Chrysler and Affiliates File for Bankruptcy Protection
Chrysler LLC and related affiliates (“Chrysler”) filed voluntary bankruptcy petitions on April 30, 2009, in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). Chrysler intends to continue to operate its businesses while in bankruptcy. Chrysler’s non-U.S. subsidiaries do not appear to be included in Chrysler’s U.S. bankruptcy filing and will continue to operate outside the supervision and jurisdiction of the Bankruptcy Court.
Although Chrysler’s filing is what is known as a “Pre-Packaged Bankruptcy,” in order to, among other things, force concessions upon certain recalcitrant bond-holders, it is unknown at this time what Chrysler’s intent is with respect to paying trade and other creditors.
Chrysler has filed numerous motions on the first day of the bankruptcy. A hearing will be held to obtain Court approval to continue to pay employees and to use cash to operate its businesses. According to documents filed with the Bankruptcy court, Chrysler has obtained debtor-in-possession financing from the U.S. Treasury in order to fund on-going operations. Chrysler hopes to quickly restructure based upon pre-bankruptcy agreements with various creditor constituencies and to emerge shortly from bankruptcy as a stronger company.
Supplier Considerations. While the overall impact of Chrysler’s recent bankruptcy filing is yet to be determined, as a supplier to Chrysler, there are ways in which your company can help protect itself now and in the future during this bankruptcy proceeding in order to increase the likelihood of being paid for both postpetition and pre-petition business. Some of the most important considerations and items for a supplier include:
- Automatic Stay: Upon the bankruptcy filing, an automatic stay was put in place by the Court. Subject to limited exceptions, the stay stops creditors from initiating or continuing collection efforts against Chrysler or its property to obtain payment on pre-petition debt (i.e., debt generated before April 29, 2009).
- Collecting on Amounts Due for Pre-Petition Debts: Once a debtor files its bankruptcy petition, an automatic stay is put in place by the Court which precludes creditors from taking certain types of actions against the debtor for pre-petition indebtedness and halts any lawsuits that have already been filed against the bankrupt company. From the bankruptcy filing date, all such claims against Chrysler must follow the rules established by the Bankruptcy Code and the Court and must generally be pursued in the bankruptcy proceeding.
- Getting Paid for Goods in Transit: If goods are currently in transit, you may want to stop their delivery in order to obtain critical vendor status (see below) or at least to get paid in advance for those goods. A supplier may, in certain instances, stop the shipment of goods sold to a customer on credit if the supplier learns the buyer is insolvent while the goods are still in transit. Therefore, it is important to review shipment receipts, bills of lading, and internal records to determine whether you currently have any shipments in transit to Chrysler.
- Reclamation Notice: Administration claims, when compared to general unsecured claims, are normally paid in full. By issuing a reclamation demand for goods shipped within 45 days before bankruptcy, you may be able to convert your unsecured claim for those goods to an administrative claim. A reclamation notice allows a supplier to recover unpaid merchandise that has been shipped to an insolvent buyer on credit. If the purchaser refuses to return the goods, you may be entitled to an administration claim. Timing is critical in the issuance of such a notice. In this situation, the bankruptcy code requires that Chrysler must have received the goods within the 45-day period prior to its bankruptcy filing. The Bankruptcy Code also requires that a supplier’s reclamation demand be issued within 45 days after the buyer received the goods or within 20 days of the bankruptcy filing, if the 45-day period has expired. A proper reclamation notice requires an adequate description of the goods to be returned. You should, therefore, review all invoices to Chrysler for goods shipped directly to it, but not yet paid for, as well as the date Chrysler actually received the goods. Steps should also be taken to calculate the exact amount presently owed under all outstanding invoices. Creating a summary of such items is an efficient way to help insure proper notice requirements are met. Finally, a reclamation notice which satisfies legal requirements should be issued.
- Credit Sales: A supplier selling to Chrysler on open account is not obligated to continue to do business with it and may choose to cease doing business with it or negotiate the terms under which it chooses to do so. You may be able to obtain improved payments terms such as cash in advance.
- Get Your Executory Contracts Assumed: If a supplier’s contract with Chrysler has material obligations that are still left to be performed at the time of the bankruptcy filing, Chrysler will be able to assume or reject the remainder of the contract with the supplier. If Chrysler chooses to assume the contract, the supplier is obligated to continue to perform its remaining obligations. The benefit to the supplier in this situation is that any pre-petition debt owed to Chrysler must be paid. However, if the debtor decides to reject the contract, the creditor does not have to continue to perform, but its claims for any pre-petition debt become unsecured and will not be paid except as determined by the bankruptcy court. An additional benefit of contract assumption is that preferential claims under the contract are barred. The assumption process can be lengthy, but a supplier can file a motion with the bankruptcy court requiring Chrysler to make a decision
- However, it is important to review the current status of all outstanding sales with Chrysler.
- Critical Vendor Status: If this status is obtained, in many instances, the debtor’s pre-petition receivables will be paid. This status is obtained by court order and indicates to the court that the supplier’s continued work with Chrysler is so vital that the supplier must be allowed to continue to perform work for, and be paid by, Chrysler. Critical vendor status may be difficult to obtain but we can help you determine if Chrysler is likely or willing to designate you as critical, and to negotiate with Chrysler.
- Negotiate Better Payment Terms: You may be able to negotiate improved payment terms for post-petition shipments such as cash in advance. That will depend on, among other things, the contracts you have with Chrysler.
- Repossess Collateral/Get Payment on Depreciation in Value of Collateral: If you have sold to Chrysler on a secured basis and if Chrysler refuses to pay you for its continued use of the collateral, you may be able to move the Bankruptcy Court to force Chrysler to pay you for its on-going use of the collateral or force Chrysler to return the collateral to you. However, before repossession can occur, the stay must be lifted, which is not a certainty, and the process to lift the stay can take considerable time.
- Getting Paid for Goods Shipped Within 20 Days of The Bankruptcy Filing: Under §503(b)(9), a creditor should be paid in full for goods received by Chrysler within 20 days of its bankruptcy filing. Make sure an appropriate 503(b)(9) claim or motion is filed timely to ensure payment.
- Proof of Claim: Make sure you file a timely proof of claim to preserve your right to a pro-rata share of any distribution to creditors from the bankruptcy estate. ?? Setoffs: Creditors with setoff rights are generally secured creditors. Make sure you preserve your setoff rights and properly assert them. Secured creditors receive increased priority in any distribution to creditors.
- You should review the impact of Chrysler’s bankruptcy filing on your business and organization as well as on Chrysler’s suppliers. To the extent you supply to another supplier to Chrysler, you should consider the impact to you of that other supplier’s potential bankruptcy and what steps you should take now to minimize your exposure.
- There may be a meeting of creditors which you can attend.
- Creditors can file a notice with the Court to receive documents filed in the case.
- You should review payments you received within 90 days of Chrysler’s bankruptcy filing to assess your exposure to preference claims.
Please keep in mind that the foregoing list does not necessarily include all of the rights and remedies your particular company may have under the Bankruptcy Code.