PETER WALSH, Chief Judge, Bankruptcy
The above-captioned debtors and debtors in possession (collectively, the "Debtors") hereby move the Court (the "Motion") for entry of an order, under 11 U.S.C. § 105(a), authorizing provisional payment in the ordinary course of business of certain prepetition claims of essential trade creditors. In support of this Motion, the Debtors respectfully represent as follows.
The facts and circumstances supporting this Motion are set forth in the Affidavit of John Nils Hanson, President, Chief Executive Officer and Chief Operating Officer of Harnischfeger Industries, Inc., in Support of First Day Motions, filed contemporaneously herewith. The law supporting this Motion is summarized in this Motion and in the Memorandum of Law in Support of the Debtors' Motions for Orders, under 11 U.S.C. § 105, Authorizing the Debtors to Pay Certain Prepetition Claims, filed contemporaneously herewith.
Jurisdiction
1. This Court has jurisdiction over this Motion under 28 U.S.C. § 1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (O).
2. The statutory basis for the relief requested herein is section 105(a) of title 11 of the United States Code (the "Bankruptcy Code").
Background
3. On June 7, 1999 (the "Petition Date"), each of the Debtors filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. Contemporaneously herewith, the Debtors filed a motion seeking to procedurally consolidate their chapter 11 cases for administrative purposes only. The Debtors are operating their businesses and managing their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code.
Summary of Operations
4. Harnischfeger Industries, Inc. ("HII") is a global holding company that manages a group of global, strategically integrated businesses that are recognized leaders in the design, manufacture, marketing, distribution and service of capital machinery and equipment and aftermarket parts. HII, through its subsidiaries, manufactures and markets products classified into two industry segments: pulp and papermaking machinery and mining equipment. Together with its more than 200 direct and indirect subsidiaries, HII employs approximately 13,000 people throughout the world, more than half of which are employed in the United States. For its fiscal year ended October 31, 1998, HII generated consolidated net sales in the amount of $2.04 billion. For its fiscal year ended October 31, 1997, HII generated consolidated net sales in the amount of $2.7 billion.
5. HII and its subsidiaries are highly integrated and operate and report on a consolidated basis. The main domestic operating entities of the corporate enterprise as a whole maintain a centralized cash management system. The Debtors' 105 active foreign subsidiaries are also integrated significantly into the enterprise structure and operations, receiving credit support and loans from the Debtors for their operations and providing the Debtors with necessary products and services on the Debtors' large manufacturing projects — at times in roles akin to subcontractors. Foreign subsidiaries (especially those of Joy and Beloit) also often are sole-source or low-cost suppliers of critical components for the Debtors' machinery and equipment. In addition, these foreign subsidiaries are often the sole distributor and servicer of the Debtors' products, selling into the markets that afford the greatest opportunities for the company's growth.
6. HII's three primary subsidiaries, Beloit Corporation ("Beloit"), Harnischfeger Corporation ("Harnco" or "PH") and Joy Technologies Inc. ("Joy"), directly and indirectly own most of HII's other subsidiaries (including foreign). HII's pulp and papermaking machinery segment is comprised of Beloit, in which HII has an 80% equity interest, and Beloit's subsidiaries. Acquired by HII in 1986, Beloit is a leader in the design, manufacture, installation and servicing of pulp and papermaking machinery, mills, and related products used in the worldwide pulp and paper industries. One of only three major paper machine builders serving the industry worldwide, Beloit is the sole U.S.-based manufacturer. Beloit's machines produce an estimated 40% of the world's newsprint, writing and printing grade paper, tissue, towels and napkins. Beloit has the industry's largest installed equipment base with more than 1,200 machines. Beloit and its subsidiaries operate in an interdependent fashion on a global basis, with major manufacturing facilities in the United States, Canada, Brazil, the United Kingdom, Poland, France and Italy and sales and service offices located on every continent except Antarctica. In addition, Beloit is a party to licensing arrangements with several major foreign companies.
7. 1998 was a challenging year for Beloit, as the pulp and paper industry remained in its cyclical bottom. Deflated pulp and paper prices and the economic collapse across the Pacific Rim resulted in significantly reduced spending among pulp and paper producers worldwide. This reduced spending contributed to significant overcapacity among the worldwide pulp and papermaking machinery companies, leading to severe price competition and cost realignment programs. As a result, Beloit sales declined from $1.26 billion in 1997 to $829.8 million in 1998, along with a significant decline in margins. Furthermore, Beloit suffered cost overruns on certain contracts in Indonesia and settled certain other contract disputes resulting in $164.4 million of losses. Lastly, Beloit underwent significant cost reductions resulting in restructuring charges totaling $65 million during 1998. The decline in sales and resultant margins, the losses on contracts, and the restructuring charges together contributed to a decline in operating profit from $76.5 million in 1997 to a loss of $368.7 million in 1998.
