Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 1 of 30 UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS EASTERN DIVISION _________________________________________ ) In re ) ) Chapter 11 CLARK-CUTLER-MCDERMOTT ) COMPANY, et al.,1 ) Case No. 16-41188 (CJP) ) Debtors. ) (Joint Administration Requested) _________________________________________ ) GENERAL MOTORS LLC’S MOTION FOR RELIEF FROM THE AUTOMATIC STAY REQUEST FOR EMERGENCY DETERMINATION General Motors LLC (“GM”) hereby submits this motion (the “Motion”), pursuant to section 362(d) of title 11 of the United States Code, 11 U.S.C. §§101 et seq. (the “Bankruptcy Code”), Rule 4001 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”), and Rule 4001-1 of the Local Rules for the United States Bankruptcy Court for the District of Massachusetts (the “Local Rules”), for relief from the automatic stay so that GM may immediately recover possession of: (a) certain tooling, dies, test and assembly fixtures, gauges, jigs, patterns, casting patterns, cavities, molds, and documentation, including engineering specifications and test reports, used by the Debtors in connection with their manufacture of component parts for GM (collectively, the “GM Tooling”), which is the owned-property of GM; (b) certain machinery and equipment, along with any related accessions, attachments, parts, accessories, substitutions, replacements, documents, software, and appurtenances, used by the Debtors in connection with their manufacture of component parts for GM (collectively, the 1 The Debtors in these chapter 11 cases are Clark-Cutler-McDermott Company and CCM Automotive Lafayette LLC. CCM’s corporate headquarters are located at 5 Fisher Street, Franklin, Massachusetts, 02038. Lafayette, a wholly owned subsidiary of CCM Automotive LLC, has its principal place of business at 1465 Shattuck Industrial Boulevard, Lafayette, Georgia 30728. 1 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 2 of 30 “Dedicated Equipment”), upon which GM properly exercised an enforceable option to purchase on July 6, 2016; and (c) certain finished component parts inventory manufactured by the Debtors for GM pursuant to the Purchase Orders and the Interim Agreement (collectively, “Finished Goods Inventory”), upon which GM properly exercised an enforceable option to purchase on July 6, 2016.2 In support of the Motion, GM respectfully states as follows: Preliminary Statement 1. The Debtors’ chapter 11 filings are the direct result of the self-interested and wrongful conduct of the Debtors’ ownership and management who, having run the Debtors’ businesses into financial distress, sought only to protect their personal assets and avoid personal liabilities, and ignored the Debtors’ responsibilities and their fiduciary duties to creditors. Incredibly, notwithstanding GM’s willingness to continue to fund the Debtors’ ongoing costs of operations as GM had done for four months, the Debtors have twice elected to shut down their operations to the detriment of their secured and unsecured creditors and their employees, causing significant damages to GM, and jeopardizing the businesses of thousands of North American automotive suppliers. The only rationale for the Debtors’ actions is an improper effort to extract value for their insiders and owners, who are almost certainly out of the money, at the expense of these real parties in interest who were owed fiduciary duties from the Debtors’ officers and directors given the Debtors’ insolvency. 2. On June 17, 2016, the Debtors first shut their doors and ceased operations, upon mere hours’ notice to GM. The U.S. District Court for the Eastern District of Michigan (the “District Court”) recognized the severity of the Debtors’ actions, and that day granted GM a temporary restraining order (the “TRO”), requiring the Debtors to continue production of certain 2 Certain of the facts and circumstances surrounding this Motion are set forth in the Declaration of Mark W. Fischer (the “Fischer Declaration”) attached hereto as Exhibit 1. 2 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 3 of 30 Component Parts (as defined below) for GM in accordance with the contracts between GM and the Debtors. See Temporary Restraining Order and Order to Show Cause [District Court Docket No. 8], General Motors, LLC v. Clark-Cutler-McDermott Co., et. al., Case No. 16-cv-12246 (E.D. Mich. June 17, 2016), a copy of which is attached hereto as Exhibit 2. GM continued to fund the Debtors’ operations following the entry of the TRO, yet despite GM’s willingness to continue to do so and the District Court’s order requiring the Debtors to produce in accordance with GM’s requirements contracts and the Interim Agreement (as defined below), the Debtors continued to condition future operations on irrational demands. 