Adapted from a Crain's Detroit Business report by Ryan Beene
Detroit, Michigan -- Auto suppliers including Recticel North America Inc. have used the bankruptcy code to revamp at least 80 percent of its customer contracts, bucking the norm of most automotive bankruptcies seen this year.
Recticel says the contracts were unprofitable and undermined the viability of its business. The bankruptcy code provides an opportunity for bankrupt businesses to rewrite contracts to reflect the current market -- not the market that was projected two, three or four years ago.
But some customers have resisted, saying Recticel and others essentially are holding guns to their heads, forcing them to give the companies better terms in order to keep their own assembly lines, and those of their customers, running on time.
Recticel North America filed for Chapter 11 bankruptcy on 29 Oct.
The company's subsidiary that applies polyurethane coatings to vehicle interiors to make plastic mimic the appearance of leather, Recticel Interiors North America llc, moved to reject supply agreements with Inteva Products llc and Johnson Controls Inc. after trying for months to win price increases from the two customers outside of court.
In an interview the day the company filed for protection, Art Vartanian, managing director for both Recticel units in North America, told Crain's Detrit Business that the goal was to use the protection of the bankruptcy code as an opportunity to revamp the contracts.
"The hope is not to walk away from the business," he said.
Those contracts accounted for 80 percent of Recticel Interiors' revenue, but the company said it was haemorrhaging about $845 000 per month under the contracts after sales expectations proved too optimistic as the automotive market sank, according to the motion to reject the contracts filed in Recticel's bankruptcy case.
But JCI cried foul.
"The debtors do not truly intend to reject 80 percent of their contracts and sustain massive damage claims," JCI said in its objection filed with the court. "Instead, they have filed the rejection motion as a bad faith 'surprise' attack in an effort to create a hostage situation and obtain extra-contractual concessions from the customers."
In the objection, JCI's attorneys say that rejecting the contract, stopping the flow of parts in the process, would cause ramifications up and down the automotive supply chain.
Because suppliers generally rely on a single company for a specific part and those parts are delivered to assembly lines as needed, if any single part doesn't arrive, "JCI's production will cease within hours or days, sending ripples throughout the supply chain," the objection said.
"It's not the first time it's happened, but it is definitely not the normal procedure," said Max Neumann, a shareholder and Chapter 11 bankruptcy attorney at Detroit law firm Butzel Long.
"Normal procedure is that this is an absolute last resort, and that you negotiate with your customers first for the obvious reason that customers don't like having contracts imposed upon them, and it will negatively impact the future business relationship more seriously than a renegotiation will."
And in cases like those seen with Recticel, when a supplier puts a contract to a customer to be renegotiated under the protection, and approval, of the bankruptcy court, "essentially what they're offering is a forum for the buyer and the OEM to work out a commercially acceptable contract, and if the parties can't agree to that, it's a because they feel there is a better alternative," concluded William Wildern, ceo of turnaround and restructuring advisory firm Hydra Professional llc.