ABI_Chapter_11_Commission_Field_Hearing05_21_2013_final

ABI Commission to Study the Reform of Chapter 11
May 21, 2013 Field Hearing
National Association of Credit Managers
Las Vegas, NV
Geoff Berman: My name is Geoff Berman. I'd like to welcome you on behalf of the co-chairs of
the American Bankruptcy Institute's Commission to Study the Reform of Chapter
11. I first want to thank NACM for hosting this hearing today, in particular, Robin
Schauseil and Darnell Foster for their enthusiastic support and help throughout.
Thanks also to the members of the Avoiding Powers Advisory Committee,
including its co-chair, Bruce Nathan, for coordinating with the witnesses for this
hearing. We will hear from a number of witnesses today on issues important to
trade creditors and credit professionals, including preference rules, the rule of
unsecured creditor companies, reclamation [claims], and administrative priority
claims under section 503(b)(9) of the Bankruptcy Code.
Trade creditors provide vital financing to American businesses and have long had
the incentive to work with financially distressed customers. The Commission is
aware of a growing sentiment among trade creditors that the Bankruptcy Code has
become imbalanced as to the treatment of trade creditors in favor of the debtor
and secured lenders.
We expect that today's witnesses, all senior credit professionals at some of our
nation's leading companies, will provide key insight into how the Code might be
revised to better balance the interest of trade creditor stakeholders. We thank you
all, the audience, for attending and being part of this today.
Let me introduce who is here. From my left is Michelle Harner. She is the
Commission's reporter, Associate Dean and Professor of Law at the Francis King
Carey School of Law in the University of Maryland.
In the middle is Steve Hedberg, [*] who is with Aequitas Capital.
On the far right in front is Bruce Nathan. Bruce is one of the co-chairs of the
Avoiding Powers Committee and with the Lowenstein Sandler firm. Up here with
me on my far right is Bill Brandt. Bill is the president and chief executive officer
of Development Specialists, one of the nation's leading turnaround consulting

firms.
On my immediate right is Deborah Williamson, lawyer with Cox Smith out of
San Antonio, Texas. Deborah is one of the ABI's early presidents and has been

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integral in a lot of the work that the Commission has done around the country on a
number of topics.
On my left is the immediate past president of the ABI, Jim Markus, who is with
Block Markus in Denver.
Why the need for reform and why now? It's been over 30 years since the
Bankruptcy Code was enacted, and a consensus has emerged that the current law
needs an overhaul. Some would contend that the Bankruptcy Code of '78 offered
a balance between creditor and debtor interest, establishing what was often
described as a level playing field. Detractors contend that the '78 Code was too
debtor-friendly, that it led to long and inefficient cases, and that it provided too
much discretion to bankruptcy judges.
For better or worse, most of the changes to the Code since 1978 have exempted
categories of claimants or transactions from the reach of bankruptcy law, have
added additional categories of administrative or priority claims, thus burdening
the already strained liquidity of distressed companies, have limited or eliminated
the discretion of the courts in administering chapter 11 cases, and have provided
for shorter time periods and faster, more truncated cases.
Supporters of the Code contend that many of the changes to the Code throughout
the years have not helped further the goal of restructuring or have unintended
consequences.
However, arguing about who is right or wrong in terms of the recent history of the

Code is, in this juncture, largely beside the point. Primarily, the world, including
the financial environment and the operation of the market, has simply changed,
and the Code, even as amended, was not designed to deal with these changes. For
the most part, a series of external factors drive the need for a rethinking of chapter
11.
Since the Code's enactment, there has been a marked increase in the use of
secured credit, placing secure debt at all levels of capital structure. Many of the
1978 Code provisions assume presence of asset value beyond secured debt and
asset value is often not present in many of today's chapter 11 cases.
The debt and capital structures of most companies are more complex, with
multiple levels of secured and unsecured debt, often governed by equally complex
inter-creditor agreements.
This is not to say that there is anything wrong with the growth of collateralized
debt per se. Indeed, that growth brought credit to many companies who could not
have attained it otherwise. However, the 1978 Code's baseline assumption of
value above the amount of liens on assets was challenged, if not cast asunder.
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The growth of distressed debt markets and claims trading introduced another
factor not present when the 1978 Code was enacted, a factor which challenges
certain other premises underlying the Code. Again, in many ways, this
development was a net positive, providing creditors with means of monetizing
claims more quickly rather than awaiting the outcome of sometimes lengthy
cases. However, the rapidity of the development of these markets also created
collateral consequences that the 1978 Code was simply not designed to deal with.
Many of today's companies are less dependent on hard assets, real estate,
machinery, equipment or inventory and more dependent on contracts and

