Patrick E. Mears and John T. Gregg on Customer Programs in an Automotive Supplier Chapter 11 Reorganization

In this Emerging Issues commentary, Patrick E. Mears and John T. Gregg discuss the importance of maintaining the goodwill and loyalty of customers by automobile suppliers, especially after filing for bankruptcy. Suppliers frequently implement and participate in a variety of customer programs to attract new customers and enhance the satisfaction of their current customers. They write:

Excerpt:

"Among these customer programs are ordinary course warranty obligations, where suppliers issue warranties related to the products and materials they produce. Suppliers also participate in certain of their customers' sharing or warranty recovery programs and/or are bound to abide by their customers' general terms and conditions, which set forth various warranty terms. Under the terms of their customers' general terms and conditions, suppliers usually remain liable for their warranty obligations for the period under applicable law, or where the customer offers a longer warranty to its end user, the point at which such longer warranty expires."

"Suppliers also frequently enter into separate warranty agreements with certain customers and participate in warranty reduction programs. Warranty reduction programs are incentive based systems designed to reduce a customer's warranty expenses, whereby the customer compares its warranty liabilities for parts supplied by the supplier for the previous six, eighteen and sometimes thirty months against the customer's present warranty liabilities for the same parts supplied by the supplier."

"In some instances, suppliers elected to participate in the Auto Supplier Support Program. The Support Program was a United States Treasury Department sponsored program that encourages Tier One suppliers to continue to supply automotive parts to certain customers by assuring that the suppliers will receive timely payment for the parts supplied to those customers. Under the terms of the support program, Chrysler and General Motors each formed a bankruptcy remote, special purpose vehicle as a subsidiary, to which Chrysler and General Motors made a capital contribution of up to five percent of their project size."

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Patrick E. Mears is a partner in the Grand Rapids, Michigan, office of Barnes & Thornburg LLP and chair of the firm's Finance, Insolvency and Restructuring Department. Mr. Mears concentrates his practice in insolvency, workouts and restructurings, commercial finance, securitizations, and creditors' rights. He represents financial institutions as individual creditors and as members of loan syndicates in matters throughout the country. He also represents debtors and creditors committees in bankruptcy cases and out-of-court workouts.

John T. Gregg is a partner in the Chicago and Grand Rapids, Michigan, offices of Barnes & Thornburg LLP. Mr. Gregg focuses on corporate restructuring, bankruptcy, and insolvency law. He has experience representing debtors, lenders, committees, trustees, asset purchasers, lessors, and other parties in interest in some of the country's largest and most complex restructuring matters.