3. Based on the Debtors’ actions, GM dedicated significant resources and funding to re-source the Component Parts (as defined below). A critical part of this resourcing, however, is moving the GM Tooling and the Dedicated Equipment to new suppliers. The Interim Accommodation Agreement, dated April 1, 2016, by and among General Motors LLC (for itself and on behalf of its subsidiaries and affiliates), Clark-Cutler-McDermott Company, CCM Automotive LLC, AirLoc LLC, Duffy’s Park LLC, CCM Automotive Lafayette LLC, CCM Automotive Hildenbran LLC and, solely with respect to Section 4 thereof, Wells Fargo Bank, National Association (as amended, the “Interim Agreement”), a copy of which is attached hereto as Exhibit 3, includes an express acknowledgement by the Debtors that GM owns the GM Tooling, as well as an exclusive and irrevocable option for GM to purchase the Dedicated Equipment and Finished Goods Inventory. Prior to the Debtors’ chapter 11 filings, GM properly exercised the purchase option with respect to certain of the Dedicated Equipment and the Finished Goods Inventory. Specifically, on July 6, 2016, GM notified the Debtors that GM was exercising the option on the Dedicated Equipment, and on July 7, 2016 (prior to the Debtors’ chapter 11 filings) GM notified the Debtors that GM intended on picking up the GM Tooling, 3 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 4 of 30 Dedicated Equipment, and Finished Goods Inventory on the morning of July 8, 2016. Within hours, the Debtors commenced these chapter 11 cases, and sought to promptly reject their contracts with GM. See Motion of the Debtors for an Order Authorizing and Approving the Rejection of All GM Contracts Nunc Pro Tunc to the Date of the Motion [Docket No. 10] (the “Rejection Motion”).3 4. If the Court does not grant the Motion, and GM is unable to obtain immediate possession of the GM Tooling and Dedicated Equipment to enable new suppliers to produce the Component Parts, GM will be reliant on continued production from the Debtors. The Debtors have made clear, however, that they have no intention on continuing this production. As a result, GM will be required to shut down all of its North American plants and suffer immense, immediate economic damages in the tens of millions of dollars. GM will also suffer immeasurable and irreparable injury to its goodwill and reputation, in addition to the significant disruption of the North American supply chain in the automotive industry and potential consequences for the economy as a whole. 5. By contrast, the Debtors and the Debtors’ estates will not suffer any damages if the Court grants this Motion and affords GM relief from stay. As described in detail herein, and in light of the Rejection Motion, the Debtors have acknowledged that there will be no continued production for GM. As a result, there is no basis for the Debtors to assert any right to possess or “use” the GM Tooling and the Finished Goods Inventory, which is specialized for GM and can only be used in connection with GM’s production, and the Debtors have no right to the 3 Concurrently herewith, GM is filing General Motors LLC’s Objection to the Motion of the Debtors for an Order Authorizing and Approving the Rejection of All GM Contracts Nunc Pro Tunc to the Date of the Motion. GM agrees to defer the hearing on this Motion in the event that the Court conditions the Debtors’ rejection of the Debtors’ contracts with GM on GM’s right to take immediate possession of the GM Tooling, Dedicated Equipment, and Finished Goods Inventory, and GM agrees to withdraw this Motion upon taking possession of the GM Tooling, Dedicated Equipment, and Finished Goods Inventory. 4 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 5 of 30 possession of the Dedicated Equipment that was being used in the production of the Component Parts, and for which GM has exercised its purchase option prior to the commencement of these cases. Although GM submits that the Debtors’ loss of possession of property that they cannot use for any productive purposes simply cannot result in harm to these estates, to remove any debate about whether the estates will be adequately compensated, GM is willing to escrow with the Court an amount of money equal to any dispute regarding the fair market value of the Dedicated Equipment and the contract prices of the Finished Goods Inventory, as well as to immediately pay to the estates any undisputed amounts. 6. The Debtors clearly understood their position as a sole source supplier to GM when they proposed that GM pay off all their liabilities with the stated intent of securing for their principals and non-Debtor affiliates assets free and clear of claims as a condition to continuing to operate and supply for GM. They then “doubled down” by precipitously ceasing operations on June 17 after GM made clear it would not accede to the Debtors’ demands but instead would continue to fund the Debtors’ operations, purchase product and negotiate in good faith over a price increase. And now the Debtors appear to be using this chapter 11 case as another way to try to get GM to pay off the Debtors’ obligations for the benefit of their principals and non- Debtor affiliates. It is difficult to infer anything else from the Debtors’ conduct. They commenced these cases immediately on the heels of GM invoking a negotiated process that requires GM to pay fair market value as part of the purchase of the Dedicated Equipment and Finished Goods Inventory. The Debtors cannot reasonably think that they will receive more than fair market value for these items from a third party. 