8. HII's mining equipment segment is made up of two entities, Harnco for surface mining equipment and Joy for underground mining equipment. Harnco and its subsidiaries are the world's largest producers of electric mining shovels and significant producers of walking draglines, large rotary blasthole drills and dredge and dragline bucket products. Harnco's products are used in surface mines, quarries and earth moving operations in the digging and loading of overburden and of minerals and ores such as coal, copper, gold, iron ore, lead, zinc, bauxite, uranium, phosphate, stone, clay and others. Harnco has the world's most extensive installed base of excavating equipment for the surface mining of these minerals with more than 1,500 shovels, drills and draglines in service. Harnco is a party to several customer alliance agreements under which it supplies equipment, parts, repair services and other support to its customers. Lastly, Harnco is a large global distributor of mining-related parts and equipment manufactured by other U.S. based companies.
9. Acquired by HII in 1994, Joy and its subsidiaries are world leaders in the manufacture of underground mining equipment including continuous miners, haulage equipment, roof bolting equipment, longwall shearers, roof supports, armored face conveyors, and continuous haulage systems. This equipment is used for the underground extraction of coal (90% of sales) and other bedded materials (10% of sales). Joy products are not sold to the general construction industry and demand for them is not tied to cycles in that industry. Joy and its subsidiaries have significant operations in Australia, South Africa, the United Kingdom and the United States. Joy and its subsidiaries maintain an extensive network of sales, service and parts distribution centers strategically located in major underground mining regions throughout the world.
10. The current economic environment in the mining industry has adversely impacted the mining equipment segment's sales. As a result of lower prices and demand for copper, coal and other minerals, mining companies are shutting down some mines and downsizing operations to bring production more in line with expected demand and reducing spending to minimize cash needs. With the pricing of commodities mined being set by the market, mining companies are focused on scaling back expenditures on capital equipment and maintenance. As a result, consolidated net sales for the mining equipment segment for fiscal year 1998 were $1.21 billion, down 17% from the previous fiscal year. Operating income slid to $82 million, down 59% from 1997.
11. Results from the quarter ended April 30, 1999 reflect HII's continuing difficult market conditions. Consolidated net sales were up slightly to $488.1 million, compared to $477.8 million in the equivalent year-earlier period, but order bookings were off significantly at $412 million, compared to $505 million in the second quarter of 1998. Losses were made up of both operating losses and potential valuation reserves. The result for the period was a consolidated net loss by HII of $74.3 million.
Summary of Capital Structure
A. Revolving Credit Facility
12. Before the Petition Date, HII partially funded its and its subsidiaries' operations through a $500 million revolving credit facility established under a certain Revolving Credit Agreement, dated October 17, 1997 (the "Prepetition Credit Facility"), by and among HII, The Chase Manhattan Bank ("Chase") as administrative agent, Chase Securities, Inc. as advisor and arranger, First Chicago Capital Markets, Inc. as syndication agent, and Royal Bank of Canada ("RBC") as documentation agent, and certain financial institutions as lenders (together with RBC and Chase, the "Prepetition Lenders"). The Prepetition Credit Facility is unsecured and is fully drawn.
B. Other Liabilities
13. In addition to the Prepetition Credit Facility, HII also issued various debt securities, including (i) $75 million of 8.9% debentures issued on March 1, 1992, (ii) $75 million of 8.7% debentures issued on June 22, 1992, (iii) $150 million of 7.25% debentures issued on December 19, 1995, and (iv) $150 million of 6.875% debentures issued on February 25, 1997, all issued pursuant to an Indenture dated March 1, 1992, and supplemented on June 12, 1992.
14. In addition, (a) HII has issued $20 million in short-term money market notes and $75 million of senior notes through private placements, and (b) the Debtors presently are indebted under various industrial revenue bonds in an aggregate amount equal to approximately $32.6 million. HII, Beloit, Harnco and Joy have guaranteed, in the aggregate, approximately $369 million of their subsidiaries' obligations. Letters of credit issued on behalf of the Debtors and their subsidiaries aggregate approximately $263 million. The Debtors are also obligors under surety bonds issued in the aggregate amount of approximately $214 million.
The $369 million of guarantees cover, among other things, some of the Debtors' foreign subsidiaries' outstanding lines of credit, which aggregate approximately $196 million.
C. Accounts Receivable Purchase Agreements
15. Beloit and Standard Chartered Trade Services Corporation ("Standard Chartered") are parties to a Master Receivables Purchase Agreement, dated January 12, 1999, pursuant to which Beloit sells certain receivables on a revolving basis to Standard Chartered up to an aggregate amount of $30 million outstanding at any one time. As of the Petition Date, approximately $23 million was outstanding under this agreement.
16. HII, Beloit and Beloit Receivables Corporation ("BRC"), a non-debtor direct subsidiary of Beloit, are parties to a Receivables Sale and Contribution Agreement, dated as of February 26, 1999 (and later amended), pursuant to which Beloit sells certain receivables to BRC. HII, Beloit and BRC are parties to a Receivables Transfer and Servicing Agreement dated as of February 26, 1999 (and later amended), pursuant to which BRC sells its interest in these receivables to Chase up to an aggregate amount of approximately $25 million. As of the Petition Date, approximately $10 million was outstanding under this agreement.
17. Beloit is also party to a Receivables Purchase Agreement dated May 5, 1999, by which it agreed to factor certain receivables up to an aggregate amount of $10 million with Standard Chartered. As of the Petition Date, approximately $2.9 million was outstanding under this agreement.
