to an exclusive backstop opportunity that was never market-tested. The exact kind of transaction that Serta and then ConvergeOne put at risk in Houston.

At a U.K. hearing on Oct. 15, the company defended the backstop goodies as a “commercial service” independent from the big holders’ notes claims and thus not a benefit provided under the plan. Again, pretty familiar: The goodies are being offered in exchange for new value, not on account of the big holders’ notes claims. “The judge was persuaded on both of these points,” our Octus U.K. colleagues remarked, with their characteristic wry understatement.

On Nov. 6, more than 75% of Fossil noteholders agreed to the notes restructuring.

You might want to get used to that tone. What is going on here is pretty obvious: Fossil is attempting to accomplish in the United Kingdom what it might not be able to accomplish in Houston post-ConvergeOne, a court-approved backstop-fueled uptier for big holders that discriminates against smaller holders, without any kind of effective market test for the opportunity.

What really impresses us: Fossil put this scheme together before the ConvergeOne ruling came out. They were prepping this in August, and the new U.K. entity guaranteed the notes six days before Judge Andrew Hanen put U.S. debtors on notice that the backstop party might be drawing to a close over here.

Which evidences that this isn’t just about ConvergeOne. It suggests that the Fifth Circuit’s Serta decision shook the very foundation of U.S. bankruptcy dominance: debtors’ ability to handpick a bankruptcy judge or pair of bankruptcy judges that would swallow whatever “parade of horribles” nonsense debtors’ counsel threw at them and approve whatever goodies they could invent, without effective appellate review. So, both equitable mootness and non-market-tested backstop goodies are on the chopping block.

Now that the doctrine of equitable mootness is dying and bankruptcy courts must answer to their Article III superiors, the party may really be over. Don’t take our word for that, by the way: In a certiorari petition reply brief filed Oct. 21, even the participating lenders in Serta Simmons concede that the question of whether an appellate court can red-pencil a plan on appeal – the sole element of the Fifth Circuit’s decision they are challenging to the Supreme Court – has become “more important as courts like the Fifth Circuit move away from prudential mootness doctrines.”

There’s hope: Apparently no one told Houston District Judge Kenneth M. Hoyt, who on Nov. 5 dismissed an appeal of the Hornblower confirmation order as equitably moot. Judge Hoyt’s order is exactly two pages long and features zero pages of reasoning, so before we declare equitable mootness revived, we best wait for the Fifth Circuit to chime in.

For now, the golden goose is cooked, and all we got was a lousy chapter 15.

“Why bother with a foreign proceeding in a pro-debtor jurisdiction and the extra costs and risks of a chapter 15 recognition fight when you can just form a Texas entity and file chapter 11 in Houston,” we wondered in December 2024, just four weeks before the Serta decision that would doom us all to sub-$2,500 hourly rates. “Is there a jurisdiction in the world more mega-case debtor-friendly than the Southern District of Texas?”

Apparently: Yes. Now, the fun part: Who is to blame? Certainly not us! For years we have been carping incessantly about bankruptcy judges virtually begging the Article III gang to rein them in by pushing the envelope further and further toward the edge, well beyond what was necessary to maintain the Greatest Insolvency Regime in History. What happens, we asked, when the real robes in district and circuit courts decide enough is enough?

As always, we blame the bankruptcy judges who failed to make difficult decisions. Venue reform would have been nice, too. The punishment remains to be seen, and no type of LME and no foreign process can replace chapter 11 for companies that are irredeemably f-cked by fraud or cyclical downturns. In the meantime: We hope you still have the number of that truck-driving school we saw on TV.

Or, maybe we’ll all be fine. On Nov. 4, German packaging company Kloeckner Pentaplast filed chapter 11 in Houston, despite a cap stack full of €s and umlauts. Wait – it’s a prepack? Never mind. Maybe we can get a U.K. scheme of arrangement-style procedure here in the United States that allows debtors to quickly reorganize only funded debt? Well, that would require congressional action, which, ugh.

