1. INSOLVENT CUSTOMERS, SUPPLIER PACTS AND THE ANTITRUST LAWS: TIPS FOR THE CREDIT TEAM TO MAXIMIZE TRANSPARENCY AND LEVERAGE PAYMENTS
Scott Blakeley, Esq.
Orange County | Los Angeles | New York
Ronald Clifford, Esq.
Orange County | Los Angeles | New York

2. 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

3. 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

4. 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

5. 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

6. 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

7. Traditional Information Sources

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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?

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