18. Harnco, Joy, The Horsburgh Scott Company, American Alloy Corporation (collectively, the "Sellers"), HII and Harnischfeger Receivables Company ("HRC"), a non-debtor direct subsidiary of Harnco, are parties to a Receivables Sale and Contribution Agreement dated as of February 26, 1999 (and later amended), pursuant to which the Sellers sell certain receivables to HRC. Harnco, Joy, The Horsburgh Scott Company, American Alloy Corporation, HII and HRC are parties to a Receivables Transfer and Servicing Agreement dated as of February 26, 1999 (and later amended), pursuant to which HRC sells an interest in these receivables to Chase up to an aggregate amount of $35 million. As of the Petition Date, approximately $35 million was outstanding under this agreement.
D. Intercompany Tax Allocation Agreement
19. As of October 31, 1986, HII and its principal domestic subsidiaries are parties to an Intercompany Income Tax Allocation Agreement, which sets forth the obligations of HII and its subsidiaries with respect to their consolidated federal income tax return. Pursuant to the terms of the Intercompany Income Tax Allocation Agreement, HII charges each of the subsidiaries an amount reflecting an estimated tax that would be payable by such subsidiary if it were filing a separate tax return.
Prepetition Restructuring Activities
20. In an attempt to counteract market weaknesses affecting their business segments, the Debtors embarked on cost-cutting programs in 1998 involving all of their business segments with the intention of reducing costs by approximately $110 million and terminating approximately 3,100 employees. HII also sold its smallest business unit and executed a restructuring effort at Beloit to downsize plant capacity and to realign global manufacturing and engineering capabilities. In a further effort to avert a looming liquidity crisis, HII commenced negotiations with Chase, as administrative agent for the Prepetition Lenders under the Prepetition Credit Facility, in an attempt to negotiate a new credit facility. The Debtors also retained Chase Securities, Inc. to assist in pursuing other strategic alternatives.
21. The Debtors commenced these chapter 11 cases after it became apparent these efforts would be unable to timely and sufficiently address the Debtors' liquidity needs. The Debtors have sought postpetition debtor in possession financing to allow them to continue their operations in the ordinary course of business under chapter 11 of the Bankruptcy Code and to implement a restructuring plan that will preserve and maximize value for all parties in interest.
22. The Debtors have entered chapter 11 with the intention of (i) obtaining adequate liquidity through debtor in possession financing, (ii) stabilizing their business operations and (iii) continuing to examine their strategic alternatives, including, without limitation, the formulation of a stand-alone reorganization plan, and/or obtaining strategic or financial investments or pursuing other strategic alternatives. The Debtors believe that accomplishing the above in chapter 11 is in the best interest of all of their constituents, including shareholders, and intend that these chapter 11 proceedings will result in full value for creditors and value for shareholders.
Critical U.S. Suppliers
23. The Debtors purchase specialized equipment from certain U.S. vendors (collectively, the "U.S. Essential Trade Creditors"). If the Debtors lost the relationships with these U.S. Essential Trade Creditors, their ability to create future revenue would suffer.
24. For example, some U.S. Essential Trade Creditors are among only a handful of such suppliers in the world. In certain circumstances, neither Debtor nor any affiliates can produce the required goods. Other U.S. Essential Trade Creditors provide goods for a reduced cost. If the Debtors can benefit from future low costs, it may be prudent for the Debtors to pay the selected U.S. Essential Trade Creditors their prepetition claims, provided that such vendors sell their goods at a reduced cost going forward.
Foreign Sources and Operations
25. In addition, the Debtors purchase a significant amount of components, services and other supplies from foreign vendors (collectively, "Unaffiliated Foreign Creditors," and together with the U.S. Essential Trade Creditors, the "Unaffiliated Essential Trade Creditors"). In this Motion, the Debtors' outstanding obligations owed to Unaffiliated Foreign Creditors are referred to as the "Independent Foreign Obligations."
26. The Independent Foreign Obligations include, among other things, obligations owed to (i) governmental authorities, (ii) suppliers of raw materials, parts, finished components and services used in manufacturing various product offerings, (iii) utility companies, (iv) insurance companies, (v) foreign and domestic agents for foreign vendors, (vi) lessors, (vii) freight and shipping providers, and (viii) providers of professional and nonprofessional services. Many of the Debtors' foreign creditors produce parts and components that are essential for the Debtors' end products, and that are not available from any other source.
Relief Requested
27. The Debtors believe that the ability to continue purchasing raw materials, finished components and services around the globe is vital to the Debtors' operations. In order to (a) preserve the network of foreign suppliers which currently provides the Debtors with vital raw materials, finished components and services, (b) maintain the Debtors' overseas manufacturing infrastructure, and (c) maintain and enhance the Debtors' estates, the Debtors seek the entry of an Order pursuant to sections 105(a) and 363(b) of the Bankruptcy Code authorizing the payment of trade claims owed the Unaffiliated Essential Trade Creditors, up to the proposed capped dollar amount. If this Motion is granted, the Debtors will establish internal controls to ensure that the proposed capped amounts are not exceeded.
28. Significantly, in the proposed debtor in possession financing, approximately $34 million is allocated to pay prepetition trade claims of Unaffiliated Essential Trade Creditors.
