Transcript Slide 1
Strategies in Dealing with
Financially Distressed Customers
Before and After Chapter 11
Bankruptcy
Friday, August 21, 2009
Presentation to the Japan
Business Society of Detroit
Gordon J. Toering, Partner
Bankruptcy and Creditors’ Rights Practice
Warner Norcross & Judd LLP
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Introduction
Do you still need to understand U.S. bankruptcy laws?
GM, Chrysler bankruptcies over; major Tier 1’s in
bankruptcy
But re-sourcing continues and supply base will be
reduced
• “Car czar Ron Bloom says the President’s Task Force on the
Auto Industry does not intend to bail out struggling parts
producers, because the thinning of the supply base must be
allowed to run its natural course.” (Wardsauto.com, August
5, 2009)
• Difficulty in obtaining credit for ramp up in production
• Your customers and suppliers continue to be at risk
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Basic bankruptcy law for
suppliers
Definitions
“Debtor” – bankrupt company
“Pre-petition” – pre-bankruptcy
“Post-petition” – post-bankruptcy
Two types of bankruptcy for companies:
Chapter 11 (reorganization)
Chapter 7 (liquidation)
Chapter 11 reorganizations
3 general types
• Traditional reorganization
• Bankruptcy sale (“363 sale”)
• Combination (sale of parts of the company, then
reorganization)
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Basic bankruptcy law for suppliers
(Cont’d)
Priority of payment
Secured creditors
Priority creditors
• Includes suppliers extending post-petition credit
• No guarantee of payment for post-petition invoices
Unsecured creditors
• Typically paid small amounts
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Basic bankruptcy law for suppliers
(Cont’d)
Preferences
Any payments made by a debtor to a creditor within
90 days prior to the bankruptcy filing may be
recoverable by the debtor or trustee in bankruptcy
There are numerous defenses to preference claims,
such as new value, ordinary course of business, cash
in advance or cash on delivery, or the creditor is fully
secured
Point: In evaluating pre-bankruptcy strategy,
preferences have to be taken into account
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Basic bankruptcy law for suppliers
(Cont’d)
If supplier is a party to an “executory contract”
(like a long-term blanket PO):
Supplier has to continue to supply parts despite not
being paid the pre-petition amounts owing
Debtor has ability to “reject” (terminate)
contracts, and supplier only has pre-petition
claim
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Strategies for recoveries of
pre-petition A/R for suppliers
20 day claims [Section 503(b)(9) claims]
Applies to goods delivered to debtor in the ordinary course
of business within 20 days prior to the bankruptcy filing
Typically not required to be paid until end of bankruptcy,
but debtors have ability to pay early
Reclamation claims
Applies to goods delivered within 45 days of the
bankruptcy filing
Requires a written demand – typically done in the first day
or two after the bankruptcy filing
Reclamation claims often are of limited or no value
due to various defenses that the debtor has
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Strategies for recoveries of pre-petition
A/R for suppliers (Cont’d)
Critical vendors
Permits payment of up to 100% of pre-petition claim
Often need leverage
Leverage could consist of short term contracts,
financial difficulty, etc.
363 bankruptcy sales
Contracts (including PO’s) can be “assumed” or
“assumed and assigned”
If contracts are assumed or assumed and assigned,
then “cure” amount has to be paid
(pre-petition A/R)
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Strategies for recoveries of pre-petition
A/R for suppliers (Cont’d)
Importance of pre-bankruptcy strategy
Sections 2-609 (“demand for adequate assurance of
performance”) and 2-702 of the UCC may allow
shortening payment terms prior to bankruptcy
Section 2-609 may also allow termination of
contracts, which could increase leverage
Review contracts to determine what rights you may
have, and whether there are ways to amend your
contracts as a supplier or customer to your
advantage before a customer or supplier files for
bankruptcy
Review setoff rights
Know which legal entity you are doing business
with
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Recap of recent bankruptcies
Chrysler/GM: not typical bankruptcies because
many suppliers were paid in full at the
beginning of the case
Tier 1 bankruptcies: more typical, but still
some suppliers being paid better than in normal
auto supplier bankruptcies
Some debtors, after filing for Chapter 11, now
pushing suppliers to extend credit rather than
going to CIA/COD terms
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Continued diligence as to
customer base is necessary
Some customers lack financial ability to ramp up
production
They may be resourced by other customers and then
unable to pay suppliers
Evaluate list of top customers and monitor
Publicly traded companies - easy to monitor
Privately held - hard to monitor, but need to push
• But can agree to keep information confidential
• Or agree upon certain financial metrics that have to be
satisfied
• If customer won't agree to provide financials, then
may need to take action (requires legal action)
• D&B alerts can be useful
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Continued diligence as to
customer base is necessary
(Cont’d)
For customers in bankruptcy
Critical vendors
20 day claims
Rights upon 363 sales - if don't assume, may
not need to supply
Contractual review important (life of the
program, annual PO), etc.
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Diligence as to supply base
Monitor suppliers’ financial condition (same as
above)
Contingency planning necessary (parts bank,
second source, etc.)
Ability to get to tooling and equipment in possession
of your supplier if they file Chapter 11
Surprises could mean paying lots of money
while you resource, including price increases,
accelerated payment of invoices, loans, etc.
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Joint venture issues
If you are party to a JV with a company in
bankruptcy, then special rules apply; the debtor
may lose some of its rights in the JV, but
prompt action may be required
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Summary
Pre-bankruptcy planning is essential as to
customer base
Pre-bankruptcy planning is also essential as to
supply base
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