EXHIBIT 99.1
UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
In re: )
) Case No. 04-67597
INTERMET CORPORATION et al., ) Chapter 11
) (Jointly Administered)
)
Debtors. ) Honorable Marci B. McIvor
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DEBTORS' MOTION FOR AUTHORITY TO ASSUME
EXECUTORY CUSTOMER SUPPLY CONTRACTS
Intermet Corporation, and its affiliated debtors(1) (collectively, the
"Debtors" or "Intermet"), by and through their attorneys Foley & Lardner LLP and
Carson Fischer, PLC, hereby move for entry of an order authorizing the Debtors
to assume certain executory customer supply contracts with the customers
identified on Exhibit B hereto (the "Motion"). In support of this Motion, the
Debtors state as follows:
INTRODUCTION
1. The Debtors constitute one of the largest independent producers of
ductile iron, aluminum, magnesium and zinc castings in the world. Intermet also
provides machining and tooling services and products related to its casting
business, along with a range of other products and services for the automotive
and industrial markets. Intermet specializes in the design and manufacture of
highly engineered, cast automotive components for the global light truck,
passenger car, light vehicle and heavy-duty vehicle markets. For the fiscal year
ended December 31, 2003, Intermet had sales from continuing operations of
approximately $731 million.
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1 The Debtors are Intermet Corporation, Alexander City Casting
Company, Inc., Cast-Matic Corporation, Columbus Foundry, L.P., Diversified
Diemakers, Inc., Ganton Technologies, Inc., Intermet Holding Company, Intermet
Illinois, Inc., Intermet International, Inc., Intermet U.S. Holding, Inc.,
Ironton Iron, Inc., Lynchburg
2. Intermet directly and indirectly provides products and services to
every major North American automotive original equipment manufacturer ("OEM"),
several major European and Japanese OEMs, and several leading suppliers to the
OEMs (also known as "Tier 1" or "Tier 2" suppliers). Ten of the Debtors'
customers, listed on Exhibit B hereto, make up nearly 80% of the Debtors' North
American business and are considered major customers (the "Customers").
3. As part of their business of supplying their Customers, the Debtors
are parties to numerous pre-petition contracts with their Customers (the
"Contracts").
CUSTOMER SUPPLY CONTRACTS
4. The Contracts take many different forms, including purchase orders
(the "Purchase Orders"), releases and various other documents pursuant to which
Intermet supplies component parts to its Customers. Purchase Orders tend to
include various terms and conditions, such as pricing, but often lack any
reference to specific supply quantities. Instead, the Customer electronically
issues a schedule of releases on a weekly or monthly basis, that sets forth the
volumes for production (the "Releases").
5. Based upon these Releases, the Debtors schedule production,
manufacture and ship parts to their Customers. In some cases, a Purchase Order
will purport to be a requirements contract referencing a specific percentage of
requirements to be produced by Intermet. In most cases, regardless of the
existence and nature of a Purchase Order, the specific quantity ordered by the
Customer is specified by the issuance of Releases.
6. Some of the Contracts are for a definite duration with expiration
dates as early as December 31, 2004. Some of the Contracts are for a definite
duration, but automatically renew
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Foundry Company, Northern Castings Corporation, Sudbury, Inc., SUDM, Inc., Tool
Products, Inc., Wagner Castings Company, and Wagner Havana, Inc., as debtors and
debtors-in-possession.
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for an additional period unless notice of non-renewal is provided. Some of the
Contracts do not have a defined expiration or renewal date. In some cases, the
Customers have the right to terminate the Contract.
PROCEDURAL HISTORY AND CUSTOMER NEGOTIATIONS
7. In connection with these bankruptcy cases, the Debtors began the
lengthy process of reviewing all of their supply contracts in order to analyze
the benefits and burdens of each and to perform an assumption/rejection analysis
in accordance with 11 U.S.C. Section 365. Through this process, the Debtors
originally determined that, absent specific changes, certain of the Contracts
were burdensome to the Debtors' estate because the terms did not permit the
Debtors to generate sufficient profit and cash flow from their main business
source -- the manufacture and supply of component parts.