intellectual property as principal assets. The '78 Code does not clearly provide for
efficient treatment of such cases and affected counterparties.
Debtors are more often multinational companies, with the means of production
and other operations offshore, bringing international law and the choice of law
implications. Today's debtor is likely to be a group of related, often
interdependent, entities. The impacts of these changes on the efficacy of the
current restructuring regime have been dramatic.
The way both courts and commentators discuss the purpose of chapter 11 has also
changed. Early decisions and the legislative history of the 1978 Code emphasized
the primary purposes of the Code were rehabilitation of businesses and the
preservation of jobs and tax bases at the state, local, and federal level. As time
passed, these purposes competed with the maximization of value as an equal, if
not competing goal.
More recent discussions of the purpose of chapter 11 tend to emphasize the value
maximization to the exclusion of other goals. This development also calls for a
fresh assessment of the purposes and goals of the U.S. restructuring regime.
Moreover, given the added complexity and a statute that often does not have the
tools or clear answers to deal with the problems that arise, even the cases that do
reorganize seem to cost more. Reorganization may be less efficient, but it is more
costly. Practitioners and the courts have achieved amazing and creative results
despite the statute's shortcomings. However, recognition that the world has
changed in significant ways since the enactment of this Code in 1978 and the
related concerns bring a restructuring community to consider the need for a
prompt and thorough reevaluation of the Code in light of these changes. A better
set of tools is required.
What is the ABI Commission? The charge of the Commission is nothing less than
the study of the need for comprehensive chapter 11 reform, by which we mean the
consideration of starting from scratch and reinventing the statute. Accordingly,
the Commission's mission statement is equally ambitious.

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In light of the expansion of the use of secured credit, the growth of distresseddebt markets, and other externalities that have affected the effectiveness of the
current Bankruptcy Code, the Commission will study and propose reforms to
Chapter 11 and related statutory provisions that will better balance the goals of
effectuating the effective reorganization of business debtors, with the attendant
preservation and expansion of jobs and the maximization and realization of asset
values for all creditors and stakeholders.
More than a year ago, I tasked the Commission's co-chairs, Robert Keach and Al
Togut, to assist me in assembling a working group of the best and brightest from
among chapter 11 practitioners, academics, bankers, and Congress, to study the
possible business bankruptcy law reforms. With the ABI Commission, we feel we
have accomplished this task.
The Commission members are listed on the screen to my right. I won't take the
time to go through all of them again. A number of them are here today.
As I mentioned, the Commission is ably assisted by its reporter, an eminent
bankruptcy scholar in her own right, Michelle Harner, Associate Dean, Professor
of Law, and co-director of the Business Law Program at the University of
Maryland Francis King Carey School of Law. Professor Harner oversees the work
of the advisory committees, provides critical research assistance, records the
deliberations of the Commission, and will assist in the production of the
Commission's final work product.
The work of the Commission is also underwritten by grants from the ABI
Anthony H.N. Schnelling Endowment Fund and by the ABI. We also wish to
acknowledge the tireless and dedicated efforts of Sam Gerdano, who is here with
us today, who has helped in the organization of these field hearings on top of
everything else ABI does.

The Commission, in a series of meetings, selected a number of topics for initial
study. For each topic, the Commission has selected an advisory committee of
distinguished judges, academics, practitioners to assist the Commission in the
study of each of those topics, to research the topic and possible reforms, and,
where warranted, to develop arguments for reform alternatives.
Over 150 of the best minds from the judiciary, academia, the bar, financial
advisory services, and the worlds of finance and banking have all agreed to serve
on these committees, and like the Commissioners, all do so without charge to the
ABI or the Commission. This is a volunteer effort. These committees are
organized and now in the midst their important work. The topics of these
committees are on the screen. The Commission is also addressing other issues at
the Commission-level as well.

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The field hearings are a function that the Commission realized that, despite the
breadth of knowledge and expertise on the Commission and the advisory
committees, many others around the country, from the bar, judiciary, academics,
financial professions, business and people like yourselves with NACM, have
critical information, experience, knowledge, data, and ideas to contribute to this
important process. Accordingly, with this wealth of knowledge, and information,
the Commission decided to hold field hearings around the country to hear and
collect testimony on various issues.
The ABI Commission held six public field hearings in 2012, Washington, D.C.,
New York, San Diego, Boston, Phoenix, and Tucson. In those hearings, the
commissioners heard testimony and asked questions of more than 20 witnesses
from various organizations, industries affected by potential restructuring reform.

The witness testimony covered various topics, including secured lending, the
effect of reform on the credit markets, claims trading, the interface of procedural
rules and substantive restructuring reform, sales of businesses via chapter 11, and
a number of other topics.
The testimony has been illuminating on a number of fronts. Among other insights,
the Commission has heard that it must consider the impact of reforms on the
broader market for credit for both distressed and healthy companies. The
Commission is fully mindful of that guidance.
The Commission will hold at least eight field hearings in 2013. We've already
conducted hearings this year addressing valuation, labor and benefits issues, fees,
and middle market companies. In addition to today's hearings, additional hearings
are scheduled for Chicago, New York, Atlanta, and Austin, Texas. Those hearings
will cover topics such as governance, sales in chapter 11, administrative claims,
and burdens on liquidity. The Commission is also soliciting and accepting written
submissions on all issues. We hope to hear from every interest affected by
potential restructuring reform.
Armed with this information, the Commissioners will discuss each topic, debate
and search for consensus for reform. The final result will be a comprehensive
report, part blueprint for reform and part catalog of open issues and current
options to be considered in updating chapter 11. At the end of the day, the
Commission's work may lead to consideration of reform legislation but legislation
that is fully informed by the careful and thorough process of the Commission and
the input of the entire insolvency community.
We could not be more excited and energized about both the quality and quantity
of the contributions of the community to date and the future of this study, and this
hearing is a great component of that.

