Litigation has been the hallmark of GSC’s chapter 11 bankruptcy case, which has been pending in the Southern District of New York since late August.1 A contentious battle between the controlling and non-controlling holders of GSC’s prepetition secured debt has spanned the duration of the company’s restructuring efforts, and is worth watching. GSC may be unique on its facts, or it may be the result of the particular investors involved, but the case nevertheless focuses attention on the difficulties encountered in a situation where the key assets are contracts, the founder-owner of the company manages the business, and most of the contracts have a “key man” provision conditioning the contract on the continuing service of the founder-owner.

The GSC dispute largely arose because a substantial portion of the company’s value derives from asset management contracts with key man provisions and the secured lenders were no longer willing to support the restructuring effort. Because of the key man provisions, the value of GSC’s collateral is dependent upon the founder-owner and would become uncertain in chapter 11 since, even though chapter 11 permits the assignment of such contracts, the key man conditions remain, and the non-debtor contract parties can seek termination. The secured lending contracts are equally important and may suggest a strategy for taking over the distress business. Yet, the cooperation of the founder-owner cannot be underestimated.

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