8. This determination was based, in large part on the fact that (a) the
price of raw materials, including scrap steel, one of Intermet's primary raw
materials, has risen substantially since Intermet began producing the component
parts under the existing Contracts, and such Contracts either did not allow, or
were inadequate or not timely in allowing, Intermet to pass such cost increases
through to such Customer, (b) in some cases, pricing for certain of the
component parts under certain Contracts was well below market and/or the cost to
produce such parts did not provide adequate profit margin, (c) the timing of
payments under certain Contracts was too slow, in light of the cash flow needs
of Intermet, and (d) certain Customers pursuant to certain of the Contracts have
required pricing give-backs or reductions for 2005, which were onerous to
Intermet under the circumstances.
9. Furthermore, given the Debtors' large losses, the Debtors were not
able to find a lender willing to provide debtor-in-possession financing absent a
commitment by the Debtors to obtain concessions from the Debtors' Customers on
renegotiated contract terms acceptable to the
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DIP lenders. In fact, the failure to obtain agreements with the Customers
comprising at least 75% of the Debtors' gross sales by December 31, 2004, in
form and substance satisfactory to the lenders, is a default under the Debtors'
DIP Credit Agreement, which default would limit funding and create an
acceleration of all indebtedness due thereunder 90 days after December 31,
2004.(2)
10. As a result of the Debtors' review of the Contracts and the terms
of their financing, the Debtors (1) began negotiations with their Customers to
modify the terms of the Contracts in such a way so as to relieve or extinguish
the burden on the estate, and (2) on November 17, 2004, filed a Motion for
Authority to Reject Executory Customer Supply Contracts (the "Rejection Motion")
with the Customers(3). Even after filing the Rejection Motion, the Debtors
continued the negotiations with their Customers in an effort to modify the
Contracts such that rejection would not be necessary.
11. Certain of the Customers joined together to object to the Motion
and on December 6, 2004 these Customers (the "Responding Customers") filed a
Response in Opposition to Debtors' Motion to Reject Customer Contracts (the
"Response"). This Court scheduled a hearing to consider the Rejection Motion and
the Response for December 20, 2004. Because the Debtors were engaged in such
productive discussions by such date and had achieved many agreements, in writing
or in principle, such hearing was adjourned in order to allow the Debtors and
the Customers to continue negotiations or finalize written agreements.
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2 In light of the fact that all agreements have been obtained and to
account for the DIP lenders need to review the same, the Debtors recently
secured an extension of this deadline to January 14, 2005. A motion has been
filed with the Court to approve this amendment to the DIP Credit Agreement.
3 All of the Customers on Exhibit B and Motorola Americas, Inc. The
Rejection Motion was withdrawn with Motorola Americas, Inc. ("Motorola") on
December 10, 2004 because the Debtors had already reached a written agreement
with Motorola. Because that agreement took the form of an amendment to the
applicable
4
12. The Debtors and the Customers have reached agreements to amend the
Contracts in a manner that is acceptable to the Debtors (the "Agreements").
These Agreements have taken the form of Amendments to the Contracts (the
Contracts as amended, the "Amended Contracts").
13. Substantially all of the Amended Contracts require assumption of
the Amended Contracts. Thus, the Debtors have filed this Motion to assume the
Amended Contracts. The Debtors intend to withdraw the Rejection Motion at such
time and to the extent that the assumption of the Amended Contracts is approved
by this Court.
THE AMENDED CUSTOMER SUPPLY CONTRACTS
14. The Amended Contracts are the product of arms length negotiations
and are beneficial to the estate. The Debtors believe that performance under the
Amended Contracts will enhance the Debtors' profitability and generate positive
cash flow.
15. While each of the Amended Contracts is different, many of Amended
Contracts include terms such as:
a. steel surcharge adjustments that, in the Debtors' business
judgment, more accurately reflect the Debtors' cost of
steel;(4)
b. Accelerated payment terms;
c. The prompt payment of outstanding accounts receivable;(5)
d. Waiver of cost reductions; and
e. Adjustments of part pricing.
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purchase orders, was executed in the ordinary course of business and did not
require assumption, the amended Motorola Contracts are not a part of this
Motion.
4 This term was included in all but one of the Amended Contracts which
already had an adequate steel surcharge arrangement.
