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 www.BlakeleyLLP.com Orange County | Los Angeles | New York Ronald Clifford, Esq. rclifford@BlakeleyLLP.com www.BlakeleyLLP.com Orange County | Los Angeles | New York

Growing Supplier Wariness and Vigilance and Its Effects Supplier concern for payment Suppliers trying to negotiate credit enhancements to offset risk Suppliers demand shorter terms and smaller credit lines

Industry Groups Unique forum for credit team to share account information, including delinquent accounts Member loyalty to industry group and vigilance to protect against customer insolvency

Industry Groups and Account Discussion Which May Lead to SP Coordination: What’s Allowed? PERMISSIBLE IMPERMISSIBLE Exchange historical factual information re credit Exchange reports re delinquent accounts and its information Discuss general industry trends and conditions Agree to refuse to ship or set terms Anything that interferes with independent judgment by the members

Supplier Pact (SP) Suppliers act as team to leverage information and payments through a single voice Can achieve cost savings of one counsel representing SP’s interest and demand 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 suppliers’ invoices to improve their cash flow Prompts credit team to rescore the customer reflecting a higher credit risk and to evaluate a collection strategy

Traditional Information Sources

The Dynamics of Insiders, Lenders and Personal Guaranties Small- and mid-sized customer: lender conditions financing on principals guarantying the financing-more of a psychological tool to use against the unsophisticated debtor 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 liquidated to pay lender

Supplier Strategy with Insolvent Customer: Alone or Team Approach SUPPLIER PACT Benefits Unique claim Negotiate repayment plan Race to the courthouse: first to the assets Risks Expense and resources to act alone Customer silence Preference risk Complaining about customer’s silence: defamation and libel Benefits Same priority Threat of an involuntary petition Share costs Stave off bky filing through a negotiated settlement Risks Antitrust concerns Share distribution with others Freerider

Supplier Acts Alone: Delinquent Account Decision Tree Termination of Contract Customer Responds Alternative Payment Form Repayment Agreement UCC Protections Setoff/ Recoupment Customer Divorce Late Penalty Payment Report to Industry Group Credit Hold Customer Ignores Arbitration/ Mediation Suit Preference Risk or Lien Avoidance if Individual Supplier Gets a Judgment

Antitrust Overlay for the Supplier Pact Sherman Act of 1890 Prohibits competitors, including industry group members, from agreeing to restrain trade Any kind of mutual understanding, written or oral, constitutes an agreement Any person who conspires to restrain trade may be guilty of felony Combination and/or conspiracy Applies whether the customer is meeting its debts when due or is insolvent

Creditors Acting Collectively to Deal with Delinquent Account: The Legal Authority Cement Mfrs.’ Protective Ass’n v. U.S. 268 U.S.588 (1925) Suppliers allowed to meet to share information United Airlines, Inc. v. U.S. Bank N.A., 406 F.3d 918 (2005) Creditors demanded return of 14 leased aircrafts unless debtor cured defaults and resumed rental payments Debtor believed creditors coordinated efforts to preserve collateral Holding: Creditors did not violate antitrust laws by collaborating on a collection strategy CompuCredit Holdings Corporation v. Akanthos Capital Management LLC, 916 F.Supp.2d 1326 (2011) Creditors acted collectively to force payment of notes Holding: Holder’s decision to act collectively to force issuer to pay above-market rates did not violate Sherman Act Antitrust laws do not prohibit cooperation among creditors to collect under competitively negotiated contracts-PFG/Hungry Howie’s

Creditors Acting Collectively to Deal with Delinquent Account: The Legal Authority Burtch v. Milberg Factors, Inc. 662 F.3d 212 (2011) Suppliers exchanged credit information and decided to stop extending credit Creditors filed suit alleging illegal price fixing and group boycott No factual details that make it any more likely that Defendants' parallel conduct was result of an unlawful agreement than the result of independent rational Holding: Mere exchange of future credit information not sufficient for per se price-fixing or group boycott Anderson News, LLC v. American Media, Inc., 123 F.Supp.3d 478 (2015) Publishers and distributors refused to accept a markup for goods from wholesaler Holding: Suppliers parallel acts, not counter to economic self-interest, is insufficient

Supplier Pact Antitrust Concerns: Chicken Suits 9/2/16: Putative class of direct purchasers files suit against major U.S. chicken suppliers alleging violation of the Sherman Act 8/4/17: Fieldale Farms agrees to pay $2.25 million to settle class claims On 1/30/18, Sysco and U.S. Foods filed a complaint against the major U.S. chicken suppliers Allegations Defendants illegally agreed to curtail the supply of chicken with each company keeping tabs on its rivals’ activity via an industry information service called Agri Stats Inc. Defendants illegally agreed to manipulate and inflate the Georgia Dock Index, a benchmark which had been maintained by the Georgia Department of Agriculture, and was based on price information supplied by chicken companies. In effect, plaintiffs allege that purchasers of broiler chickens were deprived of free and open competition

