Butzel Legal Corner - November 21, 2023
Butzel provides virtually every type of legal service required by automotive suppliers. We have counseled the leaders that transformed Michigan from the home of the Motor City into the epicenter of the global automotive industry it is today. Our work involves important matters across the world. The members of our Global Automotive Team are experienced—from connected cars and autonomous vehicles, product liability and recall and warranty matters, to supply chain management issues. We are profoundly involved in restructuring the industry, including its most significant acquisitions and divestitures, workouts and bankruptcies, technological developments and general commercial transactions.
Performance Under Fire – Chapter 7, Accommodation Agreements and Lessons Learned
Until November 8, 2023 when it abruptly shut its doors and filed a Chapter 7 liquidating bankruptcy, Unique Fabricating was a publicly-traded automotive supplier supplying specialized foam, rubber and plastic components directly and indirectly to General Motors, Stellantis and Rivian, as well as many Tier 1 and 2 suppliers. Unique’s public filings reveal that on March 23, 2023, the company’s lending group advised that it was in default under its credit agreement and that the lenders would no longer allow automatic advances under Unique’s line of credit. Unique was therefore faced with the prospect of an imminent shutdown of operations.
An imminent shutdown threatened Unique’s customers who operate on the just-in-time inventory system. Customers in the automotive industry generally do not maintain large inventories of parts, and instead rely on regular shipments from suppliers to maintain operations and to prevent shutdown of assembly lines. If shipments are interrupted, assembly lines rapidly shut down and lost profit and other costs rapidly exceed tens of thousands of dollars per minute of shutdown.
The automotive industry has developed a process for addressing the impact of financially-distressed customers on production. This is done through a series of agreements (collectively known as an Accommodation Agreement) which provide financial support for continued production in exchange for various rights in favor of the customers—all designed to prevent shutdown of assembly lines.
In March, when its lender threatened to cease advances, Unique, its lenders and at least eight customers entered into an Accommodation Agreement. The Accommodation Agreement was extended several times but expired on October 31, 2023.
After October 31, 2023, negotiations continued for an extended Accommodation Agreement, but on November 8—with less than one hour of notice—Unique Fabricating walked away from negotiations, told its employees to go home and filed a Chapter 7 Bankruptcy in the Bankruptcy Court for the District of Delaware. Despite the long restructuring process, Unique filed short-form bankruptcy schedules, without any details of its assets and liabilities.
Upon commencement of a Chapter 7, a trustee is appointed who is responsible for liquidating the debtor’s assets. In this case, that Trustee was David Carickhoff, an experienced attorney and Trustee. It happened that Mr. Carickhoff was moving from one law firm to another that week.
After his appointment, Mr. Carickhoff was inundated with customer requests for either continued production (as an operating Chapter 7 Trustee), possession of specialized equipment and tooling necessary for manufacturing automotive parts and requests for the purchase of inventory (finished goods, work in progress and dedicated raw materials).
Over Veteran’s Day weekend, without the information typically supplied by Chapter 7 Debtors, the Trustee rehired some critical employees, negotiated agreements to begin the turnover of tooling and filed a motion seeking approval for the sale of finished goods inventory, WIP and raw material, as well as specialized equipment. The Court approved the sale of inventory and equipment, and has approved stipulations for possession of tooling.
It has been an extraordinary performance under fire. Nevertheless, the Unique Fabricating case may still cause multiple industry shut-downs. There are several reasons:
- Unique did not include its Mexican or Canadian affiliates in its bankruptcy, and merely shut them down without anyone in charge of the facilities, and without any way to get out inventory and tooling except through proceedings in Mexican or Canadian Courts. In Mexico, particularly, resourcing parts usually requires payment of a share of the severance pay owed by the Debtor to its Mexican employees, the amount of which can be substantial.
- While a Chapter 7 Trustee is permitted to operate the business of the Debtor, the way that Unique filed bankruptcy exacerbated the already high risk and high cost of any operations, and the Trustee has elected not to produce parts. This means that there will be a gap in production as parts are resourced, which may cause shutdowns.
- Unique had many customers, and not all of them may be able to act quickly to resource production, nor is it clear what capacity exists in the market to absorb the sudden resourcing of many, many parts for many customers.
There are practical lessons to be learned from the Unique Fabricating case. These lessons include:
- While the Accommodation Agreement process has successfully managed dozens of supplier insolvencies over the years, the process is both expensive and imperfect. It has always been vulnerable to irrational decision-makers in the supply chain.
- Suppliers should ensure that their contracts with their sub-suppliers are preserved, up-to-date and clearly delineate ownership of tooling, rights to purchase parts and ability to resource in a crisis.
- Know your sub-suppliers. If there appears to be a tendency towards irrational behavior, or if the sub-supplier has a Board of Directors that is not deeply concerned with the automotive business, the risk of the sub-supplier interrupting production increases dramatically.
- When a supplier is in the supply chain with an insolvent supplier, it is worth a premium to (a) build a parts bank, (b) resource as soon as possible, and (c) where economically feasible, dual tool.
- Best of all, exit bad suppliers before they reach out to customers for financial accommodations.
- Finally, Butzel’s attorneys have world-class experience at managing supplier contracts, supplier disputes, resourcing and automotive-supplier insolvencies.
If you have questions, please contact your Butzel attorney or Max Newman, an experienced Butzel bankruptcy attorney and author of this article, at firstname.lastname@example.org or 248.258.2907.