29. The Debtors will only pay the trade claims of the Unaffiliated Essential Trade Creditors (up to the Unaffiliated Cap defined below) where the Debtors believe, in their business judgment, that the benefits to their estates and creditors from making such payments would exceed the costs they may incur if such payments were not made.
A. Unaffiliated Trade Creditors 1. Proposed Conditions to Receiving Payment
30. In order for the Debtors to maintain their operations, and thus remain competitive in the marketplace, certain critical prepetition obligations must be paid to certain creditors. By this Motion, and pursuant to sections 363 and 105 of the Bankruptcy Code and the "necessity of payment" doctrine, the Debtors seek limited discretionary authority to pay certain prepetition trade claims (the "Trade Claims") of the Unaffiliated Essential Trade Creditors, up to an aggregate amount of $34 million (the "Unaffiliated Cap"). The Unaffiliated Cap represents approximately 1.4938% of the Debtors' estimate of aggregate prepetition claims (which total approximately $2.276 billion, excluding intercompany claims). The Debtors reserve the right to later seek Court authority to increase the Unaffiliated Cap.
31. Due to the Debtors' size and complex organizational structure, the Debtors request authority to determine the identity of Unaffiliated Essential Trade Creditors postpetition. When determining postpetition whether a creditor is an Unaffiliated Essential Trade Creditor, the Debtors will consider, among other things, (a) whether the goods or services the creditor provides can be replaced, (b) whether failure to pay prepetition trade claims will require the Debtors to incur higher costs for goods or services postpetition, and (c) whether failure to pay prepetition trade claims will cause the Debtors to lose sales or future revenue.
32. The Debtors propose to pay the Trade Claims of each Unaffiliated Essential Trade Creditor that agrees to continue to supply goods or services to the Debtors on such Unaffiliated Essential Trade Creditor's Customary Trade Terms. If, however, such Unaffiliated Essential Trade Creditor later refuses to continue to supply goods to the Debtors on Customary Trade Terms during the pendency of these chapter 11 cases, then on motion by any party in interest, and with the Court's approval: (i) any payment of a Trade Claim made by the Debtors under the Order granting this Motion shall be deemed to be a postpetition advance that the Debtors may recover from such Unaffiliated Essential Trade Creditor in cash or in goods and (ii) upon any such recovery by the Debtors, the Trade Claim of such Unaffiliated Essential Trade Creditor paid after the Petition Date shall be reinstated in the amount so recovered.
As used herein, "Customary Trade Terms" means, with respect to a Unaffiliated Essential Trade Creditor, the trade terms and practices (including allowances) in effect between such Unaffiliated Essential Trade Creditor and the relevant Debtor as of the Petition Date, or (b) such other trade terms as agreed by the relevant Debtor and such Unaffiliated Essential Trade Creditor.
33. To ensure that Unaffiliated Essential Trade Creditors deal with the Debtors on Customary Trade Terms, the Debtors propose: (a) that a letter substantially in the form of the letter attached as Exhibit A be sent to the Unaffiliated Essential Trade Creditors along with a copy of the Order granting the Motion; (and Exhibit A shall constitute a "Trade Agreement" as used in the proposed Order attached hereto) and (b) that the check used to pay the holder of Trade Claim of an Unaffiliated Essential Trade Creditor contain a legend substantially in the following form:
By accepting this check, the payee agrees to the terms of the Order of the U.S. Bankruptcy Court for the District of Delaware, dated ____, 1999, in the Company's chapter 11 case (Case No. ____), entitled "Order Authorizing Payment of the Prepetition Claims of Essential Trade Creditors" and submits to the jurisdiction of that Court for enforcement thereof.
34. The Debtors reserve their right to obtain written acknowledgment of the Customary Trade Terms of an Unaffiliated Essential Trade Creditor before paying such creditor's Trade Claim, which written acknowledgment is substantially in the form of Exhibit B. If the Debtors request such acknowledgment, they may rely upon a confirming memorandum setting forth the Customary Trade Terms, whether received by telefax, telex, telegram, express mail, or by other customary modes of delivery. The Debtors also reserve their right to contest any invoice of an Unaffiliated Essential Trade Creditor under applicable non-bankruptcy law.
35. In the aggregate, payments to Unaffiliated Essential Trade Creditors shall not exceed the Unaffiliated Cap, unless otherwise ordered by the Court. The Debtors shall maintain a matrix summarizing for the period after the Petition Date (a) the name of each Unaffiliated Essential Trade Creditor paid on account of Trade Claims, (b) the amount paid to each Unaffiliated Essential Trade Creditor on account of Trade Claims, and (c) the goods or services provided by such Unaffiliated Essential Trade Creditor. 2. Payment of Prepetition Trade Claims Owed to Unaffiliated Essential Trade Creditors is Crucial to the Debtors' Reorganization
36. The Debtors believe that payment of Trade Claims owed to Unaffiliated Essential Trade Creditors is a key to a successful reorganization. If this Motion is not granted, Unaffiliated Essential Trade Creditors will have no incentive to continue to finance the Debtors on customary trade terms. Indeed, some Unaffiliated Essential Trade Creditors that suspected that the Debtors were contemplating filing bankruptcy petitions have gone so far as to require the Debtors to pay for their goods on a cash-in-advance or cash-on-delivery basis. Any further expansion of these activities by other Unaffiliated Essential Trade Creditors would be detrimental to the Debtors, their estates and their creditors.
