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Once a coveted prize for Eastman Kodak Co. vendors, a contract to supply goods, services or materials to the former photo giant as it seeks court protection from creditors could be a double-edged sword.
"What I'm telling my clients is, 'If I were a supplier to Kodak now, I'd rather be under (non-contractual) terms than have a contract,'" Rochester bankruptcy lawyer Paul Groschadl said.
Groschadl, head of Woods Oviatt Gilman LLP's bankruptcy practice group, represents a dozen companies that have filed or plan to file claims as unsecured creditors in the Chapter 11 bankruptcy case Kodak filed Jan. 19.
Under the Bankruptcy Code, all debtors with existing contracts are required to hold to their terms, Groschadl said. But suppliers with contracts could be in a less favored position than suppliers not bound by a pre-existing agreement. Kodak can hold a supplier to terms calling for 90-day payment but could agree to pay a vendor without a contract in 30 or 60 days.
Suppliers that see their firms unfairly disadvantaged by a contract can get out of an agreement in only two ways, Groschadl said: petition the court for a lift-stay order voiding the contract, or get the debtor to reject the contract. Both involve court proceedings.
Despite Kodak's assurances, it is not clear how well any suppliers will be paid as the reorganization proceeds, he added.
"Kodak intends to pay you in full and under normal terms for goods and services you provide us after our Chapter 11 filing," said Kodak chairman and CEO Antonio Perez in a message to vendors posted on the day the company filed. "Payments for these post-petition obligations are given priority administrative status in reorganization proceedings, providing additional protection to you."
Implied but not explicitly explained by Perez is the flip side of that full-payment assurance: Creditors that supplied goods or services to Kodak before it filed might not be fully paid and in some cases could be made to return amounts Kodak paid before it filed.
Whether Kodak proposes to fully or partly pay pre-petition debts to other vendors will only be clear after it files a reorganization plan, an event the company has said could be a year away. Once filed, a plan would need to be voted on by creditors and approved by the court.
A wrinkle not mentioned in Perez's online statement: Kodak is asking the Bankruptcy Court for permission to create a two-tiered system in which it would fully pay a selected list of critical vendors but give shorter shrift to other, less critical suppliers.
In the critical-vendor motion, Kodak proposes to pay such suppliers, a group whose members it has not identified, up to 10 percent of what they are owed for pre-petition debts, with a $40 million cap on critical-vendor payouts.
In a similar first-day motion already approved by the court, it proposes to pay non-U.S. vendors up to $60 million. After being postponed last week, a hearing on the U.S. critical-vendor motion is slated for today.
If in a year a Kodak plan calling for partial payment of pre-petition debts is approved and the company eventually emerges from bankruptcy, unsecured creditors could be forced to return money the company paid to settle pre-petition accounts and get back only some of what they gave up.
Known as preferential payments, amounts paid by a debtor to settle accounts in the 90 days prior to its filing can be reclaimed and go into a pool to be split evenly among all unsecured creditors.
Payments made within the 90-day window are not recoverable if they are made in the normal course of business, Groschadl said.
If a supplier with 60-day terms is paid in 60 days or less, for example, the transaction would be completed in the normal course of business and the supplier would be able keep the money. A payment that came after 60 days would be seen by the Bankruptcy Court as outside the normal course of business and thus would be subject to recovery.
"It's kind of like pouring salt on a wound," Groschadl conceded. "But that's how it is."
The settling up among creditors generally comes at the end of a bankruptcy as the debtor or an agent it designates files Bankruptcy Court pleadings targeting companies alleged to have been preferentially paid. Even companies with a clear normal-course-of-business defense have to pay lawyers to represent them. Most companies targeted by such a claim end up settling, Groschadl said. Legal fees related to preferential payment disputes in big cases such as Kodak's can be astronomical.
Even the priority administrative status cited by Perez as protection for suppliers that sell to Kodak while its Chapter 11 case is in progress is less than an ironclad guarantee. It is good only as long as Kodak has the money to pay, Groschadl said. Companies that run out of cash while attempting a Chapter 11 workout are termed administratively insolvent. If creditors lose confidence in the debtor's ability to pull off a reorganization, they force the company to liquidate.
In big Chapter 11 bankruptcies, there is no assurance that the debtor will succeed, he said. A fair number of cases turn into liquidations. Circuit City Inc., for example, filed a Chapter 11 in 2008, promising to reorganize. Later it abruptly announced it was closing all its stores.
"It's a misconception that Chapter 11 cases are always filed as reorganizations," Groschadl said.
Many are filed as vehicles for a company to liquidate with filers knowing in advance that the end point is dissolution, he said.
Kodak, which in its initial Chapter 11 filing admitted being strapped for cash and declared assets $1.6 billion short of its $6.8 billion in liabilities, has given no indication that it intends to liquidate.
Still, Groschadl said, its announced plans-arranging a sale of its digital patent portfolio and borrowing up to $950 million in a debtor-in-possession facility arranged by Citigroup Inc.-do not necessarily inspire confidence.
An ad hoc committee of second lien creditors is similarly dubious of Kodak's ability to manage a turnaround. The committee, whose members include the Blackstone Group L.P.'s GSO Capital Partners L.P., D.E. Shaw & Co. and JPMorgan Chase & Co., filed papers last week asking the court to go slowly on Kodak's plea to borrow the $950 million. Manhattan Bankruptcy Judge Allan Gropper partially granted the financing request, allowing Kodak to borrow $650 million.
Among moves the lien holders question is Kodak's request to set up a critical-vendor roster and be granted "unfettered authority to spend up to $100 million ... without identifying which vendors are critical or providing a shred of evidence that any such payments are necessary."
Until Kodak, which has "burned through approximately $2 billion in cash, including losses exceeding $1 billion through the first three quarters of 2011," can show that it would not also burn through money it borrowed to keep operating, the court should deny its financing request, the lien holders committee maintained.
Unsecured trade creditors might also have cause to be wary, Groschadl said. While not entirely dismissive of Kodak's chances of success, "I wouldn't put money on it, either," he said.
2/3/12 (c) 2012 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email email@example.com.
Due to a typographical error, the rate at which Eastman Kodak Co. in a motion in its Chapter 11 bankruptcy proposes to pay a class of vendors was misstated in a Feb. 3 story. Kodak proposes to pay critical vendors up to 100 percent of what the vendors are owed for pre-petition debts.