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If anyone is interested in the witness statements that are part of this hearing today,
there are copies of every witness statement at the back table. You're welcome to
take one at the end of the session or whenever you need to leave.
Our first panel today is dealing with [section] 503(b)(9) and related issues. Our
witnesses are Joseph McNamara, director of financial services and business
operations from Samsung Electronics U.S.A.; Paul Calahan, credit manager at
Cargill, Inc.; Sandra Schirmang, senior director of credit, Kraft Foods Global,
Inc.; and two attorney advisers, Deborah Thorne and Jeffrey Carlino.
I don't know who is going first from the panelists, so let me turn it over to the
witnesses. Thank you.
Paul Calahan: I'm Paul Calahan, and first of all, I'd like to acknowledge the Commission for
their time and efforts to allow credit professionals an opportunity to express their
thoughts and concerns about the Bankruptcy Code and the bankruptcy process. I
also would like to acknowledge the ABI members who will be able to view this
hearing later today on their website.
I serve as a senior credit consultant for Cargill Inc., and, prior to that, I was
divisional manager of credit for Continental Grain Company. I have worked in the
agricultural industry for 37 years. Cargill is the leading agricultural company in
the world, with sales of $135 billion and employment of 137,000 people. Cargill
is heavily concentrated in the food chain for both livestock as well as human
consumption.
I serve as a senior credit consultant for two major business units at Cargill, with
aggregate sales of more than $20 billion. I serve on Cargill's Financial Risk
Committee where all requests for extensions of credit greater than $25 million
must be approved.
I've been a member of NACM for 36 years. I had served in the past on NACM's
Legislative & Government Affairs Committee and I have lobbied for bankruptcy
reform.

In the area of reclamation [claims] during the past years, the Bankruptcy Code
and the economic environment has made it more difficult for unsecured creditors
to realize fair payment of their claims. For this reason, when I evaluate a
distressed debtor, we become more restrictive in the extension of credit and credit
terms. Frequently, we withdraw credit altogether when we identify a distressed
debtor or a potential payment risk.
Years ago, we could rely upon the reclamation [claims] for deliveries made within
10 days of the bankruptcy filing. Reclamation was designed as a remedy to
protect sellers of goods from buyers purchasing goods when the buyers were
insolvent or planning on filing bankruptcy or some other form of insolvency
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proceeding. Reclamation was really intended to prevent fraud against good-faith
sellers.
Unfortunately, [a] reclamation [claim] is no longer a remedy that protects sellers
of goods. Reclamation claims are usually denied because debtors had secured
lenders who exercised their right to have liens over all their inventories. The
distressed debtor typically does not have the inventory at the time the reclamation
[claim] is even made, or the inventory subject to reclamation [claim], in our case,
is commingled with other similar products and is not easily identifiable.
For example, from the inception of Bankruptcy Abuse Prevention and Consumer
Act, my department has experienced 300 bankruptcies, with exposure of $19.2
million subject to claims of reclamations in 43 of those cases. It is generally our
practice to file reclamation demands in each case where deliveries were made 10
days prior to petition date. In each case, Cargill did not recover any goods or
receive any recovery of any kind in those 43 reclamation demands. Generally, that
was the result of lenders exercising their lien rights on inventories and that goods

were consumed. It's not uncommon in our industry that distressed debtors are not
able to keep large amounts of inventory and use very quickly what they do have.
In the case of Vera Sun, an ethanol producer, they filed bankruptcy in 2008 in the
State of Delaware. We served a reclamation demand to recover 10 cars of ethanol
with a value of $1.2 million three days prior to the bankruptcy petition date. At
the time Cargill delivered the 10 cars of ethanol to Vera Sun, Vera Sun had
stopped producing ethanol and was buying ethanol from other suppliers to honor
their commitments to their buyers. We filed a reclamation [claim] immediately,
but because the cars had shipped and been re-consigned to a third party for Vera
Sun's account, we were not successful in reclaiming those goods, and Cargill lost
$1.2 million.
The last major successful collection of a reclamation [claim] was in the early '80s,
when Lane Processing, an Arkansas poultry company, filed bankruptcy. We filed
a reclamation [claim] for a corn train that we had sold them with an approximate
value of $800,000, and we were successful in obtaining those monies.
While a reclamation [claim] is really no longer helpful in recovering inventory
shipped just prior to the bankruptcy filing, the addition of [section] 503(b)(9) in
2005 did assist sellers of goods delivered to the debtor on the eve of bankruptcy.
Section 503(b)(9) has encouraged Cargill to sell on credit to potential debtors,
knowing that the deliveries made within 20 days will be protected with an
administrative claim. We often modify our credit terms knowing that our
exposure will be somewhat protected and mitigated by [section] 503(b)(9).
As Hostess Brands edged closer to their second filing, Cargill was managing our
exposure very closely and continued to extend credit to Hostess Brands, knowing
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that we had [section] 503(b)(9) available to us. At the time of Hostess Brands'