5 Only one of the Amended Contracts holds the Customer to its original
payment terms and does not accelerate such terms.
5
16. Some uncommon terms found in some of the Amended Contracts are:
a. A release of possible antitrust violations;
b. Certain provisions providing relief from the automatic stay;
c. A reservation of the right to reject specific Purchase Orders
if certain conditions are not met; and
d. The stipulation to reject one specific Contract, without
damages for rejection, with the agreement by the Debtors to
continue production of the part subject to such contracts on
acceptable pricing terms for a period termination upon 30 days
prior written notice after April 30, 2005.
17. Due to the sensitive nature of the Amended Contracts, most contain
a confidentiality clause which prevents the Debtors from disclosing the terms to
other Customers or the public. Even if not included in the Amended Contract,
substantially all of the Customers requested confidentiality due to the
sensitivity of the pricing information contained in the Amended Contracts.
Concurrently herewith, the Debtors are filing a motion seeking authority to file
the Agreements under seal. Filing the Agreements under seal will allow the Court
to review the Agreements and analyze the specific modifications to the Contracts
for the purposes of this Motion. Furthermore, the Debtors have provided copies
of the Agreements to the retained professionals of the Unsecured Creditors'
Committee and the lenders with the agreement and understanding that they may
disseminate the information to members who have signed confidentiality
agreements.
18. The Debtors submit that the information supplied herein, and the
information available to the Committee and the lenders, provides interested
parties sufficient information to
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make an informed decision on the Debtors' Motion sufficient to meet the standard
for assumption under 11 U.S.C. Section 365.
19. The Debtors' request authority to assume the Amended Contracts
pursuant to 11 U.S.C. Section 365.
BASIS FOR RELIEF REQUESTED
20. Section 365(a) of the Bankruptcy Code provides authority for
assumption of Amended Contracts:
Except as provided in sections 765 and 766 of this title and in
subsections (b), (c) and (d) of this section, the trustee, subject
to the court's approval, may assume or reject any executory
contract or unexpired lease of the debtor.
11 U.S.C. Section 365(a); see also, In re Miller, 282 F.3d 874, 876 (6th Cir.
2001); City of Covington v. Covington Landing Ltd. Partnership, 71 F.3d 1221,
1226 (6th Cir. 1995).
21. The Debtors may assume the Amended Contracts if they are executory
contracts and if the Court approves the assumption. Bankruptcy Court approval is
conditioned upon a showing that the debtor is using appropriate business
judgment in assuming the contract. NLRB v. Bildisco & Bildisclo, 465 U.S. 513,
523 (1984); In re SIS Corp., 108 B.R. 608, 610 (Bankr. N.D. Ohio (1989)(the test
usually applied to a debtor's decision to assume an executory tooling contract
is the business judgment rule); Phar-Mor Inc. v. Strouss Bldg., 203 B.R. 948,
951-952 (Bankr. N.D. Ohio 1997).
EXECUTORY CONTRACTS.
22. The classic definition of an executory contract is that of
Professor Vern Countryman:
A contract [is executory if it is one] under which the obligations
of both the bankrupt and the other party to the contract are so far
unperformed that the failure of either to complete performance
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would constitute a material breach excusing the performance of the
other.
In re Jolly, 574 F.2d at 350-351 (quoting Countryman, Executory Contracts in
Bankruptcy: Part I, 57 Minn. L. Rev. 439, 460 (1973)).
23. The Court of Appeals for the Sixth Circuit approves of the
Countryman definition, but also employs a "functional approach" to this issue:
The key in deciphering the meaning of the executory contract
rejection provisions is to work backward, proceeding from an
examination of the purposes rejection is expected to accomplish. If
those objectives have already been accomplished, or if they can't
be accomplished through rejection, then the contract is not
executory within the meaning of the Bankruptcy Act.
In re Jolly, 574 F.2d at 351.
24. This "functional approach" gives a trustee with an executory
contract a choice of rejection or assumption, whichever would be of the greatest
benefit to the estate. Id. "The functional approach is a result-oriented
process, which looks first to the relative benefits and burdens to the estate of
assumption or rejection, and then reasons backward to a determination of the
executory nature of the contract in question." Huntington National Bank v. Alix
(In re Cardinal Industries), 146 B.R. 720, 728 (Bankr. S.D. Ohio 1992).
