A scanning of the “Cure Costs” objections shows a brewing mess that might hamper (depending on how the various objections are handled by the judge) the planned speedy sale to new Chrysler. Whether the extent of the problems raises a red flag for Fiat has yet to be seen. For any Merger and Acquisition lawyer these problems certainly would yield sleepless nights.
The Primary Objection – Cure Cost Amounts
The objection common to the vast majority of filings is that the cure amount is incorrect. This was to be expected. What was not expected and what is somewhat alarming is the magnitude of several of the alleged Chrysler understatements of Cure Costs.
Anyone who has dealt extensively with Tier 1 suppliers will tell you that the accounts receivable of the supplier and the accounts payable of the automaker can readily get out of sync. Sometimes it is the fault of the supplier and sometimes it is the fault of the automaker. Part pricing can have some component tied to material costs or there may simply be periodic price adjustments that don’t get picked up on one side or the other. Setoffs, charge backs and returns can also cause problems in accounting.
Discrepancies between AR and AP are quickly addressed once discovered, and if the supplier believes it is owed money, discovery occurs quickly. Simply, underpayments by an automaker typically are going to be a relatively small percentage of the total supplier AR. That is why some of the cure objections are disturbing.
The cure objection of Excel Inc. is one of the largest discrepancies. Excel stated that the “Cure Cost”, as proposed by Chrysler aggregated $3,020,800. However, Excel claimed that the total amount due and owing is “in the aggregate amount of no less than $10,503,256.”
L&W, Inc. was advised by Chrysler that the Cure Cost is $1,023,279. L&W reported that “[t]he correct amount required to cure all pre-petition defaults for presently invoiced and outstanding amounts owed to Supplier under the Designated Agreements with Supplier is $5,246,385.”
Hirata Corporation of America (“Hirata”) reported that its “Cure Cost” letter from Chrysler stated the cure amount as $8,598,058. Hirata asserted that it is owed an aggregate amount not less than $13,825,240.
Mitsubishi Heavy Industries America, Inc. and its wholly owned subsidiary Mitsubishi Engine North America, Inc. (collectively “MHI”) objected to Chrysler’s cure amount of $24,459. MHI claims that the Cure Cost under the Assigned Contracts is approximately $4,131,906. MHI broke this amount down as follows: (i) $27,062.61 (for spare/replacement machine related parts); $485,989.66 (for delivered engine valves); and $3,000,000.00 (approximately for finished engine valves and raw materials requested and ordered but not yet released by Debtors for shipment).
Several suppliers objected on the grounds that Chrysler had just not given enough information to allow for a verification of the claimed cure costs. Others admitted that due to the complexity of reconciling all prepetition amounts, the supplier was unable, within the allowed time, to verify the amount due to cure prepetition defaults.
Review of the various objections to the cure costs reveals a fairly consistent theme. Chrysler’s numbers omit various pre-petition “irregular” charges and charges for “post petition” deliveries of goods and services. The omitted ancillary charges include items such as:
- increased costs for raw materials;
- continuing scrap and obsolescence charges;
- increases in the piece prices pre-petition due to dramatic reductions in the Chrysler’s projected and actual sales volumes;
- charges for cost-reduction engineering changes;
- charges for tooling and fixtures
- charges for resourcing damages or program cancellation claims
Many (but not all) objections demanded that payments for “post petition” deliveries and provision of goods and services also be made. This objection rests on solid bankruptcy law, but the bankruptcy court may respond that the support of the US Treasury provides “adequate assurance” that those amounts will be paid.
There also were some objections that Chrysler, in an effort to reduce their overall Cure Costs, took unwarranted offsets against cure claims
Finally, Lear Corporation made an interesting claim that “in determining their cure obligation to Lear, the Debtors did not account for millions in costs owed to Lear on account of the Debtors’ postpetition suspension of operations.” Whether this argument ends up holding water can be debated; but depending on the Supplier Contract content, it sounds like a good argument to make. Lear Corporation may be the only supplier expressly to have made it.
The Next Big Objection – Old Chrysler’s and New Chrysler’s Offset Claims
At least 3 suppliers honed in on a major supplier concern. While the supplier is barred from asserting further pre-assignment claims under the supply contracts, the reciprocal is not true. Simply, either Old Chrysler or New Chrysler can offset future payments due a supplier by pre-assignment damage claims against the supplier.
This may be a real concern. Lear Corporation reported in its objection that “troubling is the Debtors’ suggestion, during discussions with Lear, that its cure calculation was with full reservation of rights, signaling that the Debtors or the Purchaser may seek additional setoffs.”
Other Objection to Assignment and Assumption of Supplier Contracts
The following are the most common “other” objections to contract assignment and assumption:
- the contract to be assigned is with one of Chrysler’s foreign subsidiaries that has not filed bankruptcy
- Chrysler has not demonstrated (provided adequate assurance) that the potential assignee will be able to timely pay or otherwise perform under the Assigned Contracts
- valid and enforceable recoupment and setoff rights in favor of the supplier must be preserved and not impaired by virtue of the assignment
- Chrysler incorrectly identified the supplier name or supplier number
The Bottom Line
No supplier said that it did not want its contract assumed. Being left behind in the rotting carcass of Old Chrysler is not a place any supplier wants to be. For those left behind, non payment and preference claims are all that waits.
What about those big numbers on the Cure Costs? When losses are running in the billions, discrepancies in the millions in the calculation of cure costs might be view as rounding errors. The problem, however, is not the impact on the balance sheet. The problem is the impact on the Old Chrysler P&L where the significance of any understatement of expenses would get magnified and would raise further doubts whether Chrysler is salvageable. Will Fiat give these problems a second thought? Probably not. After all, this is not a real world transaction we are talking about.