Strategies in Dealing with Financially Distressed Customers Before and After Chapter 11 Bankruptcy Friday, August 21, 2009 Presentation to the Japan Business Society of Detroit Gordon J. Toering, Partner Bankruptcy and Creditors’ Rights Practice Warner Norcross & Judd LLP

Introduction  Do you still need to understand U.S. bankruptcy laws?  GM, Chrysler bankruptcies over; major Tier 1’s in bankruptcy  But re-sourcing continues and supply base will be reduced “Car czar Ron Bloom says the President’s Task Force on the Auto Industry does not intend to bail out struggling parts producers, because the thinning of the supply base must be allowed to run its natural course.” (Wardsauto.com, August 5, 2009) Difficulty in obtaining credit for ramp up in production Your customers and suppliers continue to be at risk

Basic bankruptcy law for suppliers  Definitions  “Debtor” – bankrupt company  “Pre-petition” – pre-bankruptcy  “Post-petition” – post-bankruptcy  Two types of bankruptcy for companies:  Chapter 11 (reorganization)  Chapter 7 (liquidation)  Chapter 11 reorganizations  3 general types Traditional reorganization Bankruptcy sale (“363 sale”) Combination (sale of parts of the company, then reorganization)

Basic bankruptcy law for suppliers (Cont’d)  Priority of payment  Secured creditors  Priority creditors Includes suppliers extending post-petition credit No guarantee of payment for post-petition invoices  Unsecured creditors Typically paid small amounts

Basic bankruptcy law for suppliers (Cont’d)  Preferences  Any payments made by a debtor to a creditor within 90 days prior to the bankruptcy filing may be recoverable by the debtor or trustee in bankruptcy  There are numerous defenses to preference claims, such as new value, ordinary course of business, cash in advance or cash on delivery, or the creditor is fully secured  Point: In evaluating pre-bankruptcy strategy, preferences have to be taken into account

Basic bankruptcy law for suppliers (Cont’d)  If supplier is a party to an “executory contract” (like a long-term blanket PO):  Supplier has to continue to supply parts despite not being paid the pre-petition amounts owing  Debtor has ability to “reject” (terminate) contracts, and supplier only has pre-petition claim

Strategies for recoveries of pre-petition A/R for suppliers  20 day claims [Section 503(b)(9) claims]  Applies to goods delivered to debtor in the ordinary course of business within 20 days prior to the bankruptcy filing  Typically not required to be paid until end of bankruptcy, but debtors have ability to pay early  Reclamation claims  Applies to goods delivered within 45 days of the bankruptcy filing  Requires a written demand – typically done in the first day or two after the bankruptcy filing  Reclamation claims often are of limited or no value due to various defenses that the debtor has

Strategies for recoveries of pre-petition A/R for suppliers (Cont’d)  Critical vendors  Permits payment of up to 100% of pre-petition claim  Often need leverage  Leverage could consist of short term contracts, financial difficulty, etc.  363 bankruptcy sales  Contracts (including PO’s) can be “assumed” or “assumed and assigned”  If contracts are assumed or assumed and assigned, then “cure” amount has to be paid (pre-petition A/R)

Strategies for recoveries of pre-petition A/R for suppliers (Cont’d)  Importance of pre-bankruptcy strategy  Sections (“demand for adequate assurance of performance”) and of the UCC may allow shortening payment terms prior to bankruptcy  Section may also allow termination of contracts, which could increase leverage  Review contracts to determine what rights you may have, and whether there are ways to amend your contracts as a supplier or customer to your advantage before a customer or supplier files for bankruptcy  Review setoff rights  Know which legal entity you are doing business with

Recap of recent bankruptcies  Chrysler/GM: not typical bankruptcies because many suppliers were paid in full at the beginning of the case  Tier 1 bankruptcies: more typical, but still some suppliers being paid better than in normal auto supplier bankruptcies  Some debtors, after filing for Chapter 11, now pushing suppliers to extend credit rather than going to CIA/COD terms

Continued diligence as to customer base is necessary  Some customers lack financial ability to ramp up production  They may be resourced by other customers and then unable to pay suppliers  Evaluate list of top customers and monitor  Publicly traded companies - easy to monitor  Privately held - hard to monitor, but need to push But can agree to keep information confidential Or agree upon certain financial metrics that have to be satisfied If customer won't agree to provide financials, then may need to take action (requires legal action) D&B alerts can be useful

Continued diligence as to customer base is necessary (Cont’d)  For customers in bankruptcy  Critical vendors  20 day claims  Rights upon 363 sales - if don't assume, may not need to supply  Contractual review important (life of the program, annual PO), etc.

Diligence as to supply base  Monitor suppliers’ financial condition (same as above)  Contingency planning necessary (parts bank, second source, etc.)  Ability to get to tooling and equipment in possession of your supplier if they file Chapter 11  Surprises could mean paying lots of money while you resource, including price increases, accelerated payment of invoices, loans, etc.

Joint venture issues  If you are party to a JV with a company in bankruptcy, then special rules apply; the debtor may lose some of its rights in the JV, but prompt action may be required

Summary  Pre-bankruptcy planning is essential as to customer base  Pre-bankruptcy planning is also essential as to supply base