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.
The Perishable Agricultural Commodities Act (“PACA”) provides federal statutory protection to vendors of fresh fruits and vegetables as the commodities pass through the “foodservice chain” from growers, to distributors and to retailers. PACA packs a real punch, and protects unpaid suppliers of produce by treating them as beneficiaries of a trust. Unpaid PACA vendors who “follow the rules” to maintain their status as trust beneficiaries, are given a first-priority, preemptive, floating trust interest in the commodities themselves, as well as the proceeds and receivables in the hands of those who have sold or disposed of them (“PACA Trust Benefits”).
During the three weeks following the date of its bankruptcy, Bashas’ has locked horns with its secured lender group (a consortium including Compass Bank, Wells Fargo and BankAmerica) on numerous matters – all substantive and all important for Bashas’ prospects. They finally have found an issue on which they agree – they all want to pay big dollars for restructuring advice.
Prior to filing its bankruptcy reorganization proceedings on July 12, 2009, Bashas’ announced its intention to close unprofitable stores. Bashas’ now has followed through and requested bankruptcy court authorization to reject fifteen store leases. Bashas’ election to reject these unexpired leases, coupled with the extent to which it rejects additional store leases, serves as a forward indicator on the direction of its reorganization and the extent of recovery by the unsecured trade creditors.
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 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.
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.
The Perishable Agricultural Commodities Act (“PACA”) and its sister statute “Packers and Stockyards Act (“PASA”) provide federal statutory lien protection to vendors of fresh foods and bulk meat. In the Bashas’ bankruptcy, pre-petition supplier claims covered by these two acts are substantial. Bashas’ estimates the combined claims will exceed $6.8 million — $4.2 million in pre-petition claims potentially subject to PACA and $2.6 million in pre-petition claims potentially subject to PASA . Bashas’ asked for blanket bankruptcy court approval to allow (but not require) the debtor to pay PASA and PACA claims. The pre-petition secured lenders have said “Not so fast”. Our first question: “Why are the pre-petition secured lenders concerned about this to begin with?”
Lear Corporation and co-debtor subsidiaries (“Lear”) have estimated that they collectively have 1,600 vendors with outstanding prepetition claims. Lear has identified 214 of these vendors as “critical vendors”. As part of its first day motions, Lear has requested an order from the Bankruptcy Court authorizing Lear to pay up to an aggregate of $50,100,000 ($25,050,000 pursuant to an interim order and up to an additional $25,050,000 pursuant to a final order) of prepetition claims held by these 214 “critical vendors.” In the Lear bankruptcies and in other bankruptcies where similar motions have been filed, suppliers (and their lenders and stakeholders) repeatedly are asking: “What is a ‘critical vendor’ and what are the chances of my company being one?”
DDJ Capital Management, LLC (“DDJ”) has thrown its money in front of the Grede Foundries fast track, 363 sale bankruptcy strategy. Grede Foundries planned a “fast-paced” section 363 sale to a new venture backed by the private equity fund Wayzata Opportunity Fund II, L.P. (“Wayzata”). DDJ has achieved a critical fist step in keeping the 363 sale from gaining momentum. DDJ has stepped in with DIP financing.