The ultimate irony here is that the U.K. judges handling schemes of arrangement are the polar opposite of what the bankruptcy courts stateside have developed into. As best we can tell from reading the reports from our colleagues across the pond, the U.K. justices trying these cases are true generalists who are just as likely to end up on a Hague tribunal as they are to land as a leader of the House of Lords.

They don’t seem to understand why they are being asked to sort out hedge fund haggling over scraps, they can’t stand deals being hashed out during hearing breaks, and they certainly aren’t seeking more action on this front.

We Got This

As we just said: Some situations will continue to require the Superfund-level cleanup expertise of U.S. experts well-versed in Worst Case Scenario. To wit: the absolute dumpster fire that is First Brands, the current cause celebre for the Eagerly Awaiting an Economic Collapse crowd. You know, guys like us.

This one has had suggestions of fraudulence from the beginning, but we were short on detailed allegations until the debtors, now under the control of Alvarez & Marsal, sued former CEO and Pynchon-level social media abstainer Patrick James on Nov. 3. According to the debtors, James fraudulently induced lenders to loan MORE THAN $4 BILLION to the auto-parts supplier so he could spend the money on real estate, luxury cars, personal chefs and other perks.

Specifically, the debtors say, James – on behalf of the company – used inflated, duplicate and fabricated invoices to swindle at least $2.3 billion from factors and employed special purpose vehicles to borrow at least $2.3 billion more, including by “double-pledging collateral.”

The real show is in the double-pledging issue. Lenders that advanced funds secured by fake or inflated invoices won’t get very far, but real invoices and inventory do exist – the question is who holds the first-priority liens and gets to recover the value of that stuff. Earlier on Nov. 3, inventory lender Evolution Credit started the party with a suit asserting that it still has valid liens on the inventory securing its $300 million loan despite the company possibly causing the SPV borrower to transfer the collateral or pledge it to other lenders.

​​Evolution says it advanced funds in reliance on those security interests and “representations, warranties, and third-party legal opinions” confirming the collateral was property of the SPV borrowers and that the security interests were “properly created, valid, and perfected.” Oh, third-party legal opinions, say no more! Another reminder: Representations, warranties and covenants are almost always worth bubkes in bankruptcy, where the debtor is already in default.

Given the debtors’ subsequent assertions that its liens may be “compromised or eliminated,” Evolution requests that the court enter a declaratory judgment “that the Evolution Inventory Lender has a perfected, first-priority security interest in the Collateral.” They make it sound so simple!

Alas, CRO Charles Morris and his colleagues at A&M have a lot of tracing to do before purportedly secured lenders know exactly what collateral they have and whether they have a senior lien on it. At least some bankruptcy professionals will be gainfully employed for a few years. And unlike the folks on Twitter, we have every confidence that they will be able to find enough assets and recover enough transfers to make a meaningful distribution. This is what we do best on this side of the pond. This upstart nation that shocked the world at Ticonderoga was founded by debtors.

But please, please don’t tell anyone. We want the world freaking out over incomprehensible fraud and impossible restructuring dynamics. If we don’t make every case look hideously complex and every situation entirely unrecoverable, then how do we justify fees in all those “hard fought” cases.

Not to mention that we might not give debtors whatever they want because every case is perpetually on the edge of catastrophic failure. Take, for example, the First Brands DIP: The UCC called it a “product of unprincipled overreach” and “desperation,” but desperate times call for desperate measures, right?

The lenders warned that the financing is “arguably among the riskiest in recent history” and they are funding into a “black box” amid “allegations of rampant fraud.” The debtors helpfully provided them with plenty of support for those assertions, and the committee seems to have buckled.

Bankruptcies only get ordinary at the end, when everybody congratulates each other on a “tremendous result.” That said, we do need to speed it up: Don’t y’all wait to set up some kind of protocol to sample invoices and inventory as a bellwether for the rest of the stuff. Start with a few thousand, and go from there. By the time the A&M gang (and the examiner) has spent $10 million or so – that’ll probably happen by Christmas – everybody should have a pretty good idea who’s on first and who’s been Designated for Assignment.