second filing, Cargill was owed $1.6 million, of which, $1.2 million was covered
by [section] 503(b)(9). Without the availability of 503(b)(9) administrative claim,
we would have withdrawn credit to Hostess Brands.
Section 503(b)(9) has provided needed protection for unsecured trade creditors
selling goods and likewise has enabled many potential debtors to continue in
business. Why should secured creditors or secured lenders agree with the clause?
Simply, [section] 503(b)(9) allows trade creditors to deliver value to the debtor's
business. It is trade credit that often allows a debtor to maximize the going
concern of the debtor's business. This, in turn, helps lenders protect the value of
their collateral. When a distressed debtor is having liquidity problems, it is
oftentimes trade credit that keeps and allows that business to continue.
Section 503(b)(9) allows unsecured creditors of goods to continue to work with
the distressed debtor knowing that the [section] 503(b)(9) clause is a means to
mitigate risk. Without the provision, typically, the response is to reduce or to
withdraw credit.
Currently, Cargill is working with a company that is not yet and hopefully will
not file bankruptcy. For this reason, I will not mention their name. The company
is a major retail chain and may have been in the process of restructuring their debt
as well as selling assets. Cargill has trimmed their credit line discounting by
$8,000,000, and as we speak, we're owed twice that.
Section 503(b)(9) has been critical to our negotiations as well as our developing
our strategy. Very simply, as important as this customer is to Cargill, we will not
knowingly throw away millions of dollars to a distressed debtor. Without the
protection offered by [section] 503(b)(9), shipments would have stopped, and
store shelves would not be replenished.
To get you a flavor of what empty store shelves look like. When Hostess Brand
shut their doors here a few months ago, store shelves went empty because they
were not replaced by goods of other companies, they just remained empty. Bread
and snack foods were not on shelves where they once were. In comparison, when
disasters or storms are forecast, people will frequently go and stock up their

refrigerators and their shelves with goods. [*]
Another example where section 503(b)(9) made a difference was in the
Townsends case. 2011 was the worst year for the poultry industry in their history.
Anything and everything that could go wrong did. The poultry industry, for some
years, has struggled with over capacity, over supply, the inability to pass on
higher ingredient cost to their buyers. Many poultry companies expanded into the
wrong areas and leveraged their balance sheets. All these factors, including the

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decline of exports, made losses astronomical into the industry, and Townsends
was no exception.
Townsends was one of many poultry companies that would file bankruptcy in
2011. Townsends was a poultry company located in the Southeast, and they have
been distressed for some time. They hired outside consultants to determine what
their options were, which would eventually lead to a bankruptcy filing. When they
filed bankruptcy, Cargill was owed $1.3 million. Cargill was concerned about
recovery, as were the lenders who were owed approximately $73 million and
were believed to be undersecured on their loans.
There was near unanimous perception that Townsends was administratively
bankrupt. At the time Townsends filed bankruptcy, the prevailing view was that
the debtor's business was worth $30 million less than what the lender's claim was.
In addition to that, they also filed for immediate liquidation. Cargill and other
creditors were concerned with the chapter 11 filing because it would potentially
allow the lender to recover a better recovery on the sale of the assets and of a
higher return than if they had not foreclosed on the property outside of
bankruptcy.

I participated on the Creditors' Committee, and as a committee, we retained
professionals. To make a longer story short, the lenders did not want to carve out
any monies for [section] 503(b)(9) claims or administrative claims for goods sold
or services provided to the debtor during the chapter 11 proceeding case. Lenders
were concerned that if the assets weren't sold quickly, administrative expenses
would exceed dip financing by millions of dollars.
The committee objected to the financing and negotiated a settlement that assured
the payment of chapter 11 administrative claims and provided a graduated scale to
recover 503(b)(9) claims. To give you an idea of the graduated scales, the
business sold for X dollars, 503(b)(9) claimants would receive Y dollars; if sold
for A, it would receive B dollars. This was up to $15 million and if the assets
were sold for $63 million.
The recovery in the Townsends case was beyond everyone's expectations because
the assets sold for a lot more. Because of [section] 503(b)(9), Cargill recovered
$1.2 million, nearly its entire [section] 503(b)(9) claim.
There was another favorable aspect of the Townsends case in that creditors were
permitted to include their [section] 503(b)(9) claims in their proof of claim form.
Creditors were permitted to assert their Section 503(b)(9) claims in their proof of
claim because there was a court order permitting them to do so. Creditors should
be allowed to do this in every bankruptcy case so it is easier and less expensive on
the estate rather than having to assert the [section] 503(b)(9) claims in court.

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Unfortunately, there is nothing in the Bankruptcy Code or in the Rules of
Procedure that allows creditors to include their [section] 503(b)(9) claims in their
proof of claim. This has created a lot of uncertainty on how creditors should be

