The Stant bankruptcy is structured as a 363 Sale to an affiliate of an insider (i.e. a current equity holder).  For suppliers this will be a case of suppler “haves” and supplier “have nots”.  Each supplier should determine its classification as soon as possible.  This bankruptcy likely will move fast – 45 days and the 363 sale will be done.  Based on the limited financial information provided to date, administrative insolvency is a risk.  So for some suppliers who don’t pay attention, this may be a bankruptcy that just keeps on giving.

Supplier “Haves” and Supplier “Have Nots”

For suppliers, this bankruptcy is going to be either black or white.  There likely will be no grays.  “Have” suppliers will be paid their pre-petition claims in full.  “Have not” suppliers are going to receive nothing.  What we can not determine at this point is the proportion of suppliers in each of these buckets.

Each Chapter 11 bankruptcy targets one or more debtor “problems” the bankruptcy is intended to fix.  One of the first things we do when we evaluate a bankruptcy is to try and determine what/who are “the problems to be solved.”  If supplier trade debt is not the target, the next task is to determine the potential extent of “collateral damage” to suppliers.  In other words, burning off supplier trade debt may not be an objective of the bankruptcy, but it just happens as a collateral affect of achieving the bankruptcy objectives.

In the Stant bankruptcy, we just don’t have enough information to identify all the intended targets of this bankruptcy.  A couple of targets are obvious, but supplier trade debt is not one of these obvious targets.  We also can’t tell the degree of collateral damage the supply base is going to suffer.

The task for each Stant supplier (and any supplier in a 363 sale bankruptcy) – determine if it is going to be a “have” supplier or a “have not” supplier.  Two definitive characteristics of a “have” supplier are – (1) “critical vendor” status allowing the supplier to be paid pre-petition claims; and (2) the existence of an executory contract to be assigned to the buyer in the 363 sale?  If both of these questions are answered “yes”, do the happy dance.

“Have” Suppliers Still have Work to Do

For “Have” suppliers this is going to be a pretty good bankruptcy.  In all likelihood these suppliers will be paid in full.  But these suppliers still have work to do.  In conjunction with the assignment and assumption of their executory contracts, any defaults (monetary and non-monetary, liquidated and unliquidated) under the contract are going to have to be cured.  This means payment to the supplier of all amounts necessary to cure all defaults under the contract.  Determining the “cure amount” is sometimes a difficult and time consuming task.

There is a real possibility that this 363 sale will be complete within the next 45 days.  The notice of assignment of an executory contract will require confirmation of the cure cost within a very short period of time.  If there is no objection to the cure amount, then the contract will be assigned and the supplier looses any chance to ever recover any additional amounts attributable to the period prior to the assignment.

“Have not” suppliers – Threat this as Liquidation

“Have not” suppliers should approach this bankruptcy like a Chapter 7 liquidation.  As a practical matter, for these unfortunate suppliers, that is what this bankruptcy will look like.  So go through the bankruptcy creditor rights checklist including:

  • Reclamation Claim
  • 503(b)(9) Claim (But see “Administrative Insolvency” discussion below)
  • COD terms (WARNING – if there is an executory contract in place, remember the automatic stay will preclude any refusal to honor pre-petition terms.  Talk to bankruptcy creditor rights counsel regarding your alternatives.)
  • State lien law claim preservation (Remember that the 363 sale will be a transfer assets free of all liens.  Unless an objection or other motion to preserve the lien is filed, the lien claim is lost.)

Administrative Insolvency and Preference Claims

The problem with any 363 sale is whether there will be enough paid for the assets, or enough assets left behind for future sale, to allow the debtor to pay its administrative expenses.  These expenses include 503(b)(9) claims and payments due for post-petition goods and services.  The way the Stant 363 sale is structured increases the possibility of administrative insolvency.  There is no cash is being received by Stant for the assets – payment is being made through credit bid and assumption of certain liabilities.

There has been one particularly ugly bankruptcy 363 sale in recent months that left the debtor administratively insolvent – at this point, $1 million in remaining assets and $4 million in post petition liabilities.  In several ways, including the documentation, this 363 sale closely tracks that disaster.

One of the ways that debtors try to cope with administrative insolvency is through recovery of preference payments through avoidance actions.  There is some goods news for suppliers who received payments in the 90 days prior to the petition.  The buyer is seeking to include the avoidance actions in the assets it is buying.  While it is possible that a buyer could pursue preference actions, it would be highly unusual since the reason for buying the actions is to preserve the goodwill of the supply base.

Whether the sale of avoidance actions survives the inevitable objections is a big question.  So this is something suppliers may want to pay attention to.

No Reason to Be Angry

We have seen 363 sale transactions where suppliers had reason to be upset.  At this point, we don’t think this case is one of them.

Stant has too much secured debt for any dings on the purchase price or other 363 sale terms to make any difference for the unsecureds in terms of payment for pre-petition goods and services.  Since the debt was put in place in June 2008, collateral values have evaporated and sales levels have plummeted.  The secured debt seems to substantially underwater.  The supplier unsecured debt is below it.

The focus for suppliers who have the opportunity to be “have” suppliers should be on playing nice while protecting themselves should the 363 sale collapse.  Determining cure amounts and deciding whether to sign (or negotiate) the critical vendor trade agreement likely are the next tasks.  For “have not” suppliers, the focus should be on doing all that can be done (but don’t expect much) and, by all means, don’t let it get any worse.