25. [I]n determining whether or not an agreement is executory, a
bankruptcy court, at least in this circuit, must consider the applicability of
both the functional approach and the Countryman definition." Cardinal
Industries, Inc., 146 B.R. at 729 n.7 (internal quotations and citations
omitted). See also, In re DMR Fin. Servs., 274 B.R. 465 (Bankr. E.D. Mich.
2002)(applying both the Countryman and functional tests.).
26. When application of the Countryman and functional tests leave the
Court in doubt, executory contracts may also be identified by reference to the
goals of 11 U.S.C. Section 365:
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(1) taking advantage of contracts which will benefit the estate; (2) relieving
the estate of burdensome contracts; (3) promoting the debtor's fresh start; (4)
permitting the allowance and determination of claims; and (5) preventing parties
from remaining "in doubt concerning their status vis-a-vis the estate."
Huntington National Bank Co. v. Alix (In re Cardinal Industries, Inc.), 146 B.R.
720 (Bankr. S.D. Ohio 1992)(citing In re Monument Record Corp., 61 B.R. 866, 868
(Bankr. M.D. Tenn. 1986); Chattanooga Memorial Park v. Still (In re Jolly), 574
F.2d 349 (6th Cir. 1978).
THE BUSINESS JUDGMENT STANDARD.
27. Debtors may assume or reject executory contracts in the exercise of
their sound business judgment. See e.g., Phar-Mor Inc. v. Strouss Bldg., 203
B.R. 948, 951-952 (Bankr. N.D. Ohio 1997)("Whether an executory contract is
`favorable' or `unfavorable' is left to the sound business judgment of the
debtor . . . Courts should generally defer to a debtor's decision whether to
reject an executory contract."); In re Federated Department Stores, Inc., 1990
Bankr. LEXIS 706, at *3 - *4 (Bankr. S.D. Ohio 1990)(the "business judgment rule
affords the debtor `wide latitude' in determining whether rejection will benefit
the estate . . . [T]he debtor's sound business judgment enjoys a presumption of
correctness unless it can be shown to be `manifestly unreasonable.'" (citations
omitted)).
28. By allowing debtors to retain favorable contracts through the power
of assumption, section 365(a) thus advances one of the Bankruptcy Code's central
purposes, the maximization of the value of the bankruptcy estate for the benefit
of creditors." Matter of Midway Airlines, Inc., 6 F.3d 492, 494 (7th Cir.
1993)(citing In re L & S Industries, Inc., 122 B.R. 987, 993 (Bankr. N.D. Ill.
1991), aff'd sub nom. Williams v. Stefan, 133 B.R. 119 (N.D. 1991) aff'd, 989
F.2d 929 (7th Cir. 1993)).
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DISCUSSION
THE AMENDED CONTRACTS ARE EXECUTORY.
29. Applying either the functional approach or the Countryman
Definition in these cases, the Amended Contracts are executory, and this Court
should authorize the Debtors' assumption of the Amended Contracts. Significant
performance obligations remain for both the Debtors and the Customers such that
failure to perform by either would constitute a material breach, satisfying the
Countryman definition. The Debtors are obligated to manufacture and supply
certain parts according to the terms and conditions of the Amended Contracts and
the Customers are obligated to purchase those parts. Clearly a material failure
to perform by either party would be a material breach of the Amended Contracts.
ASSUMPTION OF THE AMENDED CONTRACTS SATISFIES THE BUSINESS JUDGMENT STANDARD.
30. Assumption of the Amended Contracts will benefit the estate by
securing for the estate the benefits negotiated by the Debtors.
31. One of the reasons for the filing of these bankruptcy cases was the
inability of the Debtors to generate sufficient profit and cash flow with the
Contracts in the form they existed pre-petition. As part of the filing and their
reorganization, the Debtors analyzed the customer supply contracts to pinpoint
the problems and thereby determined that the pass through of steel costs,
pricing and payment terms were issues that needed to be corrected in order for
the Debtors to reorganize their business.