37. The continued availability of trade credit in amounts and on terms consistent with those that the Debtors enjoyed prepetition is necessary for the Debtors to maintain liquidity for operations and continued high levels of operating profitability. The Debtors believe that preserving working capital through the retention or reinstatement of traditional trade credit terms will enable the Debtors to maintain their competitiveness and to maximize the value of their business. Conversely, a deterioration of trade credit and a disruption or cancellation of deliveries of goods would hinder the Debtors' operations and severely undermine their ability to reorganize. Additionally, the relief requested herein also may help to avert the institution of countless reclamation claims, suits and motions. Avoiding the time and expense of evaluating and litigating such claims will benefit the Debtors, their estates and their creditors.
38. Simply put, failure to pay prepetition Trade Claims owed to Unaffiliated Essential Trade Creditors would damage the Debtors, their estates, their creditors and other parties in interest. The Debtors would lose an inexpensive and existing source of financing. Indeed, failure to pay prepetition Trade Claims may result in Unaffiliated Essential Trade Creditors ceasing to do business with the Debtors. Either of these occurrences could prolong the Debtors' chapter 11 cases and undermine their reorganization.
B. Authority (1) The Court May Rely on its General Equitable Powers to Grant the Motion
39. The Court's general equitable powers are codified in section 105(a) of the Bankruptcy Code. Section 105(a) empowers the Court to "issue any order, process, or judgment that is necessary to carry out the provisions of this title." 11 U.S.C. § 105(a), a bankruptcy court's use of its equitable powers to "authorize the payment of prepetition debt when such payment is needed to facilitate the rehabilitation of the debtor is not a novel concept." In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989) (citing NLRB v. Bildisco Bildisco, 465 U.S. 513, 528 (1984)). Under section 105(a), a court "can permit pre-plan payment of a prepetition obligation when essential to the continued operation of the debtor." In re NVR L.P., 147 B.R. 126, 127 (Bankr. E.D. Va. 1992). The Debtors strongly believe the continuation of favorable trade terms and credit are imperative to the Debtors' reorganization, that the payment of the prepetition Trade Claims of Unaffiliated Essential Trade Creditors is essential to assure such a result and that the Court may exercise its equitable powers to grant the relief requested in this Motion.
(2) The Court May Rely on the "Necessity of Payment" Doctrine to Grant the Relief Requested Herein
40. The "necessity of payment" doctrine further supports the relief requested in this motion. The "necessity of payment" doctrine "recognizes the existence of the judicial power to authorize a debtor in a reorganization case to pay prepetition claims where such payment is essential to the continued operation of the debtor." Ionosphere Clubs, 98 B.R. at 176; In re Chateaugay Corp., 80 B.R. 279 (S.D.N.Y. 1987); In re Columbia Gas System, Inc., 171 B.R. 189 (Bankr. D. Del. 1994) (internal citations omitted). This doctrine is consistent with the paramount goal of chapter 11, i.e., "facilitating the continued operation and rehabilitation of the debtor." Ionosphere Clubs, 98 B.R. at 176.
41. It is not uncommon for courts to authorize payments to vital suppliers and trade creditors. See, e.g., In re Penn Traffic Company, et al., Case No, 99-462 (PJW) (Bankr. D. Del. March 1, 1999) (critical vendor payments); In re Discovery Zone, Inc. et al., Case No. 99-941 (JJF) (D. Del. April 21, 1999) (critical vendor payments); In re Acme Steel Company, et al., Case No. 98-2179 (MFW) (Bankr. D. Del. Sept. 29, 1998) (critical vendor payments); In re WSR Corporation, et al., Case No. 92-1241 (MFW) (Bankr. D. Del. June 10, 1998) (critical vendor payments); In re FF Holdings Corp. And Farm Fresh, Inc., Case Nos. 98-37 and 98-38 (JJF) (D. Del. Jan. 7, 1998) critical vendor payments); In re Allis-Chalmers Corp., No. 87 B 11225 (Bankr. W.D. Pa. Aug. 24, 1987) (court authorizes debtor to pay prepetition warranty claims); In re Wilson Foods Corp., No. 83-01034A (Bankr. W.D. Okla. 1983) (debtor authorized to spend, in its discretion, a sum not to exceed $5 million in the aggregate to pay essential pre-chapter 11 obligations); see also Dudley v. Mealey, 147 F.2d 268, 271 (2d Cir.), cert. denied, 325 U.S. 813 (1945) ("Let it [the debtor] once be shut down, and it will lose much of its value. . . . Some priority [to the debtor's prepetition suppliers] may be essential to preservation of the business.").
