• Bankruptcy Court Grants Priming Lien To Debtors' Primary Contract Manufacturer To Secure Post-Petition Trade Credit And Authorizes Continued Use Of Cash Collateral Over Secured Creditors Objection
  • December 27, 2012
  • Law Firm: Morris James LLP - Wilmington Office
  • In re: Satcon Technology Corporation, et al., Case No. 12-12869 (KG) (December 7, 2012)

    After an evidentiary hearing, the Bankruptcy Court granted the Debtors’ Emergency Motion for Entry of an Order Authorizing (I) Entry Into a Settlement with Great Wall, (II) Incurrence of Post-Petition Trade Credit, and (III) Granting of a Priming Lien to Secure Post-Petition Trade Credit (the “Settlement Motion”) and the Motion of Debtors for Entry of Final Order Authorizing Use of Cash Collateral (The “Cash Collateral Motion”). The Court found that the Debtors’ settlement with its creditor, supplier and customer, Great Wall, provided Debtors with numerous benefits, including continued relations that would enable Debtors to continue operations and avoid immediate liquidation. Further, the Court granted the Cash Collateral Motion because, for among other reasons, the Secured Creditors’ interests were adequately protected. Following its ruling, the Bankruptcy Court permitted an oral stay of its ruling for two days (extended for another two days) to allow the appealing parties an opportunity to request a stay pending appeal from the District Court.[1]
    The Court approved the Debtors’ settlement agreement with Great Wall under sections 363(b)(1) and 105(a) of the Bankruptcy Code and Bankruptcy Rule 9019. The Court concluded that the Debtors properly exercised their business judgment and found that the entry of a settlement with Great Wall was reasonable and in the best interest of their estates. The settlement agreement allowed the Debtors to continue to operate their business and avoid an immediate liquidation. The settlement agreement provided Great Wall with a Priming Lien on all of Debtors’ assets to secure the Postpetition Advances.

    China Great Wall Computer Shenzhen Co., Ltd. (“CGW”) and Satcon Technology Corporation (“STC”) entered into an agreement (the “Contract Manufacturing Agreement”), dated February 6, 2012, pursuant to which CGW and its subsidiary Perfect Galaxy International Limited (collectively “Great Wall”), agreed to manufacture and supply certain products and sub-assemblies (collectively, “Satcon”). Great Wall was the Debtors’ primary contract manufacturer and supplied approximately 90% of the products and sub-assemblies used in Debtors’ business. Prior to the October 17, 2012 petition date (the “Petition Date”), the Debtors owed Great Wall approximately $26.2 million for product that had previously been delivered to Satcon (the “Prepetition Payable”) and Great Wall owed Satcon approximately $1.3 million for parts and materials purchased from Satcon. Great Wall was unwilling to extend credit in excess of $26 million to Debtors.

    Debtors believed that the absence of a settlement agreement with Great Wall would prevent Debtors’ continued operations because Great Wall would not be willing to provide parts.   Further, Debtors also lacked liquidity and were operating on cash collateral subject to an Order permitting the use of cash collateral on an interim basis (the “Existing Cash Collateral Order”). Debtors were unable to secure alternative credit. The Existing Cash Collateral Order provided for certain sale milestones that required the Debtors to actively market its assets.

    After extensive negotiations, Debtors and Great Wall reached an agreement. The settlement with Great Wall provided for an offset of $1.4 million owed to Debtors against the Prepetition Payable.   Great Wall agreed also to purchase certain spare parts from Debtors’ inventory by offsetting the purchase price against the Prepetition Payable. Debtors anticipated that the purchases and resulting offset would be $5 million. The settlement also contemplated application of three of the Debtors’ post-petition payments aggregating approximately $1.2 million to the Prepetition Payable. As a result of these transactions, the Prepetition Payable would be reduced to approximately $18.7 million and Great Wall would be willing to provide the Debtors with trade credit. Beginning in January 2013, the Debtors would begin paying Great Wall pursuant to an agreed payment schedule. Based on the Debtors’ projections, the Debtors would receive approximately $4.9 million in post-petition trade credit (the “Postpetition Advances”) through the week ending March 9, 2013 with the total balance owing to Great Wall at that time approximating $23.8 million.

    As part of the settlement, Great Wall would be provided with a “priming lien” (the “Priming Lien”) under section 364(d) of the Bankruptcy Code on assets of the Debtors to secure the Postpetition Advances subject only to the Carve-Out (as defined in the Final Cash Collateral Order). Great Wall would also receive certain protections with regard to the intellectual property necessary to allow for sale and servicing of inventory purchased by them in the event that Satcon is not in the position to service such inventory. The Court reviewed section 364(d) of the Bankruptcy Code that permits a debtor to incur debt secured by a senior, or “priming lien” when, such in this case, there was adequate protection of the interest of the otherwise senior secured creditors. Silicon Valley Bank (the “Senior Secured Creditor”) and Horizon Credit I LLC and Velocity Venture Funding, LLC (together, the “Subordinated Secured Creditors”, and with the Senior Secured Creditor, the “Secured Creditors”) were owed approximately $21.1 million as of the Petition Date. According to the Debtors, based on the liquidation value of the Debtors’ assets, the Secured Creditors benefited from an equity cushion of at least $10.5 million. The Secured Creditors did not provide any additional liquidity other than the use of Cash Collateral and the Debtors submitted that the value of the Secured Creditors’ interests in the Debtors collateral far exceeded the value of their claims. The Court did not find the Secured Creditors’ argument that there was a post-petition deterioration of the collateral persuasive and did not find the Secured Creditors’ opinion as to valuation as credible as the opinion rendered by the Debtors because the Secured Creditors’ witness failed to include substantial assets, including international goods and work in progress in its valuation analysis. According to the Court, the equity cushion permitted the priming of the Secured Creditors’ liens and the Secured Creditors were adequately protected to the extent Great Wall provided the Postpetition Advances. 

    [1] A notice of appeal was filed on or about December 11, 2012.