There were approximately 479 objections filed by the June 15, 2009 deadline by suppliers and other trade creditors to GM’s proposed cure costs (click link to see list). An additional 75 objections were filed after the deadline and on or before June 20, 2009. As in the case of Chrysler, the majority of the objections were to cure cost amounts. However, as noted in our prior post, the cure cost procedures also provided a frequent basis for objection. As a final irony, Chrysler’s objection was among the most vehement (as well as apparently a day late). In the following post, we discuss the substantive objections and provide a sampling of the differences between GM’s cure costs and cure costs computed by suppliers.
Automotive suppliers can only hope that GM will make better cars than they do cure cost procedures. Based on the cure cost objections (“Cure Cost Objections”) filed, the procedures approved by the Bankruptcy Court either were flawed from the beginning or improperly executed. The net result is to cast a shadow on the entire contract assignment and assumption process pursuant to the proposed 363 sale to New GM. In the following post we discuss the problems experienced by suppliers. In a later post, we summarize the substantive objections that were filed and give a sampling of the differences between the GM cure costs and the Supplier cure amounts.
Chrysler LLC has filed 4 (the original and 1 amendment and 2 supplemental) lists of Assumed Designated Supplier Contracts and Cure Costs. Undoubtedly, there are changes that will be made. The lists to date have already undergone substantial objection and in many instances Chrysler and the Supplier are on different planets in terms of Cure Cost amounts.
For any Tier 2 Supplier, however, it is still important to determine if its Tier 1 customer is on the list. There is at least one big surprise omission from the assumed contract list.
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.
Chrysler has filed a “Declaration of Bradley A. Robins in Support of the Sale of the Debtors Assets to New Chrysler” (click document name to view) that includes as an attachment a fairness opinion of Greenhill & Co LLC. The fairness opinion relies heavily on a liquidation analysis of Capstone Advisory Group, LLC. That Liquidation Analysis concluded that “the value range” from a Chrysler asset liquidation (i.e. not as a going concern) “is $0.9bn to $3.2bn on an undiscounted basis”
We discussed in a prior post the completion of the auction and bankruptcy court approval of sale of assets to an affiliate of Fluid Routing Solutions. Despite its success in getting the sale approved, Fluid Routing Solutions was unable to obtain the concurrence of its automaker customers to the Proposed Sale Order. Fluid Routing Solutions advised the bankruptcy court in submitting the Proposed Sale Order to the bankruptcy court that Toyota, Chrysler, Ford and General Motors (the “Automaker Customers”) provided comments to the proposed order that were “wholly inconsistent with, and went far beyond, the requirements of the Agreement”.
On March 26, 2009, 48 days after the Chapter 11 filing, the sale of the fluid routing business and assets of Fluid Routing Solutions was approved. The winning bidder a/k/a the only bidder was FRS Holding Corp., (“FRS Deux”) who was the “stalking horse bidder” and an admitted “affiliate of an insider of the Debtors” and affiliate of the DIP lender, Sun Fluid Routing Finance, LLC (“Sun”). The purchase price is $11 million “less Cure Amounts less Prorated Taxes, minus/plus the Closing Net Assets Shortfall/Surplus.”
Feb. 20, 2009 – On February 12, 2009, another volley was fired in the onging Cadence Innovation LLC (“Cadence”) battle with GM. This time Cadence fired the volley. In an adversarial “Complaint to recover Money and to Enforce Accomodation Agreement and Stipulation and Consent Order”, Cadence alleges that GM is refusing to pay Cadence more than $4,914,075, including amounts due for equipment and raw material that GM purchased from Cadence. The purchase price was to be determined as a post-sale matter by an agreed appraiser. The designated appraiser firm was Hilco Appraisal Services, LLC. (“Hilco”).
The story is not the latest GM/Cadence fight. The story is the results of the appraisal, which was released on January 13, 2009 and attached to the February 12, 2009 Cadence complaint. This appraisal shows that the orderly liquidation value is $.10 on the dollar of fair market value.
Feb. 19, 2009 – In an article entitled Section 365 Executory Contract Assumption Defense to a Bankruptcy Preference Claim, we discuss the absolute defense to a preference claim created when a bankrupt company or its trustee “assumes” an “executory contract”. That defense was firmly established in a 2003 decision by the Third Circuit Court of Appeals in the bankruptcy case of In re Kiwi International Air Lines Inc., so the defense is sometimes called the Kiwi defense.
The Kiwi defense is a defense that we believe may be underutilized. As we explain elsewhere on this web site, the facts needed to establish the 3 most common defenses are “fixed” at the time of the bankruptcy filing. As to establishing the subsequent new value, ordinary course of business and contemporaneous exchange defenses, there is nothing that the supplier can do but pull together books and records.
In our posts on the bankruptcy of Fluid Routing Solutions, we have discussed unique aspects of this case that made it worthy of study. These aspects include the following:
- apparent inability to get institutional financing despite strengths;
- sophistication of the overall bankruptcy strategy;
- first day motions that were specifically directed at keeping the supplier base in place;
- challenges of a bankruptcy of a supplier in the automotive sector;
- being part of the investment portfolio of a major, private equity player, Sun Capital Partners;
- DIP financing from a Sun Capital Partners affiliate;
- close scrutiny given the case by Chrysler, Ford and Toyota;
- presence of the UAW,
- speed at which the case was moving.