Then it’s time to mediate a global settlement and agree on a plan, before whatever is left of the company (and lenders’ recoveries) has been devoured for fees. Chasing down all the funds that flowed to the wrong lender or vendor should still keep everybody busy for a while after whatever’s left of this company emerges.

As for First Brands being the Cockroach in the Coal Mine, our money is on no. Disclaimer: We have no money, and Octus doesn’t allow us to invest in stonks and bonds anyway. Sure, the lenders completely boffed their diligence here, but they’re going to pay for it – we don’t see the U.S. government backstopping their losses any time soon, although who knows nowadays. There are certainly other bad loans out there, but fraud like this is just another day in bankruptcy. Now get out there and catch ‘em all!

Village People Roadshow

Judge Thomas Horan issued an interesting decision on Nov. 5 in the Village Roadshow case that touches on a fairly arcane, rarely litigated issue: section 365(c)’s prohibitions against assumption and assignment of personal services contracts and contracts “to make a loan, or extend other debt financing or financial accommodations, to or for the benefit of the debtor.”

Film producer and financier Village Roadshow filed chapter 11 in March to sell its film library, including its interest in Warner Bros. collabs including “The Matrix” series, “Ocean’s” series, “The Lego Movie,” “Happy Feet,” “Mad Max: Fury Road,” “American Sniper,” “Sherlock Holmes,” “Cats & Dogs” and “Joker.” The filing was precipitated by studio losses and a dispute with Warner Bros. over the release of “The Matrix Resurrections” on Max, nka HBO Max, that threatened both massive damages and the end of the parties’ business relationship.

In June, Judge Horan approved the sale of Village Roadshow’s library to Alcon Media for $417.5 million after Warner Bros. withdrew its objection. So far, so good. That left the debtors with their pretty worthless studio business and “derivative rights” – agreements with Warner Bros. that give the debtors the right to cofinance derivative works based on film library assets co-owned with Warner Bros.

On May 29, the debtors selected Alcon’s $18.5 million bid for the derivative rights, kicking off another showdown with Warner Bros., which submitted a $17.5 million backup bid. On June 16, Warner Bros. objected to the Alcon sale, arguing that the derivative rights agreements include financial accommodations that cannot be assumed without Warner Bros.’ consent.

Warner Bros. pointed out that if the debtors exercised their right to cofinance a project under the agreements, Warner Bros. would have to advance all production costs and then recover the debtors’ share before distribution. In other words, the agreements required Warner Bros. to extend credit to the debtors – a financial accommodation that cannot be assumed or assigned, according to the studio.

Warner Bros. also argued that the derivative agreements were personal services contracts with former Village Roadshow management. According to Warner Bros., the derivative rights agreements’ financial structure is a “relic” from when Village Roadshow was a family-owned business with a multi-decade relationship with Warner Bros., and the terms were “personal to that former relationship.” Ah, a little mom-and-pop Hollywood studio handshake deal – that doesn’t sound implausible at all.

Then on Oct. 7, Warner Bros. upped its offer to $28.5 million, several months after the auction ended. Nice carrot, but there’s a stick: Warner Bros. again argued that the derivative rights could not be sold to someone else without its consent because the agreements are “unassignable financial accommodations if not outright loan commitments” and contain Warner Bros.’ exclusive copyrighted material.

Warner Bros. also highlighted Alcon’s “hostility” toward the studio and “apparent zeal to publicly accuse Warner Bros. of various imagined wrongdoings in litigation filed over token matters.” Warner Bros. again emphasized the “trust-based relationship” required by the agreements, which, we had no idea that the movie business is apparently built on trust and loyalty. Robert Evans would be so disappointed with all this conflict!

In their Oct. 16 response, the debtors characterized the sale as a transfer of the debtors’ interests in copyrights co-owned with Warner Bros. According to the debtors, under “well-established” copyright law, co-owners hold an independent right to exploit the copyright, and a co-owner may transfer its interest in the copyright – whether through assignment or a nonexclusive license – without the consent of the co-owners.

The “personal services” assignment exception did not apply, the debtors continued, because the agreements are between two entities and not, you know, actual persons. The “financial accommodation” exception did not apply, according to the debtors, because the agreements do not require Warner Bros. to lend money to the debtors or their assignee.