(3) Authority to Pay Trade Claims of Unaffiliated Foreign Creditors
42. Absent relief sought herein, there will be a severe disruption of the normal business operations by the Debtors. As noted above, foreign vendors provide parts and components essential for the Debtors' enterprise as a whole that, in many cases, are not available from any other source. Many, if not all, Unaffiliated Foreign Creditors whose claims will not be satisfied from the outstanding letters of credit may refuse to deliver goods ordered before the Petition Date and to engage in any further business with the Debtors unless the Independent Foreign Obligations are satisfied. Further, it is unlikely that the Unaffiliated Foreign Creditors will forbear collection of their prepetition claims against the Debtors and their foreign subsidiaries and instead may seize or impound assets within their respective jurisdictions. Moreover, such Unaffiliated Foreign Creditors may also invoke civil or criminal penalties against the employees or agents of the Debtors or of their foreign direct and indirect subsidiaries.
43. While the automatic stay may technically prohibit such actions, any relief sought or obtained through the Bankruptcy Court would not be enforceable against the Debtors' foreign creditors, particularly those with infrequent contacts with the United States. See, e.g., In re Vessel Charters, Inc., Index No. 190-15899-260 (E.D.N.Y. Jan. 10, 1991); In re Pan Am Corp., Index No. 91B 10080-10087 (S.D.N.Y. Jan. 8, 1991); Ace Pecan Co. v. Granadex Int'l, Ltd. (In re Ace Pecan Co.), 143 B.R. 696 (Bankr. S.D.N.Y. 1992).
44. Authority to pay the Unaffiliated Trade Creditors (up to the Unaffiliated Cap) in the ordinary course of the Debtors' business is in the best interest of the Debtors' estates and creditors. Absent such payment, the value of the Debtors' estates is likely to suffer drastic diminution.
Notice
45. Notice of this Motion has been given to (i) the United States Trustee and (ii) counsel to the proposed debtor in possession lenders. In light of the nature of the relief requested, the Debtors submit that no further notice is required.
No Prior Request
46. No prior Motion for the relief requested herein has been made to this or any other Court.
WHEREFORE, the Debtors respectfully request that the Court enter an Order, substantially in the form attached hereto, (i) authorizing, but not directing, the Debtors to pay prepetition claims of Unaffiliated Essential Trade Creditors, and (ii) granting such other and further relief as the Court deems appropriate.
EXHIBIT a [APPROPRIATE DEBTOR LETTERHEAD] ____, 1999
TO: [Unaffiliated Essential Trade Creditor] [Name] [Address]
Dear Valued Supplier:
As you are no doubt aware, on ____, 1999 (the "Petition Date"), Harnischfeger Industries, Inc., together with certain of its affiliates (collectively, the "Debtors"), filed voluntary petitions under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Cases" and the "Bankruptcy Court," respectively). On the Petition Date, we requested the Bankruptcy Court's authority to pay certain suppliers in recognition of the importance of our relationship with such suppliers, and our desire that the Debtors' Bankruptcy Cases have as little effect on certain suppliers as possible. On ____, 1999, the Bankruptcy Court entered an order (the "Order") authorizing us, under certain conditions, to pay prepetition claims of certain trade creditors that agree to the terms set forth below and to be bound by the terms of the Order. a copy of the Order is enclosed.
Harnischfeger Industries, Inc., American Alloy Company, American Longwall Face Conveyors, Inc., American Longwall, Inc., American Longwall Rebuild, Inc., American Longwall Roof Supports, Inc., Beloit Corporation, Beloit Pulping Group, Inc., Beloit Technologies, Inc., Benefit, Inc., BWRC Dutch Holdings, Inc., BWRC, Inc., Dobson Park Industries, Inc., Field Repair Services LLC, Fitchburg Corporation, Harnischfeger Corporation a/k/a PH Mining and a/k/a Harnco, Harnischfeger Technologies, Inc., Harnischfeger World Services Corporation, HCHC, Inc., HCHC UK Holdings, Inc., HIHC, Inc., The Horsburgh Scott Company, Joy MM Delaware, Inc., Joy Technologies Inc., Joy Technologies Delaware, Inc., JTI UK Holdings, Inc., Optical Alignment Systems and Inspection Services, Inc., Princeton Paper Company LLC a/k/a Fitchburg, RCHH, Inc., South Shore Corporation, and South Shore Development LLC.
In order to receive payment on prepetition claims, each selected trade creditor must agree to continue to supply goods to the Debtors based on "Customary Trade Terms." In the Order, Customary Trade Terms are defined as the normal and customary trade terms, practices and programs (including, but not limited to, credit limits, pricing, cash discounts, timing of payments, allowances, rebates, coupon reconciliation, normal product mix and availability and other applicable terms and programs) in effect between such trade creditor and the Debtors on a historical basis for the period immediately prior and up to the Petition Date or such other trade terms, practices and programs that are at least as favorable as those that were in effect during such time.
For purposes of administration of this trade program as authorized by the Bankruptcy Court, the Debtors and you agree as follows:
1. The estimated balance of the prepetition trade claim (net of any setoffs, credits or discounts) (the "Trade Claim") that the Debtors will provisionally pay you is $____.
2. You will provide open credit terms as follows (if more space is required, attach continuation pages)
3. The open trade balance or credit line that you will extend to the Debtors for shipment of postpetition goods is $ ____ (which shall not be less than the greater of the open trade balance outstanding: (a) on ____, 1999, or (b) on normal and customary terms on a historical basis for the period immediately before and up to the Petition Date).
