Feb. 08, 2009 – Through two “First Day Motions”, Fluid Routing Solutions, Inc. and its affiliated filers (“Fluid Routing Solutions”) are taking steps to hold their own supplier base in place and avoid disruption to its manufacturing operations. The two motions are:

  1. Motion for Order Pursuant to Sections 105(a), 503(b), and 507(a) of the Bankruptcy Code Authorizing Debtors to Pay Certain Prepetition Claims of Suppliers and Vendors of Goods and Services Entitled to Administrative Priority
  2. Motion for Order Pursuant to Sections 105, 363 and 506(b) of the Bankruptcy Code for an Order Authorizing the Debtors to Elevate Certain Prepetition Claims of Certain Critical Vendors to Administrative Priority

This post addresses the first of these motions.

The motions were to be heard at 3:00 pm on Friday, February 6, 2009. As this post precedes the results of that hearing, its contents are qualified. Simply, we don’t know how or if the Court handled the motions on Friday.

Regardless, the motions themselves raise a number of difficult questions – questions of bankruptcy law and questions to be asked by the supplier base. However, this post does not question the motivation of Fluid Routing Solutions. There is a legitimate and reasonable concern to avoid disruption of supply from critical suppliers.

The Basics of the Administrative Priority Granted under 11 USC 503(b)(6).

11 USC Section 503(b)(9) provides that a supplier shall be entitled to an “administrative expense claim” for “the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.” It is necessary for a supplier to file a motion to have a court order entered recognizing an amount to be granted 503(b)(9) status. The motion is short and simple. The burden of proof, in most instances, is not difficult to meet.

The trick is not in being granted the administrative expense claim. The trick is in getting paid sooner rather than later. The Bankruptcy Code provides that “the timing of the payment of that administrative claim is left to the discretion of the court.” If there is a secured lender providing debtor in possession financing, the answer almost always is going to be “after the secured lender gets paid.” In these instances, payment of an administrative expense claim under 503(b)(9) often occurs weeks, months and even years after the petition was filed.

The Fluid Solutions Motion Regarding Administrative Expense Claims under 503(b)(9)

Fluid Solutions has moved for an order authorizing Fluid Routing Solutions to make “ordinary course” payments of 503(b)(9) claims to certain “critical vendors.” Fluid Solutions simply has requested the ability to offer the prospect of ordinary course payment for goods and services provided in the 20 days preceding the filing. “Ordinary course” is not explained, but presumably it means that payment would be made per 30, 60, 90 day terms in effect pre-petition. For suppliers who may not be paid for months for goods and service provided prior to this 20 day period, “early” payment of the administrative expense claim may represent an opportunity to receive desperately needed cash flow.

So what is the catch? There are some. [Please Note: In addition to the following, we are posting the entirety of the Motion in the Resources section of this web site. Please read the following in conjunction with reading the motion in its entirety.]

1. The request is to authorize, but not direct, payment in the ordinary course of prepetition claims entitled to administrative priority under Bankruptcy Code. If granted, Fluid Solutions will be given a right to pay the claims as it determines “in its sole discretion”.

2. The order only covers “Priority Vendors”, as determined by Fluid Services. The vendors who are to be considered “Priority Vendors” are not identified. There seems to be, however, a minimum standard to be considered a “Priority Vendor”. A supplier must be sufficiently “critical” as to be able to disrupt Fluid Solutions’ operations if it refuses to continue providing the Debtors with goods and services. Fluid Solutions estimates “that the Priority Vendor Claims total approximately $3.6 million.”

3. To “ensure” that the Priority Vendors continue to deal with Fluid Routing Solutions on the “Customary Trade Terms”, the motion proposes that “a letter agreement (a “Trade Agreement”) be sent to the Priority Vendors for execution, together with a copy of the Order granting this Motion.”

4. The motion identifies certain provisions to be included in the Trade Agreement. The following lists certain of the terms identified to be included together with our first thought. [Note, we have other thoughts, but a post is just not the place for them. All we are trying to do here is illustrate that questions can arise.]

a. “The amount of such Priority Vendor’s estimated prepetition claim, after accounting for any setoffs, other credits and discounts thereto, shall be as mutually determined in good faith by the Priority Vendor and the Debtors (but such amount shall be used only for purposes of the Order and shall not be deemed a claim allowed by the Court, and the rights of all parties in interest to object to such claim shall be fully preserved until further order of the Court).” [Emphasis added] [Our first thought: How will the accounting departments and auditors deal with this contingency?]

b. “The Priority Vendor’s agreement to be bound by the Customary Trade Terms, which were favorable to the Debtors and in effect between such Priority Vendor and the Debtors on a historical basis during the period within one hundred twenty (120) days of the Petition Date, or such other trade terms agreed to by the Debtors in their sole discretion.” [Our first thought: Why another “sole discretion” standard?]

c. “The Priority Vendor’s agreement to provide Goods and Services to the Debtors based upon Customary Trade Terms, and the Debtors’ agreement to pay the Priority Vendor in accordance with such terms.” [Our first thought: What remedy for the supplier in the event of a default in payment by Fluid Solutions?]

d. “The Priority Vendor’s agreement not to file or otherwise assert against any of the Debtors, their estates or any of their respective assets or property (real or personal) any lien (a “Lien”) (regardless of the statute or other legal authority upon which such Lien is asserted) related in any way to any remaining prepetition amounts allegedly owed to the Priority Vendor by the Debtors arising from Goods or Services provided to the Debtors prior to the Petition Date, and that, to the extent the Priority Vendor has previously obtained such a Lien, the Priority Vendor shall immediately take all necessary actions to release such Lien.” [Our first thought: What is the value of the lien surrendered versus an accelerated 503(b)(9) payment.].

e. “The Priority Vendor’s acknowledgment that it has reviewed the terms and provisions of the Order and consents to be bound thereby.” [Our first and last thought: Ok.]

f. “The Priority Vendor’s agreement that it will not separately assert or otherwise seek payment of any reclamation claims.” [Our first thought: What is the value of goods covered by a potential reclamation clam?]

g. “The Priority Vendor’s agreement that if it receives payment of a prepetition claim but subsequently refuses to provide Goods or Services to the Debtors on Customary Trade Terms, any payments received by the Priority Vendor on account of its Priority Vendor Claim will be deemed to have been in payment of then outstanding post petition obligations owed to such Priority Vendor, and that such Priority Vendor shall immediately repay to the Debtors any payments received on account of its Priority Vendor Claim to the extent that the aggregate amount of such payments exceed the postpetition obligations then outstanding, without the right of setoff or reclamation. [Our first thought: How does this accommodate a change in circumstance of Fluid Solutions?]

The Bottom Line

The authority sought by Fluid Routing Solutions may be a great thing for many suppliers. It may not be. Forgiveness for not getting the right answer should be readily forthcoming. Not asking the right questions is less pardonable.

We applaud the concept of “early” payment of 503(b)(9) claims.  If this motion is granted, it might encourage similar efforts in future bankruptcies, and suppliers at least will have an opportunity to opt in.