Lear Corporation and related U.S., Canadian, and Cayman Island affiliates (“Lear”) filed voluntary bankruptcy petitions on July 7, 2009 in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”). Lear intends to continue to operate its businesses while in bankruptcy. Other than certain Lear related entities based in Canada and the Cayman Islands, Lear’s non-U.S. subsidiaries do not appear to be included in Lear’s U.S. bankruptcy filing and apparently will continue to operate outside the supervision and jurisdiction of the Bankruptcy Court.
Lear intends to conduct business throughout its bankruptcy proceedings and seeks to have the proceedings completed as quickly as possible. Lear has indicated that it hopes to quickly have its reorganization plan submitted to the Bankruptcy Court. Lear’s first day motions and filings are similar to other recent automotive bankruptcies and may follow many similar processes.
Rulings on Lear’s various first day motions will have an impact on its current suppliers and any outstanding contracts. For example, Lear may choose to appoint certain categories of suppliers as “critical” to the reorganization thereby increasing substantially that certain creditors will be paid in full. In addition, Lear may assume many supplier contracts thereby also providing possibly full relief to suppliers whose contracts are assumed (as well as a bar to preference claims). A hearing will be held today to obtain Court approval to continue to pay employees, to use cash to operate its businesses, and to make payments to certain suppliers.
Supplier Considerations. As a supplier/creditor to Lear, 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 post-petition and pre-petition business. Keeping the foregoing in mind, some of the most important considerations and items for a supplier to consider include:
- The 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 Lear or its property to obtain payment on prepetition debt (i.e., debt generated before July 7, 2009).
- Getting Paid for Goods in Transit: If goods are currently in transit, depending on the type of contract you have with Lear, 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 your contract, shipment receipts, bills of lading, and internal records to determine whether you currently have any shipments in transit to Lear and whether you have the legal right to stop goods in transit.
- 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 Lear 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 after the Petition Date. A proper reclamation notice requires an adequate description of the goods to be returned. You should, therefore, review all invoices to Lear for goods shipped directly to it, but not yet paid for, as well as the date Lear 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 Lear 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 Lear has mutual, material obligations that are still left to be performed, Lear will be able to assume or reject the remainder of the contract with the supplier. If Lear 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 Lear 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 sometimes be lengthy, but a supplier can file a motion with the bankruptcy court requiring Lear to make a decision, if Lear does not voluntarily make a decision earlier in the proceeding.
- Critical Vendor Status: If this status is obtained, in many instances, the debtor’s prepetition receivables will be paid. This status is obtained by court order and indicates to the court that the supplier’s continued work with Lear is so vital that the supplier must be allowed to continue to perform work for, and be paid by, Lear. It is possible that Lear, as part of its filing strategy, will elect to designate many categories of its suppliers as “critical.” However, if Lear fails to use that strategy, critical vendor status can be difficult to obtain but we can help you determine if Lear is likely or willing to designate you as critical, and to help you negotiate with Lear to increase your chances of obtaining such designation.
- 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 type of contracts you have with Lear.
- Repossess Collateral/Get Payment on Depreciation in Value of Collateral: If you have sold to Lear on a secured or some basis other than on open account and if Lear refuses to pay you for its continued use of the collateral or goods, you may be able to move the Bankruptcy Court to force Lear to pay you for its on-going use of the collateral or force Lear to return the collateral to you. Before repossession can occur, the stay must be lifted, which is not a certainty, and the process to lift the stay can take sometimes considerable effort.
- 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 Lear 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 Lear’s bankruptcy filing on your business and organization as well as on Lear’s suppliers. To the extent you supply to another supplier to Lear, 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 Lear’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.