Orange County | Los Angeles | New York | Delaware INSOLVENT CUSTOMERS, SUPPLIER PACTS AND THE ANTITRUST LAWS: TIPS FOR THE CREDIT TEAM TO MAXIMIZE TRANSPARENCY AND LEVERAGE PAYMENTS Scott Blakeley, Esq. SEB@BlakeleyLLP.com Ronald Clifford, Esq. Rclifford@blakeleyllp.com 18500 Von Karman Ave, 5th Floor Irvine, CA 92612 V. (949) 260-0611 | F. (949) 260-0613 www.BlakeleyLLP.com Orange County | Los Angeles | New York | Delaware

Industry Groups Unique forum for credit team to share customer account information, including delinquent accounts Supplier pact (SP): Suppliers act as team to leverage information and payments through a single voice Can achieve cost savings of one counsel representing the SP’s interest and possibly have the debtor pay costs

Reading the Risk Flags: Surprise Insolvency or Anticipated? Credit team’s mission to identify and evaluate credit risk Evaluate information traditional and modern sources Trade data from industry group members The customer’s payables team likely instructed to hold payment of supplier’s invoices to improve their cash flow Prompts supplier’s credit team to rescore the customer reflecting a higher credit risk and to evaluate a collection strategy

Traditional Information Sources

Social Media Sites for The Credit Team

The Dynamics of Insiders, Lenders and Personal Guaranties Small- and mid-sized customer: lender conditions financing on principals guarantying the financing Principal’s focus is on maximizing the company’s assets to ensure that the lender is paid in full and the guaranty is released May include principals ordering more inventory on terms from key suppliers if they perceive the lender is undersecured, and the inventory can be liquidated to pay down the lender.

Supplier Strategy with Insolvent Customer: Alone or Team Approach Decision based on a number of factors Whether the supplier’s claim is unique If not unique, whether have the resources to act alone Industry group members and suppliers often share the same priority, face a similar contingent lability, and their collection costs are comparable Can share costs Opportunities and risks of individual collection strategy vs. SP approach

Delinquent Account Decision Tree Delinquent Accounts Credit Hold Report to Industry Group Late Penalty Payment Termination of Contract UCC Protections Setoff/ Recoupment Customer Divorce

The Credit Team and the Antitrust Laws Flow Chart Sherman Act: (SA) Robinson-Patman: (RPA)

Supplier Pact and Antitrust Overlay Sherman Act Prohibits competitors, including industry group members, from agreeing to restrain trade Applies whether the customer is meeting its debts when due or is insolvent SP members cannot collectively agree to refuse to extend credit or fix credit terms

Supplier Pact and Holding POs Sherman Act does not prohibit an SP for the purpose of collecting a delinquent account An SP cannot have its members agree to refuse credit requested by the customer, even where the customer is delinquent and may be liquidating its assets The decision to extend credit is with each SP member, and they must act independently

Supplier Pacts: A Tool to Get Information and Strategy for Payment Unifying themes Threat of litigation by an SP may create leverage in a negotiation with the customer Members of an SP to limit collection costs by sharing May be able to leverage the trade debt as tool to get financial and payment information from debtor

Industry Group Bylaws Does not prevent group members from joining SP to attempt to collect a customer’s debt

Supplier Pact Bylaws Adopt bylaws that state the duties and restrictions on members Restrict members from discussing orders pending by the insolvent customer

Insolvent Customer Alternatives Customer’s Lenders’ Liquidation Alternatives Secured Creditor Sale Receivership Customer Out-of-Court Workout and Liquidation Choices Close Shop Negotiated Settlement with Suppliers Bulk Sale Assignment for the Benefit of Creditors In-Court Solvency Proceedings – Chapter 11 Supplier Pact Alternatives To work with Customers and Lenders Involuntary Bankruptcy Petition

Insolvent Customer Alternatives Close Shop Key suppliers may get notice of closing SP strategy recover from assets that remain SP may have difficulty getting information from the debtor and may conduct their own asset search

Insolvent Customer Alternatives Negotiated Settlement with Suppliers Customer unable to meet supplier debts when due, but tries to operate by shedding liabilities by agreement with its suppliers and creditors SP strategy Access to key financial and creditor information is necessary to make their own evaluation as to the merits of suppliers discounting their invoices. Evaluation of the information may lead the SP to propose an alternative payout.

Insolvent Customer Alternatives Bulk Sale Customer sells assets to a third party Subject to existing liens Seller’s suppliers must be notified of sale Because sale is not supervised, most states have repealed the bulk sale statute SP strategy May investigate whether the buyer of the assets complied with the Bulk Sale statue.

Insolvent Customer Alternatives Assignment for the Benefit of Creditors Customer elects a formal out-of-court liquidation where a third party, selected by the customer, takes title to the assets and liquidates them for the benefit of the creditors SP strategy If the assignee does not cooperate with the SP’s request for information, the SP may be forced to file an involuntary bankruptcy petition to ensure full financial disclosure is met.

Insolvent Customer Alternatives In-Court Insolvency Proceedings – Chapter 11 Customer elects a formal court insolvency proceeding Can be a sale of assets Bankruptcy Code mandates the debtor to make a number of financial disclosures SP strategy If a committee is not appointed or does not fairly represent the interest of suppliers, SP may create value for the supplier class.

The Customer’s Lender’s Choices Secured Creditor Sale Sale can be private or by public auction. Private sales generally are not advertised Often, the principals of the debtor or an entity affiliated with the principals of the debtor, are the purchasers at a private sale Sale must be conducted in a commercially reasonable manner, usually with at least 10 days’ notice SP strategy If the debtor and secured creditor do not cooperate with the SP’s request for information, the SP may be forced to file an involuntary bankruptcy petition to ensure full financial disclosure

The Customer’s Lender’s Choices Receivership Criteria for the Appointment of a Receiver Role of the Receiver Control over Receivership Property Sale of Assets SP strategy If the Receiver does not cooperate with the SP’s request for information, the SP may be forced to file an involuntary bankruptcy petition to ensure full financial disclosure.

The Takeaway with Supplier Pacts SP may create value for members on a number of fronts Access to financial information Payment as a result of trade leverage

The Involuntary Bankruptcy Petition The Petitioner's Due Diligence Eligibility to file: Claims subject to bona fide dispute Contingent claims Unsecured claims aggregate $10,000 The number of petitioning creditors The Standard: The debtor generally not paying its non-disputed debts as they come due Bad Faith filings