32. By negotiating new or modified terms that are memorialized in the
Amended Contracts, the Debtors believe that they have secured contracts with
their Customers that will provide benefit to the estate and provide the basis
for the Debtors' reorganization. In fact, the
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success of these negotiations and the modification of the Contracts was and
still is key to the Debtors' reorganization efforts.
33. The Debtors' extensive negotiations with the Customers resulted in
Amended Contracts which provide the Debtors with favorable terms for the sale of
their products. The steel surcharge adjustments are designed to allow the
Debtors to more fully capture the rising cost of steel for the life of the
Amended Contracts such that rising cost of steel does not erode the
profitability of the Amended Contracts.
34. The Debtors also secured, in some cases, pricing adjustments on
certain parts and a waiver of the Customers' scheduled price reductions for
2005.
35. These concessions were critical to the Debtors' ability to continue
producing under the Contracts with the Customers which make up approximately 80%
of the Debtors' business.
36. As long as assumption of a lease or executory contract appears to
enhance a debtor's estate, court approval of a debtor-in-possession's decision
to assume the lease or executory contracts should only be withheld if the
debtor's judgment is clearly erroneous, too speculative, or contrary to the
provisions of the Bankruptcy Code. See Richmond Leasing Co. v. Capital Bank,
N.A., 762 F.2d 1303 (5th Cir. 1985). Furthermore, the court should not withhold
approval of the debtor's assumption of a lease or executory contract that the
debtor determined to be in its best interests on the basis of second guessing
the debtor's judgment. Allied Technology, Inc. v. R.B. Bruenmann & Sons, Inc.,
(Matter of Allied Technology, Inc.), 25 B.R. 484, 495 (Bankr. S.D. Ohio 1982).
As set forth above, assumption of the Amended Contracts enhance the estate and
should be authorized by the Court.
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37. The fact that the Amended Contracts are the result of modifications
agreed to post-petition does not alter the analysis under Section 365 or change
the result. The facts of Richmond Leasing are similar to the facts in this case.
The debtor sought to assume a lease which was amended post-petition by agreement
of the parties to provide more favorable terms to the debtor. Richmond Leasing,
762 F.2d at 1310. The debtor's lenders objected arguing that the debtor was only
able to assume the lease as it existed as of the petition date and the debtor
could not be afforded any greater or lesser rights under Section 365. Id. The
Fifth Circuit Court of Appeals rejected this argument and held that because both
parties to the lease agreed to the amendment, Section 365 does not prohibit the
amendment. Id. Instead, Section 365 prevents parties from forcing new terms on
the other party to the other agreement. Id. Furthermore, the court held that
negotiations resulting in modifications of contracts fall outside the scope of
Section 365. Id. Instead Sections 1107 and 1108 authorize the debtor to operate
the business of the debtor. Id. In addition, there is no requirement under
Section 365 that assumed contracts be solely Prepetition contracts. Rather,
provided that the contract is executory, it may be assumed by the Debtor. The
debtor-in-possession, "subject to the court's approval, may assume or reject any
executory contract or unexpired lease of the debtor." 11 U.S.C. Section 365(a)
(2004).
38. As in Richmond Leasing, the Debtors' should be authorized to assume
the Amended Contracts because they will enhance the estate. Furthermore, all
parties to the Contracts agreed to the modifications as set forth in the
Agreements.
39. In their sound business judgment, the Debtors have determined that
the best interests of the bankruptcy estates and their creditors will be served
by the assumption of the Amended Contracts identified herein.
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NOTICE
40. Notice of this Motion has been or will be furnished to each of the
Customers listed on Exhibit B and in accordance with the Limited Notice
Procedures Order. The Debtors submit that given the nature of the relief
requested herein, no other or further notice is necessary.
WHEREFORE, the Debtors respectfully request that the Court enter an
order, substantially in the form attached hereto as Exhibit A, (i) authorizing
the Debtors' to assume the Amended Contracts identified on Exhibit B, and (ii)
granting such other and further relief as the Court may deem just and proper.
