Southwest Georgia Ethanol, LLC (the “Debtor” or “SWGE”) filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code on February 1, 2011 in the Bankruptcy Court for the Middle District of Georgia (Albany Division, transfer request to Macon Division pending) (Case No. 11-10145). The Honorable Judge James D. Walker Jr. has been assigned to the case. With this filing, another ethanol producer seeks bankruptcy protection, going the way of Verasun Energy Corporation and Pacific Energ2y Resources Ltd. Suppliers and trade creditors should hope this bankruptcy has a happier ending. Both Verasun Energy Corporation and Pacific Energy Resources Ltd. are now in the midst of mass bankruptcy preference litigation (although the Iowa corn farmers were able to escape the claims in the Verasun Energy Corporation bankruptcy).
Eastern District of Virginia Bankruptcy Judge Kevin R. Huennekens, in a December 1, 2010 opinion in Circuit City Stores, Inc. v. Mitsubishi Digital Electronics America, Inc. (AP No. 10-03068), held that the preference claim defendant could not utilize a new value defense (Section 547(c)(4) defense) if the defendant receives a transfer for its § 503(b)(9) administrative claim predicated upon the same instance of new value. In reaching the conclusion, the Court methodically and with remarkable precision parses through the complexities of Section 547(c)(4). Given the Court’s reasoning, the next question is “What about payments post petition under critical vendor, warehouseman, carrier and wage motions.”
A simple statement of the April 28, 2010 holding in TI Acquisition, LLC, v. Southern Polymer, Inc. 2010 WL 1993848 (Bankr.N.D.Ga.), may paint the decision as adverse to creditor interests. Certainly, Judge Mary Grace Diehl held that “new value” paid as a 503(b)(9) administrative expense is unavailable in a “subsequent new value” defense to a bankruptcy preference claim. However, this holding is overshadowed
Does a supplier have to choose between asserting a subsequent new value bankruptcy preference defense and making a Section 503(b)(9) administrative expense request? Judge Marian F. Harrison of the Bankruptcy Court for the Middle District of Tennessee held on January 7, 2010 that a supplier does not have to choose. In the memorandum decision In re Commissary Operations, Inc. — B.R. —-, 2010 WL 99036 (Bkrtcy.M.D.Tenn.), Judge Harrison ruled that deliveries entitled to Section 503(b)(9) claim status are not disqualified from constituting new value for purposes of the subsequent new value defense to a bankruptcy preference claim.
In adding Section 503(b)(9) in the 2005 amendments to the Bankruptcy Code, did Congress intend that the supplier beneficiaries of the new section would wear a sign saying “BANKRUPTCY PREFERENCE TARGET – HIT ME”? This article challenges the growing use of bankruptcy preference actions under Section 547 to defeat and delay the allowance of Section 503(b)(9) administrative expense requests. As discussed below, the ploy subverts Congressional intent in adopting Section 503(b)(9). More fundamentally, the ploy ignores a basic tenet of the Bankruptcy Code that also is embodied in the prima facie requirements for bringing a bankruptcy preference action – “First Determine Priority.”
Bankrupt retailer and manufacturer attacks on allowance of administrative expenses under Section 503(b)(9) of the Bankruptcy Code are increasing in frequency, breadth and ingenuity. One recent case in which pervasive attacks have been launched on supplier 503(b)(9) requests is the Grede Foundries bankruptcy where the debtor has sought to disallow more than 99% of suppliers’ $5,100,000 in 503(b)(9) expense requests. The following table summarizes the 8 objections made to 503(b)(9) requests in the Grede Foundries bankruptcy.
December 22, 2009 Update: On December 21, 2009, Grede Foundries filed the affidavit of Eric W. Ek in support of the of the Debtor’s motion to authorize the sale of assets. The affidavit provides both additional background and updated information regarding the proposed Section 363 Sale to Wazata Opportunity Fund II, LLC, through its subsidiary, Iron Operating, LLC. The affidavit reveals that there was an alternative bidder at the auction.
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.”
The first day motion of Arclin US Holdings Inc. and its 6 co-debtor affiliates (“Arclin”) to pay “critical vendors” illustrates how dramatically the “critical vendor” concept can vary from industry to industry. The motion also illustrates how a “critical vendor” motion can be used by a debtor to extract post petition concessions from suppliers holding administrative expense claims under Section 503(b)(9). Finally, the case presents an interesting situation where a debtor argues in favor of inclusion of freight costs in 503(b)(9) claims.
Grede Foundries has filed 10 first day motions (3 procedural and 7 substantive). The 7 substantive motions are listed below. The one of special interest is item 6, which deals authorization of Grede to enter into accomodation agreements with customers. The presence of these agreements in an automotive supplier bankruptcy is a pretty good indication that there was a major supply disruption risk.
Grede has filed a 503(b)(9) procedural motion (which was not filed as a motion to be heard at the first day hearing) that seeks to preclude suppliers from filing 503(b)(9) motions and only permit the use of the general claims procedure. This motion affords suppliers no substantive relief in terms of accelerated payment of 503(b)(9) claims. The motion is actually anti-supplier. It seeks to postpone and procedurally restrict the exercise by suppliers of their rights under 503(b)(9).