asserting their section 503(b)(9) claims in bankruptcy cases.
Townsends also illustrates the value that a strong creditors' committee can bring to
a case, particularly in the case that was at risk of administrative insolvency.
Frequently, there is discussion that creditors' committees increase the cost of
chapter 11 proceedings. The voice for unsecured creditors is clearly needed and
provides a valuable insight to the court and to other parties. Creditors' committees
frequently explore transactions and underlying conduct which may not have any
interest to the debtor's management and maybe not even to the secured lenders but
by pursuing the assets, the committee brings value to the unsecured creditors and
maybe just even to the underwater secured lender.
Other important contributions of creditors' committee is that they provide an
essential role in the representation of all unsecured creditors, and they bring
balance to the proceedings that ensure a more equitable administration of the
estate for all classes of creditors. To strip away any rights and/or representation
for unsecured creditors would deny unsecured creditors any role in chapter 11
cases.
Creditors' committees bring balance to the proceeding and will challenge the
status quo positions of the debtor, the secured lender, and/or other insiders where
appropriate.
I'm currently involved in a bankruptcy proceeding with John and Catherine
Burger. The Burgers have five limited liability companies, of which four filed
bankruptcy at the same time. The meetings were conducted by phone with the
judge, the debtor, secured lenders, and some unsecured creditors. Before anyone
convened in person, the lenders had decided that they would not fund the
creditors' committee. From that point, the committee could not find any attorney
to represent the committee, with only a hope of being paid by the estate.
Briefly, some issues that appeared in that case include a debtor and his wife
operating five limited liability companies. They did not keep separate books.
They operated all of their businesses out of one single bank account. They
commingled their assets. They had audited financials that were overstated and not

only were they not able to pay Cargill and other unsecured creditors, it's our belief
they had no intention to pay Cargill and others.
Although the committee was formed, because the committee was not funded and
professionals could not retain counsel to raise such issues as fraud, insider trading,
the likelihood of improperly perfected security interest on some assets,
officer/director insurance, the reconstruction of the debtor's books over the last
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year to see what has transpired, potential lender liability, and the fact that the
debtor had lost millions of dollars, the debtor was unable to infuse money into the
business, was in poor health, was unable to secure dip financing, chances are, the
most logical step in this bankruptcy proceeding was to liquidate the business.
Let's just take one of those potential events, improperly perfected security
interests. This would have the result of making the secured lender an unsecured
lender subject to a pro-rata share of the proceeds with sale of the assets. However,
given that the creditors' committee had no voice, most of these issues will never
ever be explored, and the debtor and the lenders will simply just work this stuff
out by themselves. This was because the committee did not have professional
representation, could not explore these issues in depth, and the motions and the
objections were appropriate on behalf of unsecured [creditors].
I would further suggest that whether a debtor is administratively insolvent or not
should not be the criterion to decide whether or not a creditors' committee should
be formed. Simply, there would be no creditors' committee in most cases where,
at the beginning of the bankruptcy, there is a risk that the debtor is
administratively insolvent. Bankruptcy already assumes the debtor is insolvent.
That means unsecured creditors would have no vehicle for investigating and
challenging secured lenders' unperfected security interests, improper conduct, and

conduct of the debtor's insiders prior to bankruptcy. These claims might be the
only source of recovery for creditors in this case.
Objectivity, fairness, and balance would be lost if the debtor and lenders were left
to resolve the issues. [*]
In conclusion, section 503(b)(9) is a valuable provision of the current Bankruptcy
Code and should be retained to provide a meaningful incentive to sellers to
continue selling on credit. It protects trade creditors from insolvent buyers of
goods stocking up on inventory just prior to a bankruptcy filing much in the same
way a reclamation [claim] was intended to prevent fraud during the initial days of
the Uniform Commercial Code. Frankly, if unsecured creditors were to lose their
hard-fought ground they received, the most likely trend would be the more
conservative approach to the extension on credit to distressed debtors. Credit will
become more restrictive, if not withdrawn. Liquidity issues will accelerate, and
chances are, it will hasten those bankruptcy filings.
Finally, we understand that it's not necessary to have creditors' committees in
every chapter 11 proceeding. However, when there is interest to form a
committee, a committee should be formed and not be prohibited from doing so
because a debtor may appear to be administratively bankrupt. Thank you.
Geoff Berman: Thank you, Mr. Calahan. If I can, before we start, in the interest of time, please
understand that the Commissioners have read your written statements, and so that
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there is enough time for questions and answers when you're done with your
testimony, if you could summarize them as best as you can, we would appreciate
it. Who is next? Mr. McNamara?
Joe McNamara: Thank you. First of all, I would like to thank the ABI and the ABI's Commission
to Study the Reform of chapter 11 in allowing me to speak today.

My name is Joseph McNamara, and I'm the director of financial services and
business operations at Samsung Electronics America. I have the responsibility for
financial services throughout the United States of America and basically all the
Samsung products, with the exception of cell phones. I had been with Samsung
for 10 years in a senior manager position before moving on to become the
Director of Financial Services. My role encompasses the entire credit, collections
and accounts receivable function. Prior to Samsung, I worked for several
companies, including BP Castrol, Panasonic, and Crown Vantage Paper
Manufacturing, but I have maintained a position in management of trade credit for
the last 20 years.
During the last 10 years, 25 of Samsung's customers have been debtors in chapter
11 proceedings. There was one filing in 2004, none in 2005 or 2006, and three
accounts filed in 2007. Then, between 2008 and present, there have been 21
filings: six in 2008, three 2009, five in 2010, three in 2011, and three in 2012.
Electronics Expo Electronics Retailer was the most recent filing [*]when they
sought chapter 11 protection at the end of March.
Three of these accounts also involved the second filing for the same said
company, a so-called "Chapter 22". These were Tweeter Entertainment, Ultimate
Electronics, and Ritz Camera. In my experience, over the last half decade,
companies have had a harder and harder time successfully reorganizing their debt
and using the chapter 11 process, and thus are more prone to either fold their
reorganization procedure into a liquidation or successfully exit and then re-enter
bankruptcy a few short years later.
I'm going to address several issues today that I think are important for the
Commission to consider. My testimony includes [section] 503(b)(9) claims,
reclamation [claims], and the importance of creditors' committees.
Of the bankruptcies that I've been involved with, the Circuit City filing was the
largest and most noteworthy, and from what I understand has become a poster
child of how retailers are often unable to successfully navigate their way through
chapter 11. Samsung was a member of the unsecured creditors' committee of

