Cooper-Standard Holdings Inc. and its affiliated debtors (“Cooper-Standard Automotive” or the “Debtors”) have combined into one motion a request to allow payment of 503(b)(9) administrative expense claims, a request to allow payment of critical vendors a/k/a essential suppliers, and a request to allow for payment of foreign vendors. The dollar amount of pre-petition claims Cooper-Standard Automotive is seeking to pay seems to vary between the motion and the interim and final orders. However, the relief requested in the interim order is for authority “to pay, in their sole discretion, as and when they come due, Essential [including 503(b)(9)] and Foreign Suppliers Claims in an amount that shall not exceed $19.5 million.”

Request to Allow (but not Require) Payment of 503(b)(9) Claims

The Debtors estimate that they have outstanding prepetition claims totaling approximately $25.1 million; approximately $16.9 million represents obligations due to production related goods; and $15.0 million of this total obligation would be entitled to priority treatment under section 503(b)(9) as an administrative expense claim (the “503(b)(9) Claims”). Cooper-Standard Automotive seeks the authority to pay, in its sole discretion, the 503(b)(9) Claims in the ordinary course of business.

In further support of the 503(b)(9) Claims payment request, Cooper-Standard Automotive further states that it will be making payment on account of such 503(b)(9) Claims “on the condition that such suppliers return to terms with the Debtors that are appropriate, in the Debtors’ business judgment, and at least as favorable as the Customary Terms… .” As discussed below, the proposed requirements for receiving this payment are far more extensive than merely continuation of pre-petition payment terms.

Request to Allow (but not Require) Payment of Critical Vendors-Essential Supplier Claims

The Debtors estimate that approximately $3 million of its prepetition claims is owed to the Debtors’ “Essential Suppliers”, exclusive of the 503(b)(9) Claims. The Debtors estimate that these Essential Supplier pre-petition claims represent approximately 15.5% of the Debtors’ total pre-petition accounts payable and approximately 20% of the Debtors’ production-related accounts payable amount outstanding.

Cooper-Standard Automotive defines 3 categories of Essential Vendors whose prepetition claims it seeks authority to pay — Sole-Source Vendors, Directed Vendors and Distressed Vendors.

“Sole-Source Vendors” are suppliers who represent the only source for a particular component, part or raw material and for whom “an interruption in production related goods would cause a significant, meaningful or otherwise prohibitively costly interruption in the Debtors supply chain and production cycle… .”

“Directed Vendors” are suppliers whose goods the Debtors are specifically directed to use by their customers.

“Distressed Vendors” are financially distressed vendors who provide near sole-source goods at highly competitive and advantageous pricing for whom the Debtors make up a meaningful portion of that vendor’s revenue.

The Debtors seek authority to, in their sole discretion, pay the prepetition claims of these Essential Suppliers “only to the extent necessary and only on such terms and conditions as are appropriate, in the Debtors’ business judgment, to avoid disruptions to their business and to return the Essential Suppliers to ‘Customary Terms’”. These “Customary Terms” are described below.

Request to Allow (but not Require) Payment of Foreign Vendor Claims

The Debtors estimate that approximately $630,000 of its prepetition claims are owed to the Debtors’ Foreign Suppliers, exclusive of the 503(b)(9) Claims.

The Debtors seek authority to, in their sole discretion, pay the prepetition claims of certain Foreign Suppliers. This authority is requested based on Cooper-Standard Automotive’s belief that “there is a significant risk that failing to pay even a single invoice of a Foreign Supplier could provoke certain Foreign Suppliers to stop shipping goods to the Debtors on a timely basis or to sever their business relationship with the Debtors.”

What Suppliers are Asked to Agree to in Exchange for Pre-petition Claims Payment

The Debtors propose to pay the Essential and Foreign Suppliers Claims “upon the understanding of the individual Essential and Foreign Supplier that they are to continue supplying services to the Debtors on terms that are appropriate, in the Debtors’ business judgment, and at least as favorable as the historical terms between the parties… .” These post-petition supply terms are referred to as “Customary Terms” by the Debtors.

In addition to the continued provision of goods and services on Customary Terms, Essential and Foreign Supplier’s will be asked to agree to certain other terms and conditions in order to receive their pre-petition claims payments.

  • if the supplier refuses to honor the Customary Terms at any time “during the Debtors’ Cases”, the supplier must repay the pre-petition claims payments and/or allow the Debtors to offset such payments against post petition sums due the supplier.
  • the supplier must waive and release of any lien related to any remaining pre-petition amounts owed to the supplier;
  • the supplier must agree to release to the Debtors, upon their request, goods or other assets of the Debtors in the supplier’s possession;
  • the supplier must confirm that it has no lien on any production tooling based upon the Debtors’ failure to pay pre-petition amounts owed; and
  • the supplier must agree that it will not separately assert or otherwise seek payment for reclamation claims or claims pursuant to section 503(b)(9).

These types of conditions always put suppliers in a difficult position of trying to predict the future of a customer’s bankruptcy.  However, by far, the first requirement is the most disconcerting. On its face, the first condition penalizes a supplier from demanding COD payment on post-petition goods or services even if a customer’s prospects take a turn for the worse.  Not only would the pre-petition claims payments have to be returned, but there is no provision for reinstatement of liens and 503(b)(9) claims even if the payment are returned.

It should be noted that the Debtors have sought authority to negotiate or even waive the listed conditions. The Debtors likely will exercise that authority only for suppliers with sufficient clout to refuse to agree to the waiver requirements and still be paid.  However, given the potentially high stakes, it might be appropriate to employ the adage: “There is no harm in asking.”