7. In addition to the foregoing, GM is also entitled to relief from the stay in order to foreclose its security interests in the Dedicated Equipment and Finished Goods inventory. These 5 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 6 of 30 assets constitute GM’s collateral, the Debtors have no equity in these assets, and the Debtors have no reasonable likelihood of any reorganization. Background A. The Purchase Orders 8. The Debtors manufacture and supply GM’s requirements of various vehicle acoustic insulation parts, service parts, and assembled goods (the “Component Parts”). For more than 45 years, GM and the Debtors have entered into various purchase orders, supply agreements, and/or releases (collectively, the “Purchase Orders”), pursuant to which the Debtors are obligated to manufacture the Component Parts in quantities and at such times as needed to meet GM’s requirements. GM is the Debtors’ largest customer by volume, accounting for more than 80% of the Debtors’ revenues. 9. GM uses the Component Parts in nearly every vehicle that GM manufactures and assembles in the United States, Canada, and Mexico. The Component Parts are integrated primarily in the interior of vehicles for acoustic insulation, including, but not limited to, behind dashboards, in truck cabs, under carpets, and in wheel liners. 10. The Debtors are the sole supplier to GM of the Component Parts, meaning that GM obtains all of its requirements of the Component Parts from the Debtors. Since at least the early 1970s, GM has issued hundreds of Purchase Orders to the Debtors, pursuant to which the Debtors have supplied millions of Component Parts to GM. The Component Parts supplied by the Debtors are unique and essential components of GM’s vehicle manufacture and assembly operations throughout North America, and without sufficient quantities of Component Parts, GM cannot maintain production of vehicles at its assembly facilities. 6 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 7 of 30 11. Over the past several months, as the Debtors have threatened to cease production, GM has worked tirelessly, at a cost of millions of dollars, to procure alternative sources of supply of Component Parts. However, because the Component Parts use specially manufactured and unique tooling—which is owned by GM, but in the possession of the Debtors—the new suppliers need the tooling in order to produce the Component Parts. Even one day’s disruption in the supply of Component Parts could cause a shutdown of GM assembly operations, so without an ability to get the GM Tooling and the Dedicated Equipment immediately, GM’s North American plants will be shut down and all vehicle production will be ceased. 12. A continued disruption in the supply of Component Parts would also cause a catastrophic disruption in the supply chain and the operations of countless GM suppliers, dealers, customers, and other stakeholders. There are approximately 6,000 automotive suppliers that supply to, and depend upon, the operations of GM’s North American plants. Depending on the level of their business with GM, these suppliers will also be directly, and potentially significantly, harmed by the Debtors’ failure to ship Component Parts, or by any delay in GM’s ability to obtain Component Parts from new suppliers. Tens of thousands of workers would potentially be laid off in the event GM’s North American operations are shut down. 13. GM’s damages that would result from such a shutdown would be in the millions of dollars per plant per day. Further, GM would suffer loss of customer relations and goodwill as a result of its inability to deliver vehicles and replacement parts as ordered by customers, all of which would constitute damage claims against the Debtors. These damages, however, will be substantially reduced if this Motion is granted without delay. B. The Accommodation Agreement 7 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 8 of 30 14. On or about March 1, 2016, the Debtors notified GM that they were in default under their senior secured credit facility with Wells Fargo Bank, National Association (“Wells Fargo”), and that absent accommodations from GM, Wells Fargo would foreclose on its security interest and the Debtors would be forced to shut down operations. These requested accommodations included, but were not limited to, payment by GM of increased Component Part prices over the agreed-upon prices set forth in the Purchase Orders, immediate payment of all outstanding GM accounts payable, payment on a hyper-accelerated basis for Component Parts shipped by the Debtors going forward, and the funding of any budget shortfalls necessary to continue the Debtors’ operations. 