Finally, the debtors maintained that Warner Bros.’ improved offer did not top the Alcon bid because $10 million of the $28.5 million would come from the release of a reserve held by, you guessed it, Warner Bros. The release of the reserve would not provide any additional value to the estates, the debtors said, because it would not cap Warner Bros.’ $100 million-plus Matrix arbitration claim.

In other words, Warner Bros. offered to pay the debtors $10 million that they would have to immediately hand back if Warner Bros. secured an arbitration award. Here’s a dramatization, part of Octus’ 2018-style pivot to video.

Judge Horan took the sale under advisement on Oct. 21 after two days of hearings. Then, on Nov. 5, he ruled in favor of the debtors on all counts.

The judge found that the derivative rights agreements are not “financial accommodations,” despite the apparent extension of credit by Warner Bros., because the “nature of the entire transaction” is not one of financial accommodation. “The purpose of the agreements is not for Warner Bros. to provide financing to the Debtors, but for the Debtors to provide financing to Warner Bros.” to “mitigate the risk (or share in the profit) of the project,” Judge Horan explains. Basically, the judge found any extension of credit immaterial to the contracts as a whole.

In rejecting Warner Bros.’ personal services contract argument, Judge Horan pointed out that under California law, a contract with a corporation is itself evidence that the contract is not for personal services. Judge Horan also noted that since the parties began working together in 1998, both entities have been bought, sold and experienced a large amount of turnover in personnel. The survival of the agreements through these changes is “[s]trong evidence” that the agreements “are not based on any personal services or attributes of either party,” according to the judge.

Finally, Judge Horan declined to second-guess the debtors’ – wait for it – business judgment that the Alcon bid remained a higher and better offer than Warner Bros.’ improved bid. Sure. You know how we feel about that.

We tend to agree with Judge Horan on the personal services issue – typically personal services agreements involve personal services, by individual persons – but there is a bit of wobble in that financial accommodation holding.

Let’s say Warner Bros. wants to make a sequel to “American Sniper” where Chris Kyle returns from the dead to take vengeance on the evil bastards who sent him to war on false pretenses (presumably he’s already taken care of Dick Cheney in hell). If that film is covered by the derivative rights agreements, Warner Bros. has to offer Alcon, the purchaser of the debtors’ rights under the agreements, the chance to cofinance the sequel.

Alcon then has a free option to cofinance the movie on a buy-now, pay-later basis – basically, Klarna for film financing. Does Warner Bros. elect not to make the movie because it fears Alcon won’t pay up later? Does Warner Bros. have to keep costs down to account for the chance that Alcon doesn’t reimburse as required? The agreement puts all the uncertainty on Warner Bros. – the same kind of uncertainty lenders have to think about before extending credit to a borrower.

On the other hand: Warner Bros. agreed to share copyrights with Village Roadshow, and it seems unfair that Warner Bros. could effectively seize sole ownership of those copyrights solely on account of Village Roadshow’s bankruptcy.

It’s a tough call. At the very least, Judge Horan clearly took the issue seriously, thought it through and ruled for the debtors based on his legitimate view of the merits, rather than the typical bankruptcy judge knee-jerk impulse to just do whatever it takes to get more assets into the estate. Like we’ve said, tough work, if you can get it.

Either way, the fights between the debtors and Warner Bros. are far from over. Warner Bros. secured stay relief to proceed with the “Matrix” arbitration and prevailed, securing a $100 million award. Then, on Nov. 3, the studio asked for derivative standing to bring fraudulent transfer claims related to derivative rights transferred out of its debtor counterparties for a whopping nine dollars.

Whatever happened to the Hollywood we knew, where people treat each other right?

Conversion Will Seize the Doctor, Too

Two months ago we cited Dr. Phil McGraw’s Merit Street Media case as a positive example of a bankruptcy judge (in this case, Judge Scott Everett in Dallas) calling a debtor’s bluff when confronted with a parade of horribles. Judge Everett refused to proceed with a hearing on approval of the debtors’ proposed $8.7 million second DIP draw while a motion to dismiss remained pending, even though the debtors warned that merely putting off the DIP hearing would definitely lead to dismissal or conversion and filed their own motion to dismiss (keep that in mind).

