Chapter 23: Treatment of Automotive Suppliers and Customers in Chapter 11 Cases

Patrick E. Mears & John T. Gregg

Barnes & Thornburg LLP, Grand Rapids, Michigan

Chapter 23 addresses legal issues that have come to the forefront in the context of the large number of recent chapter 11 cases involving Tier I and Tier II automobile suppliers and two automobile assemblers, General Motors Corporation and Chrysler LLC (referred to as "Original Equipment Manufacturers" or "OEMs").  Although the same provisions of the Bankruptcy Code apply to these debtors and debtors in other industries, there are many unique twists that arise in automotive insolvency cases that practitioners must understand in order to represent their clients competently. Chapter 23 will assist insolvency practitioners to solve these important legal issues in future cases commenced in the United States.    

A number of these unusual aspects arise from the automotive supply chain, where just-in-time inventory supply practices and long-term supply contracts predominate the relationships between buyers and sellers of automotive parts and components. Other special legal issues arise from the constant need for tooling in automotive production, including statutes adopted by a number of states that grant tool fabricators nonconsensual liens in tooling made and sold by them and the concept of PPAP (an acronym for "production part approval process") and its use as a trigger for payment to tooling vendors.  Many of these issues involve the treatment of executory, long-term supply contracts between nondebtor suppliers of goods to higher-tiered suppliers and OEMs that are debtors in possession in chapter 11 cases; these contracts are rife in and critical to the smooth operation of the automotive supply chain.  

In addition to these unique aspects of the automotive industry that impact the practice of law in this area, many novel issues arose from the chapter 11 cases of General Motors Corporation and Chrysler LLC that were commenced by these OEMs at the urging of the U.S. Department of Treasury in April and June 2009.  As a result of expedited sales of these OEMs' primary operating assets to acquisition vehicles under sections 363(b) and (k) of the Bankruptcy Code, the U.S. Department of Treasury and Export Development Canada were granted large equity stakes in the new entities that acquired these assets.  In addition, the Chrysler sale resulted in the entry of Fiat Group Automobiles, S.p.A., an Italian OEM, into the North American automobile market with the active encouragement of the United States government.  Because the structure of these sales determined in large part what classes of creditors would receive distributions in these chapter 11 cases, many creditors of General Motors and Chrysler as well as legal commentators have argued that the sales were merely disguised, sub rosa plans of reorganization that are impermissible under the Bankruptcy Code.  

The world financial crisis of 2008-2009 hastened the pace of many troubled automobile suppliers and OEMs to the bankruptcy courts in the United States.  This development, coupled with European OEMs and suppliers adjusting to a new global market with substantially reduced automobile sales, is causing a seismic shift in OEM market shares and the conscious reduction of manufacturing and assembly capacities in the North American and European markets.  There is no reason to expect that these developments have run their course; it is likely that there will be more insolvency cases commenced on both sides of the Atlantic Ocean in the years to come.  

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The Collier Guide to Chapter 11: Key Topics and Selected Industries is the latest addition to the Collier line of bankruptcy products from LexisNexis. Written by over 20 bankruptcy lawyers from leading firms, the Guide takes an in-depth look at the key topics involved in current chapter 11 practice and the special issues that arise in selected industries. It fills the gap between the Code-based coverage of Collier on Bankruptcy and the more general topical approach of the Collier Bankruptcy Practice Guide. Visit the LexisNexis Book Store to learn more.   

Collier Guide to Chapter 11 authors will be participating in a free CLE accredited webinar on Oct. 19, beginning at 2 pm ET. During the webinar, you will hear highlights from the new publication that will cover topics including issues affecting reorganizations for the retail industry, treatment of hospitals and health care businesses in Chapter 11 and Debtor-in-Possession (DIP) financing in the aftermath of the credit crisis.

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