15. While GM and the Debtors were negotiating an interim accommodation agreement, on or about March 13, 2016, the Debtors informed GM that the Debtors would be forced to immediately shut down operations without emergency funding from GM. As a result of the Debtors’ request, and in order to enable the Debtors to continue producing Component Parts, on March 14, 2016, GM provided the Debtors with a $300,000 secured loan. On March 15, 2016, again to ensure the flow of critical Component Parts, GM provided the Debtors with an additional $700,000 secured loan. 16. On March 15, 2016, GM and the Debtors entered into an Amended and Restated Security Agreement (the “Security Agreement”), pursuant to which the Debtors granted to GM a security interest in and lien on substantially all of their assets (as defined in the Security Agreement, the “Collateral”) then owned or at any time thereafter acquired by the Debtors, second in priority only to the liens and security interests of Wells Fargo. On or about March 15, 2016, GM perfected the security interests granted by the Debtors pursuant to the Security Agreement by filing UCC-1 financing statements with the Secretary of State for the State of 8 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 9 of 30 Massachusetts. On March 23, 2016, GM provided the Debtors with an additional $950,000 secured loan. 17. On or about April 1, 2016, following extensive negotiations, GM, the Debtors, and Wells Fargo entered into an Interim Accommodation Agreement (as amended, the “Interim Agreement”). Pursuant to the Interim Agreement, GM provided substantial financial accommodations to the Debtors to ensure production of the Component Parts through the Interim Agreement’s expiration on April 29, 2016. Among other things, GM agreed to: (i) negotiate potential price increases for the Component Parts; (ii) immediately pay all outstanding accounts payable; (iii) pay for all Component Parts shipped by the Debtors during the term of the Interim Agreement on a “net instant” basis; and (iv) fund any budget shortfalls necessary to continue the Debtors’ operations through a combination of loans and Component Part price surcharges (effectively a lump sum temporary price increase). The Debtors also requested that GM resource certain Component Parts to other suppliers, as the Debtors would be unable to meet their obligations under the Purchase Orders even with the accommodations being provided by GM, which GM agreed to do at significant cost and expense. 18. The Interim Agreement contemplated that GM and the Debtors would negotiate in good faith the terms of a final accommodation agreement that would replace and supersede the Interim Agreement, and which would include long-term price adjustments for the Component Parts, with the final agreement continuing through at least September 30, 2016. The Interim Agreement also included an agreement by GM and the Debtors to negotiate the time frame and other terms and conditions for the process of a sale of the Debtors’ businesses. In connection therewith, the Interim Agreement required the Debtors to promptly engage an investment banker for this purpose. 9 22074515.6 Case 16-41188 Doc 27 Filed 07/08/16 Entered 07/08/16 14:30:35 Desc Main Document Page 10 of 30 19. On or about April 29, 2016, GM and the Debtors entered into the First Amendment to Interim Accommodation Agreement, pursuant to which, among other things, the parties extended the term of the Interim Agreement through June 3, 2016 (the “First Amendment”). Prior to the parties executing the First Amendment, the Debtors retained Conway MacKenzie, Inc. as their investment banker to run a sale process for their businesses. The First Amendment included milestone dates for that sale process. 20. During the term of the Interim Agreement, including the extensions pursuant to the amendments thereto, GM provided the Debtors with additional secured loans of $425,000 on April 25, 2016; $270,000 on May 6, 2016; $185,000 on May 13, 2016; $125,000 on May 23, 2016; $320,000 on May 27, 2016; and $175,000 on June 10, 2016. 21. In accordance with the Interim Agreement, the parties attempted to negotiate a final accommodation agreement. During those negotiations, it became clear that a continuation of the Debtors’ businesses as going concerns under current ownership was not sustainable, and GM and the Debtors agreed that either a sale or wind-down of the businesses would need to occur. 22. As the parties negotiated the terms of a final accommodation agreement, the Debtors informed GM, for the first time, that in order for the Debtors to continue production of Component Parts, the final accommodation agreement would need to include more than just increases in the price of Component Parts and a commitment by GM to fund any budget shortfall. Specifically, the Debtors further demanded that GM: (i) pay all of the Debtors’ unsecured creditors in full (and use the proceeds of a sale of the Debtors’ businesses to make those payments prior to GM obtaining any repayment of GM’s secured loans); (ii) pay the more than approximately $18 million in pension withdrawal liability (for which certain non-Debtor 10 22074515.6