4. You agree that you shall not require a lump sum payment upon confirmation of a plan in these cases on account of any administrative expense priority claim that you may assert, but instead agree that such claims will be paid in the ordinary course of business after confirmation of a plan under applicable Customary Trade Terms, if the plan provides for the ongoing operations of the Debtors.
5. You will hereafter extend to the Debtors all Customary Trade Terms (as defined in the Order).
Payment of your Trade Claim in the manner set forth in the Order may only occur upon execution of this letter by a duly authorized representative of your company and the return of this letter to the Debtors. Your execution of this letter agreement and return of the same to the Debtors constitutes an agreement by you and the Debtors:
(i) to the Customary Trade Terms and, subject to the reservations contained in the Order, to the amount of the Trade Claim set forth above;
(ii) that during the pendency of the Bankruptcy Cases, you will continue to supply the Debtors with goods pursuant to the Customary Trade Terms and that the Debtors will pay for such goods in accordance with Customary Trade Terms;
(iii) that you have reviewed the terms and provisions of the Order and that you consent to be bound by such terms;
(iv) that you will not separately seek payment for reclamation and similar claims outside of the terms of the Order unless your participation in the trade payment program authorized by the Order (the "Trade Payment Program") is terminated; and
(v) that if either the Trade Payment Program or your participation therein terminates as provided in the Order, any payments received by you on account of your Trade Claim will be deemed to have been in payment of then outstanding postpetition obligations owed to you and that you will immediately repay to the Debtors any payments made to you on account of your Trade Claim to the extent that the aggregate amount of such payments exceed the postpetition obligations then outstanding without the right of any setoffs, claims, provision for payment of reclamation or trust fund claims, or otherwise.
The Debtors and you also hereby agree that any dispute with respect to this letter agreement, the Order and/or your participation in the Trade Payment Program shall be determined by the Bankruptcy Court.
If you have any questions about this Agreement or our financial restructuring, do not hesitate to call.
Sincerely, [APPROPRIATE DEBTOR]
By: ____________________________ Its: _______________________ Agreed and Accepted by: [Name of Trade Vendor]
By: _________________________ Its: _____________________
Dated: ______________________
EXHIBIT B ACKNOWLEDGMENT BY UNAFFILIATED ESSENTIAL TRADE CREDITOR
[Name of Unaffiliated Essential Trade Creditor] is in receipt of [relevant debtor's] purchase order #____ requesting shipment of [describe requested goods by type, quantity and price] (the "Goods") or delivery of services ("Services") which was/were received by us on ____, 1999 (the "Purchase Order") and which requests delivery of the Goods or Services on ____, 1999, at those places set forth in the Purchase Order. (If the Purchase Order requires multiple delivery dates and/or locations, we have attached a schedule of such information to this Acknowledgment.) We hereby acknowledge and agree that shipment of the Goods or Services will be in accordance with Customary Trade Terms and the Order Granting Debtors Authority for Provisional Payment of Prepetition Trade Claims of Essential Trade Creditors entered by the Court.
[Name of Unaffiliated Essential Trade Creditor]
By: _________________________________________ Printed Name: Title:
Date: _________________________________________
ORDER GRANTING DEBTORS AUTHORITY FOR PROVISIONAL PAYMENT OF PREPETITION CLAIMS OF ESSENTIAL TRADE CREDITORS
Upon the Motion (the "Motion") of the debtors and debtors in possession in the above-captioned chapter 11 cases (collectively, the "Debtors"), seeking entry of an Order granting authority to pay prepetition claims of essential trade creditors; and it appearing that the relief requested is in the best interests of the Debtors' estates, their creditors and other parties in interest; and it appearing that this proceeding is a core proceeding pursuant to 28 U.S.C. § 158(a); and after due deliberation and cause appearing therefor; it is hereby
ORDERED that the Motion is granted; and it is further
ORDERED that the Debtors are authorized but not directed, in the reasonable exercise of their business judgment, to pay the prepetition "Trade Claims" of Unaffiliated Essential Trade Creditors (as defined below) upon such terms and in the manner provided in this Order. As used herein, a "Trade Claim" is the claim (as such term is defined in section 101(5) of title 11 of the United States Code (as amended, the "Bankruptcy Code")) against the Debtors for goods or services provided to the Debtors before the petition date. As used herein, the term "Unaffiliated Essential Trade Creditor" refers to an entity that is not an indirect or direct subsidiary of the Debtors, and is the holder of a Trade Claim; and it is further
ORDERED that the Debtors payment of Trade Claims owed Unaffiliated Essential Trade Creditors shall not exceed, in the aggregate, $34 million, unless otherwise ordered by the Court; and it is further
ORDERED that, after the date hereof, the Debtors shall determine who is a Unaffiliated Essential Trade Creditor by considering, among other things, (a) whether the goods or services the creditor provides can be replaced, (b) whether failure to pay the creditor's prepetition Trade Claims will require the Debtors to incur higher costs for goods or services postpetition, and (c) whether failure to pay the creditor's prepetition Trade Claims will cause the Debtors to lose sales or future revenue; and it is further
ORDERED that the Debtors shall maintain a matrix summarizing for the period after the Petition Date (a) the name of each Unaffiliated Essential Trade Creditor paid on account of Trade Claims, (b) the amount paid each Unaffiliated Essential Trade Creditor on account of Trade Claims, and (c) the goods or services provided by such Unaffiliated Essential Trade Creditor; and it is further
