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.
The Grede Foundries Official Committee of Unsecured Creditors (the “Committee”) confirmed on September 17, 2009 what only had been implied in other filings and indicated by a few of the Debtor’s maneuvers over the past several weeks – the Debtor is planning to sell all or a substantial portion its operations under Section 363 of the Bankruptcy Code. In an objection to Debtor’s motion to engage an executive headhunter, the Committee’s counsel stated:
The Committee is informed and believes that the Debtors intend to sign a stalking horse asset purchase agreement and file a motion for approval of sale procedures before the end of September, and to have the stalking horse bidder and sale procedures approved by mid-October.
The Committee went on to state that DDJ Capital Management, LLC (“DDJ”), the spoiler of Wayzata Opportunity Fund II, L.P. 363 sale plans, was one of the “the serious potential stalking horse bidders… .”
The hearing of the Grede Foundries first day motions is now on its third continuance – July 1 to July 2, July 2 to July 6 and now July 6 to July 13. While it is unusual for a hearing on first day motions to be continued 3 times and extended for 13 days, we believe that this is understandable given the switch in direction of this bankruptcy when DDJ Capital Management, LLC (”DDJ”) jumped in front of the 363 sale strategy the Debtor had planned. In the meantime, certain other aspects of the case go forward.
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.
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).
Grede Foundries, Inc. (“Grede”) has filed a single debtor bankruptcy in the US Bankruptcy Court for the Western District of Wisconsin (Case No. 09-14337). Grede is one of the largest cast iron foundries in the United States. It produces ductile and gray iron and specialty metal parts for the automotive, heavy truck, off-highway, diesel engine and industrial markets.
Of the 20 largest claims of unsecured creditors, 16 claims are identified at trade debt.