Respectfully submitted,
INTERMET CORPORATION, et al, as
Debtors-In-Possession
By: /s/ John A. Simon
--------------------------------
One of their Attorneys
Judy A. O'Neill (P32142)
William J. McKenna (Pro Hac Vice)
Laura J. Eisele (P42949)
Ann Marie Uetz (P48922)
John A. Simon (P61866)
FOLEY & LARDNER LLP
500 Woodward Avenue, Suite 2700
Detroit, MI 48226
313.234.7100
Attorneys for Debtors with
respect to Customers:
DaimlerChrysler Corporation, Ford
Motor Company, Honda of America
Manufacturing, Inc., (and its
affiliates Honda Manufacturing of
Alabama, LLC, Honda Canada and Honda
Transmission Manufacturing, Inc.), and
Visteon Corporation.
CARSON FISCHER, PLC
By: /s/ Lawrence A. Lichtman
---------------------------
Robert A. Weisberg (P26698)
Lawrence A. Lichtman (P35403)
300 E. Maple Road, 3rd Floor
Birmingham, MI 48009
13
248.644.4840
Attorneys for Debtors with
respect to Customers: General
Motors Corporation, American Axle
& Manufacturing, Inc., SMW
Automotive Corporation (and its
affiliate Automotive Corporation,
Inc.), Delphi Automotive
Systems, PBR International USA
Ltd. and Metaldyne Corporation
Dated: December 28, 2004
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UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
In re: )
) Case No. 04-67597
INTERMET CORPORATION et al.(1), ) Chapter 11
) (Jointly Administered)
)
Debtors. ) Honorable Marci B. McIvor
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ORDER PURSUANT TO 11 U.S.C. SECTION 365(A) AUTHORIZING THE
ASSUMPTION OF CERTAIN EXECUTORY
CUSTOMER SUPPLY CONTRACTS
This cause having come before the Court on the Motion of Intermet
Corporation, and its affiliated debtors (collectively, the "Debtors"), to Assume
Certain Customer Supply Contracts (the "Motion"), the Court having jurisdiction
over this matter; and it appearing that notice of the Motion has been provided
to the Customers(2) and in accordance with the Limited Notice Procedures Order
which the Court finds sufficient and that no other or further notice need be
provided; and it further appearing that the relief requested in the Motion is in
the best interests of the Debtors, their estates and creditors; and upon all of
the proceedings had before this Court; and after due deliberation and sufficient
cause appearing therefore, it is
IT IS HEREBY ORDERED THAT the Motion be, and hereby is, granted; and it
is further
ORDERED THAT the Debtors are authorized to assume the Amended Contracts
with the Customers identified in Exhibit B to the Motion pursuant to Section
365(a) of the Bankruptcy
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(1) The Debtors are Intermet Corporation, Alexander City Casting
Company, Inc., Cast-Matic Corporation, Columbus Foundry, L.P., Diversified
Diemakers, Inc., Ganton Technologies, Inc., Intermet Holding Company, Intermet
Illinois, Inc., Intermet International, Inc., Intermet U.S. Holding, Inc.,
Ironton Iron, Inc., Lynchburg Foundry Company, Northern Castings Corporation,
Sudbury, Inc., SUDM, Inc., Tool Products, Inc., Wagner Castings Company, and
Wagner Havana, Inc., as debtors and debtors-in-possession.
(2) Capitalized terms not otherwise defined shall have the definition
assigned to them in the Motion.
Code and the Amended Contracts are hereby approved including the
"uncommon terms" identified in paragraph 16 of the Motion; and it is further
ORDERED THAT such authorization to assume the Amended Contracts is
effective immediately.
Dated ___________________, 2004. ______________________________________
Marci B. McIvor
UNITED STATES BANKRUPTCY JUDGE
EXHIBIT B
CUSTOMERS
1. DaimlerChrysler Corporation
2. General Motors Corporation
3. American Axle & Manufacturing
4. Delphi Automotive Systems
5. Ford Motor Company
6. American Honda Motor Co., Inc. (and its affiliates Honda Manufacturing
of Alabama, LLC, Honda Canada and Honda Transmission Manufacturing, Inc.)
7. Metaldyne Corporation
8. Visteon Corporation
9. PBR International USA Ltd.
10. SMW Automotive Corporation (and its affiliate Automotive Corporation,
Inc.)