ORDERED that the Debtors shall not make any payments to a Unaffiliated Essential Trade Creditor under this Order unless and until such Unaffiliated Essential Trade Creditor first executes its written agreement substantially similar to Exhibit A to the Motion, which shall include at least the following terms and no other term that is inconsistent with the model agreement or this Order:
a. The amount of such Unaffiliated Essential Trade Creditor's estimated prepetition Trade Claims, accounting for any setoffs, other credits and discounts thereto, shall be as mutually determined in good faith by the Unaffiliated Essential Trade Creditor and the Debtors (but such amount shall be used only for the purposes of this Order and shall not be deemed a Claim allowed by the Court and the rights of all interested persons to object to such Claim shall be fully preserved until further order of the Court);
b. The normal and customary trade terms, practices and programs (including, but not limited to, credit limits, pricing, cash discounts, timing of payments, allowances, rebates, coupon reconciliation, normal product mix and availability and other applicable terms and programs) in effect between such Unaffiliated Essential Trade Creditor and the Debtors on a historical basis for the period immediately prior and up to the Petition Date or such other trade terms, practices and programs that are at least as favorable as those that were in effect during such time ("Customary Trade Terms");
c. The Unaffiliated Essential Trade Creditor's agreement to provide goods and services to the Debtors based upon Customary Trade Terms and the Debtors' agreement to pay in accordance with Customary Trade Terms;
d. The Unaffiliated Essential Trade Creditor's acknowledgment that it has reviewed the terms and provisions of this Order and consents to be bound hereby; and
e. The Unaffiliated Essential Trade Creditor's agreement that it will not separately seek payment for reclamation claims outside of the terms of this Order unless the Unaffiliated Essential Trade Creditor's participation in the trade payment program authorized by this Order is terminated; provided that such claims shall, if thereafter raised by the Unaffiliated Essential Trade Creditor as permitted by this Order, be treated as though raised on the date of this Order.
An agreement executed between the Debtors and an Unaffiliated Essential Trade Creditor as set forth in this paragraph is referred to herein as a "Trade Agreement." The Order is intended to authorize, but shall not require, the Debtors to enter into Trade Agreements, it being the express intention of this Court that the Debtors shall enter into Trade Agreements only when the Debtors determine, in the exercise of their reasonable business judgment, that it is appropriate to do so; and it is further
ORDERED that, subject to the terms of specific Trade Agreements (defined below), the Debtors may, in the exercise of their reasonable business judgment, make the payments authorized in the preceding paragraph on account of prepetition Trade Claims of Unaffiliated Essential Trade Creditors either (1) after goods are delivered or services are rendered postpetition, or (2) up to one business day before requested delivery of the postpetition goods, provided, however, that (a) the Debtors shall have issued purchase orders (or computer equivalents thereof) and (b) the Unaffiliated Essential Trade Creditor shall have confirmed shipment will occur not later than the next business day after the aforementioned payment has been made and further agrees that postpetition goods are being shipped in accordance with Customary Trade Terms and this Order by executing an acknowledgment form substantially similar to Exhibit B to the Motion; and it is further
ORDERED that a Trade Agreement with an individual Unaffiliated Essential Trade Creditor shall be deemed to have terminated, together with the other benefits to the Unaffiliated Essential Trade Creditor as contained in this Order, on the date the Debtors deliver notice to the Unaffiliated Essential Trade Creditor that the Unaffiliated Essential Trade Creditor has not complied with the terms and provisions of the Trade Agreement or has failed to continue to provide Customary Trade Terms;provided, however, that the Trade Agreement may be reinstated if:
a. Such determination is subsequently reversed by the Court for good cause shown that the determination was materially incorrect after notice and a
hearing following a motion from the Unaffiliated Essential Trade Creditor, or
b. The underlying default under the Trade Agreement was fully cured by the Unaffiliated Essential Trade Creditor not later than five business days after the date when the initial default occurred); and it is further
ORDERED that all Trade Agreements shall be deemed to have terminated, together with the other benefits to Unaffiliated Essential Trade Creditors as contained in this Order, upon entry of an Order converting this case to a case under chapter 7 of the Bankruptcy Code; and it is further
ORDERED that if termination as set forth in either of the two previous paragraphs, provisional payments made to Unaffiliated Essential Trade Creditors on account of prepetition Trade Claims shall be deemed to have been in payment of then outstanding postpetition Trade Claims without further order of the Court or action by any person or entity. An Unaffiliated Essential Trade Creditor shall immediately repay to the Debtors any payments made to it on account of its prepetition Trade Claims to the extent that prepetition Trade Claim payments exceed the postpetition Trade Claims then outstanding without the right of any setoffs, claims, provision for payment of reclamation or trust fund claims, or otherwise, it being the express intention of this Court to return the creditors to the status quo in effect as of the date of entry of this Order with respect to all prepetition claims if a Trade Agreement is terminated; and it is further
ORDERED that the Court shall retain jurisdiction with respect to any matters, claims, rights or disputes arising from or related to the implementation of this Order.