Circuit City, and I was the representative for Samsung on that committee.
Among the reasons floated by legal pundits for Circuit City and other retailers'
demise is the fact that the section 503(b)(9) of the Bankruptcy Code provides
vendors with administrative claims on goods shipped to the debtor in the 20 days
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preceding their bankruptcy, and this is a burden that proves to be too much for the
debtor to bear because they have to pay these claims in full as administrative
claim for the chapter 11 to be approved.
When they cannot do so, the argument goes that it forces them to liquidate.
However, suggestions that section 503(b)(9) is responsible for the demise of
companies like Circuit City ignores several fundamental facts to these cases that
precluded their success. A closer look at Circuit City from Samsung's perspective
and more generality is helpful to understanding the big picture.
Samsung was one of Circuit City's largest unsecured trade creditors, and we were
owed approximately $122 million at the time that they filed in Richmond,
Virginia. Samsung had a 503(b)(9) claim, an administrative priority claim of
approximately $19 million.
We also had a reclamation claim, which we filed twice. We filed prior to their
bankruptcy, for a claim of $74 million, and then a week later after they filed, we
filed again for just over $6 million. In both cases, the reclamation [claim] was
rendered valueless [*] for two reasons. First, Circuit City successfully offset its
claims against Samsung for deductions, chargebacks and other amounts that
Circuit City claimed was owed by Samsung. Samsung was also hamstrung by the
bankruptcy court order relying on section 502(d) of the Code that temporarily
disallowed section 503(b)(9) claims, pending the resolution of the debtor's alleged
preference claims.

The judge effectively denied the [section] 503(b)(9) claims by using Circuit City's
other alleged claims against Samsung and also on the mere allegation of a
preferential payment even before Circuit City was required to prove that Samsung
actually received a preference. In reality, except for a couple of rogue invoices
that totaled approximately $1 million, the preference claim asserted against
Samsung was meritless. We never changed our terms in Circuit City’s case, and
their payments were made in a timely schedule without issue. Still, Circuit City
argued that their portion of the payments made to us on open terms during the 90day preference period were preferential, without any justification.
Based on part by the mere assertion of Circuit City's bogus preference claims, the
court tossed out Samsung's legitimate [section] 503(b)(9) claim. Technically
speaking, the [section] 503(b)(9) claim was 100% recoverable, and practically
speaking, it was completely null and void.
Samsung's claim, which was for $122 million, was filed in two separate
components: one for the [section] 503(b)(9) claim of $19 million and a second for
the remainder of the $103 million. Circuit City asserted a baseless preference
claim against Samsung for approximately $50 million and argued that their
preference offset the [section] 503(b)(9) claim and sought to disallow it.
* Language clarified in transcription process.

13


Circuit City also was seeking to disallow Samsung's [section] 503(b)(9) claims
based on the claims recovery of deductions, chargebacks, and other related claims
against Samsung. Rather than attempt what would have been a protracted and
expensive process of litigating these issues, Samsung ultimately chose to settle
with Circuit City in such a way that it reduced the [section] 503(b)(9) claim to
zero and reduced its unsecured claim in exchange for the release of Circuit City's
preference claim against Samsung.
Samsung's experience in the case is not unique. Many creditors' [section] 503(b)

(9) claims weren't paid for the same reason Samsung's weren't: because the
[section] 503(b)(9) administrative claims were denied due to alleged preference
claims, or they were unpaid based off of Circuit City's pre-bankruptcy deduction,
chargebacks, and other claims against the creditor. Considering that the debtor
had never had to pay many of these [section] 503(b)(9) claims, I personally
cannot see how section 503(b)(9) contributed to Circuit City's demise.
My experiences dealing with Circuit City provided a whole host of reasons why
the company was bound to fail in chapter 11. In addition to the weakened U.S.,
global, and credit meltdown that was in full swing at the time, Circuit City was a
poorly managed company. Although they did bring in competent management
during the case, it was too little, too late.
Second, their stores were older and not in the best locations. If you can recall
from your own experience where there was a Circuit City in your area, usually it
wasn't located in the most popular shopping malls. They were often found in odd
locations hard [that were] to get in and out of. This might have been a good
strategy for Circuit City 25 or 30 years ago because it allowed them favorable
pricing on real estate and leasing, but once competitors such as Best Buy entered
the market, they took an opposing strategy and became anchor stores in high-end
strip malls. There might be a Dick's Sporting Goods, a Costco, a Home Depot, a
Lowe's, or even a Best Buy, but that was never the case with Circuit City [*].
Third, Circuit City also made a major mistake when they exited the appliance
sales sector. They thought that the sector wasn't a benefit for their business, but by
exiting the sector, their stores missed out on a great deal of foot traffic. At home,
when your dishwasher or your refrigerator or washer/dryer breaks, instead of
opting to fix them, you might go out and decide to replace them altogether, so you
go to purchase a new one. You would go to a store like the former Circuit City to
buy the appliance, and when you were there, you would walk past the TV section,
the computer section, or another area of the store that didn't even bring you there
in the first place. Many times, this increased foot traffic led to additional sales.
After getting out of the appliance business, Circuit City lost all of that attach-on

clientele, and the business suffered.