Antitrust Laws: SP Customer Negotiations vs. Collections Group Effort to Negotiate Sales Newspaper Industry Group, Google and Facebook News Media Alliance: Asks Congress to grant a temporary exception from the Sherman Act to allow collectively negotiation with Google and Facebook Book Publishers, Amazon and Apple Publishers allegedly joined forces and negotiate with Apple to fix price. Publishers allegedly tell Amazon to “take it or leave it” Department of Justice sues Apple and publishers for price fixing, and Judge finds conspiracy Publishers end agreements with Apple and allow retailers to set price Group Effort to Collect Delinquent Account Open invoices that are the basis of the delinquent account is competitively negotiated and therefore joining forces with other suppliers (who may be competitors) to collect on multiple independently negotiated contracts would not rise to the level of price fixing

Restrictions on Supplier Pact Members’ Speech: Antitrust and Defamation Considerations Prohibited SP Member Statements Where Customer Placing POs or Supplier Holding POs Agreement not to sell to customer Agreement not to extend terms Agreement not to provide extended terms/workout Agreement to advise suppliers who are not SP members to refuse to sell Defamation and Libel Complaining (possibly false statements) about customer’s silence as lever to get financial information and negotiate payment 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

Bylaws Industry group bylaws SP bylaws Does not prevent group members from joining SP to attempt to collect a customer’s debt SP bylaws Adopt bylaws that state duties and restrictions on members Restrict members from discussing orders pending by the insolvent customer Similar in nature to the bylaws of an unsecured creditors committee

Creation of the SP Facts to support forming SP Forming the SP Industry member delinquent accounts Customer not responding Industry rumors Departure of management and key employees Forming the SP Industry group members Debtor’s A/P list Credit application/supplier reference Membership to include other creditors, such as landlord, union or bondholders? Again similar in nature to an unsecured creditors committee with diverse constituencies expecting various outcomes requiring collaboration Retention of attorney and accountant Eligibility to serve Closing the SP Addressing the free rider issue

Duties of SP Members Investigating Assets, liabilities, and financial condition of debtor Operation of debtor’s business Desirability of continuation of the business Likely negotiations with secured lenders Consulting with debtor re administration Conflicts of interest Confidentiality of communications Fiduciary duty to non-SP members, including payment of claims Disputed, contingent or unliquidated claims

Attorney Advising the SP Compliance with the antitrust and bankruptcy laws Demands for information and payment Evaluation of avoidability of lender’s liens Evaluation of claims against insiders Prepare term sheet Negotiate preference release-will this hold up in the event a Chapter 11 is filed? Negotiate payment through carve out from lender’s collateral

Insolvent Customer Alternatives Supplier Pact Formation Supplier Involuntary Petition 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 Customer’s Lenders’ Liquidation Alternatives Secured Creditor Sale Receivership

Chapter 11 vs. Supplier Pact First and Second Day Motions (Pertinent to Vendor) Critical Vendor 503(b) (9) Motion Cash Collateral/DIP Financing Store Closing Program / Rejecting Real Estate Leases Creating Transparency through Financial Reporting: Bankruptcy Schedules, Statement of Financial Affairs and Monthly Operating Reports Chapter 11 Exit Strategy Proof of Claim Operating or Earn-Out Plan (Traditional Approach) Debt for Equity Swap §363 Asset Sale (Modern Approach)   -Bid Procedures -Assumption / Rejection of Supply Contracts Structured Dismissal Liquidating Plan Conversion to Chapter 7 CHAPTER 11 Supplier Pact Formation Meet with Lender Negotiate Payment with Debtor and Lender Monitor and Negotiate Payout over Time Meet with Debtor Review Debtor’s Financial Information, Including Insider Issues Review Lender’s Loan Documents Suppliers Involuntary Petition Debtor’s Liquidation Alternatives SUPPLIER PACT

Supplier Deal Term Sheet Parties to agreement: supplier pact, debtor, and debtor’s lender Information sharing Reconciliation of claim amounts-similar to liquidating trustee Payment amount Preference risk: source of payment Who is paid: supplier or supplier class Releases-be careful not to waive potential commercial tort causes of action or D&O liability Confidentiality agreement

Involuntary Bankruptcy: Suppliers’ Payment Maximization Tool Bankruptcy Code section 503(b)(9) grants goods suppliers a priority claim for goods received by debtor within 20 days prior to filing 503(b)(9)’s must be paid before a plan can be confirmed Debtor may load up on inventory on credit terms and then delay planned bankruptcy filing to limit 503(b)(9) claims In many Chapter 11’s, 503(b)(9) claims are the only claims paid of the supplier class Suppliers at risk of losing on 503(b)(9)’s can file an involuntary bankruptcy petition, which allows the 20 day look-back to start the day it is filed Petitioning creditors preference evaluation before filing

The Involuntary Bankruptcy Petition Petitioner's due diligence Eligibility to file: Claims subject to bona fide dispute Contingent claims Unsecured claims aggregate $15,325 Three or more petitioning creditors The standard: The debtor generally not paying its non-disputed debts as they come due Bad faith filings Who is responsible for professional fees in an involuntary proceeding?

Involuntary Petition Supplier Pact Formation Suppliers Involuntary Petition Contests Involuntary Petition Answers and Consents to Involuntary Petition Motion to Abstain Debtor’s Alternatives