After the judge called their bluff, the debtors filed a motion to approve a modified unsecured $10 million DIP, with 0% interest, from Dr. Phil. On Sept. 4, Judge Everett approved the new DIP. Thanks to Judge Everett’s judicial courage, the debtors secured much more favorable terms for a DIP that would pay expenses and prevent administrative insolvency, and the case proceeded quickly to a consensual, dare we say amiable, confirmation hearing.

Well, no. The committee deal did not placate either Trinity Broadcasting, Dr. Phil’s erstwhile joint venture partner, or the debtors’ largest creditor, Professional Bull Riders (yup, the guys with the chaps). Their motions to convert or dismiss proceeded to a six-day trial at which, ah yes, Dr. Phil himself had to take the stand to defend himself against accusations of fraud. Dr. Phil said he put “a tremendous amount of money” into the debtor and lamented the damage done to his “brand” by the filing.

Dr. Phil also accused Trinity and Professional Bull Riders of conspiring against him in the press, which doesn’t seem like the sort of personal responsibility this guy pushes on everyone else.

Anywho, on Oct. 28 Judge Everett issued an oral ruling converting the case to chapter 7. The judge pointed to the debtors’ “conflicted” chief restructuring officer and his lack of candor with the court, the continued loss of estate value and Dr. Phil’s destruction of relevant text messages. The CRO holds a bias in favor of Dr. Phil, the judge explained, and “bless[ed]” other officers of the debtor working for Dr. Phil affiliate Envoy. The CRO also “disastrous[ly] attempt[ed]” to “shield” his communications with Dr. Phil over the debtor’s “abrupt” dismissal motion.

Judge Everett found that Dr. Phil “purposefully deleted” text messages with a UCC member meant to “deep-six” evidence showing preferential treatment of the member’s claims over other creditors, including Trinity and PBR. That sounds like the kind of thing that gets you thrown in federal prison ’round these parts. Folks: Justice is supposed to be swift AND consistent.

Dr. Phil also made “Alexander Haig-like statements” throughout the case about his control over the bankruptcy and litigation against Trinity, the judge added, which, deep cut, Hizzoner. A podcast invitation is in the mail.

On Nov. 3, the debtor and Dr. Phil’s affiliate Peteski Productions each asked Judge Everett to stay his decision pending an appeal to the Fifth Circuit. Good luck with that! In the stay motion, the debtor maintains that the judge’s findings regarding the CRO and Dr. Phil are not supported by the record and Peteski says none of the statutory grounds for conversion relate to information production or candor assessments. The stay motion is set for hearing on Monday, Nov. 10.

In other words, the stay brief seems to suggest that the Bankruptcy Code allows management and insiders to lie to the court and destroy evidence without fearing conversion. Sure. Peteski also argues that the committee settlement would “unravel” absent a stay, which: The horse is kind of out of the barn on that one. Judge Everett already rejected the parade of horribles a few times to get to conversion; guessing he’s not going to stay his decision based on that old saw.

Finally, Peteski asserts that if the court’s reasoning stands, “every liquidating debtor” in chapter 11 would be at risk of having their case be converted to chapter 7 or dismissed. Well, duh. Thanks to section 1112 of the Bankruptcy Code, every chapter 11 debtor – liquidating or not – is at risk of having its case converted to chapter 7 of the Bankruptcy Code, especially if insiders withhold information and destroy evidence. “You are an adult now and you need to take responsibility for your actions,” as Dr. Phil himself says.

Like we’ve often said, reorganizing in chapter 11 is supposed to be hard. The relief afforded by the Bankruptcy Code is sweeping and extraordinary, and shouldn’t be tossed about lightly. Dr. Phil had his chance, and apparently he decided to delete text messages, thereby putting himself and his company in what we are sure he would call a “pickle.” Them’s the breaks, and props again to Judge Everett for calling it so.

While we are on the topic of pickles…. What in the fresh hell is going on at Jimmy John’s these days?