* Language clarified in transcription process.

14


Fourth, Circuit City was considerably overleveraged and burdened by more than
$1 billion in secured debt, while owning none of their real estate at the time of
their filing. All things considered, it defies logic to blame [section] 503(b)(9)
claims, a portion of which were never paid, for Circuit City's demise, when so
many other factors had already left the company doomed to begin with.
Both Circuit City's court treatment of the [section] 503(b)(9) claims and the
possibility of losing [section] 503(b)(9) altogether has created a chilling effect on
the extension [of credit] that will only hurt troubled companies. For instance, it
has negatively affected my ability, as a credit and risk manager, to feel safe in
selling on open terms to our customers when they appear to be headed for
financial trouble.
Up until the Circuit City case, section 503(b)(9) enabled the vendor to sell more
freely to distressed customers because it was a remedy that could be relied on and
an element of the statute that was part of the credit decision process. We could say
that even if this particular customer were to file, we'd still be able to collect a
certain amount of money and secure ourselves with a higher claim position
because of section 503(b)(9).
As it was in Circuit City, and as it has been in other cases, the claim could be
worth millions of dollars, and so being able to rely on it makes us considerably
more likely to ship product to a company that wouldn't be able to ship to without
knowing that the remedy was available.
Of course, in Circuit City, some of the claims were rendered valueless, including
Samsung's. So what ends up happening is after we have been stung by the court,

and considering the differences from circuit to circuit, we're less able to rely on
the 503(b)(9) priority claims, and thereby less likely to extend credit to distressed
companies. This results in our company [stopping] business with distressed
customers faster, weakening their cash position more quickly, impairing their
ability to transact business, accelerating their financial demise, and ultimately
increasing the likelihood of them filing bankruptcy sooner rather than later.
The last creditors' committee that I served on was in Archbrook Laguna. They
were an electronics and small appliance distributor in New Jersey. They filed
bankruptcy and ceased operating and there was nothing left after liquidation to
pay the section 503(b)(9) claims and general unsecured claims. In this case, there
wasn't even enough to pay off the bank in full, who was a secured lender. The
case was pretty much a mess from the get-go.
We also filed a reclamation claim in the Archbrook case, which was $1.6 million,
but it made no difference because there were basically no assets left to liquidate to
even make the bank whole. As you can see, with section 503(b)(9) claims,
unsecured creditors are often left with little to no payment for goods received,
* Language clarified in transcription process.

15


essentially through fraud. In the days leading up to a bankruptcy filing, section
503(b)(9) is a useful tool but not without its shortfalls. It is not, however, the
reorganization buster that some pundits have suggested.
I disagree with the policy arguments by some secured lenders that the repeal of
section 503(b)(9) is needed to once again restore the balance between the
relationship of secured and unsecured creditors. An April 16, 2013 study by Fitch
Ratings suggested that tremendous disparity remains, as one might expect,
between the payment of secured and unsecured claims.
Specifically, Fitch studied bankruptcy cases that detail 20 large retail

bankruptcies. While first-lien creditors experienced outstanding recoveries, with
at least one being paid in full in each of the 20 cases, unsecured recoveries were
considerably lower, with the median recovery being about 10%,and the average
recovery about 20%.
When Samsung sees a customer's bankruptcy coming, we now take the steps to
exit the market before the actual filing. Doing so, it has allowed us to avoid
leftover unsecured claim in the majority of the 25 cases that we've seen since I
joined the company in 2003. The only two cases where we held an unsecured
claim were Circuit City and Archbrook Laguna.
In Circuit City, we settled our claim for $50 million less than the thing was worth
and have so far received three installment payments totaling 15% of our
settlement value. In Archbrook, since the bank wasn't even made whole, I expect
that we'll either receive less than 5% or most likely nothing at all.
Finally, I would like to emphasize to the Commission the importance of a strong
creditors' committee in a chapter 11 process. Chapter 11 is a process that best
works when all parties are at the table and part of the process involves funding an
unsecured creditors' committee. If the goal of the proceeding is to merely sell the
debtor's assets in order to satisfy the secured lender, there are other alternatives
for the company and lenders hoping to do that. Debtors looking to successfully
reorganize using chapter 11 should be required to “pay to play” and have the
resources necessary to ensure that all parties are involved in the process.
There is certainly less liquidity and more secured debt in this market today, and
reorganization is more difficult as a result. A creditors' committee brings
credibility to the process by allowing creditors to determine whether the liens of
unsecured creditors are valid, to examine other assets that may have value, [to
review] fraudulent conveyances and preference claims against insiders, and make
sure that the process is fair and economical. Creditor committees also bring a
valuable perspective to the case for the court, as the vendors, unions, and other
parties who are part of the committee’s body are knowledgeable about debtors in
the industry and in business.

* Language clarified in transcription process.

16


Again, I'd like to thank the Commission for allowing me to speak today, and I'm
happy to answer any questions.
Berman:

Thank you, Mr. McNamara. We're going to save questions until Ms. Schirmang is
done.

Sandra Schirmang: First, I'd like to thank the Commission and the American Bankruptcy
Institute for having me here to speak today. My name is Sandra Schirmang, and I
am Senior Director of Credit at Kraft Foods. I'm a former member of the
American Bankruptcy Institute's Board of Directors and former co-chair of the
ABI's Unsecured Trade Creditor Committee.
In the nearly 30 years that I've spent working for Kraft, it's safe to say that Kraft
has been involved in every major bankruptcy case in the food industry because
our products are so ubiquitous. Fleming companies' filing in 2003 was the largest
bankruptcy case in which I participated. It also had a distinction of being a case
where Kraft was able to successfully leverage the Bankruptcy Code's reclamation
[claim] provisions as a creditor remedy.
In the Fleming case, I served as the co-chair of the General Unsecured Creditors'
Committee. In that case, a separate Reclamation Committee was formed. I
supported its formation and ultimately benefited from its work. In Fleming, the
reclamation claims were paid. Considering that the Fleming case was expected to
be a total liquidation when it was filed, largely through pressure from the OCUC
and the Reclamation Committee, we were able to reorganize around Fleming's
Core-Mark subsidiary, which still gets strong business results, and then its

remaining assets were sold.
The Reclamation Committee promoted a pragmatic reconciliation of all claims of
those creditors against the debtor, using a three-prong approach that
simultaneously addressed reclamation claims, unsecured claims, and preferences.
The allowance of the reclamation claims provided unsecured creditors with a rare
and remarkable recovery.
A general reclamation [claim] recovery was always a risk for creditors because of
the way it was structured. It seemed that, as case law developed, any lien wiped
out reclamation [claim] rights, and these claims became secondary to the interests
of a secured lender's liens in inventory. Coupled with the growth in secured debt,
which has been addressed elsewhere, this fact essentially made reclamation
claims valueless.
Debtors often incur second and in some cases third-lien debt in an effort to stave
off bankruptcy, but they are frequently unsuccessful. While the acquisition of this
type of financing is often used by debtors to reassure trade creditors like me, it
often has the opposite effect. With each new tier of debt, Kraft's chance of being
paid what we are owed declines.
* Language clarified in transcription process.

17


Ultimately, I believe that the growth in secured debt has actually pushed more
companies into liquidation, because as secured debt levels increase, debtors can
find it more difficult to purchase inventory on credit. My colleagues up here have
confirmed that. Vendors are less willing to continue selling on credit when they
are not confident that they are going to receive payment.
Too often in the past, unsecured suppliers have sold to debtors and have been left
with little or nothing in a bankruptcy proceeding. The frustration of unsecured
creditors also makes it difficult for debtors to get the supplier credit they need to

successfully function after emerging from bankruptcy.
Before BAPCPA, in my opinion, when reclamation claims were paid, it was
because the debtors felt compelled to maintain good relationships with their
suppliers. Payment of reclamation claims wasn't necessarily a certainty, but it was
something that a debtor had to consider doing if they still wanted credit after
making it out of chapter 11.
Generally speaking, the company that is emerging from reorganization is not
stronger, so if a supplier was owed $1 million pre-petition and if they're lucky,
they get .20¢ on the dollar, they are then asked to double down on that and reopen
another million-dollar credit line for the emerging customer who comes up with
bankruptcy. It's hard for suppliers to come to the table and take that risk. This fact
also makes it hard for the company that just went through a reorganization, raising
a question about whether or not the debtor will be able to get the inventory that
they need in order to function competitively on open unsecured credit terms.
If their new credit from their unsecured supplier is tighter, it makes it harder for
the new debtor to operate effectively and could actually send them back into
liquidation eventually.
Since BAPCPA, although we do send out reclamation [claim] letters, we rarely
actually fight for payment of the claims, choosing instead to focus our recovery
efforts on the section 503(b)(9) 20-day administrative priority claim. This is a
remedy that is much more straightforward than a reclamation [claim], which, as
I've said, has become much less effective. The [section] 503(b)(9) process
provides a much-needed dose of certainty for the unsecured suppliers to continue
shipping to a company in the days leading up to a bankruptcy.
In consumer products industries, we sell on reasonably short terms of sale, and the
implications of [section] 503(b)(9) are very important to us from a financial
standpoint. I would imagine that it's even more important for smaller companies.
Kraft is certainly big enough to absorb a reasonably-sized loss, but when you
think about smaller companies and other businesses that are operating on thin
margins, the disallowance of their [section] 503(b) claim or the elimination of the

* Language clarified in transcription process.

18


statute altogether would cause a great deal of damage to them if, say, one of their
biggest customers were to file bankruptcy.
For large suppliers like Kraft, our ability to rely on section 503(b)(9) allows us to
continue selling to a customer that might be circling the drain because we have
some reasonable certainty of recovery. When a company decides that Kraft
restricts credit to a customer, it can often speed the customer's descent into
bankruptcy.
For instance, for Fleming and A&P, if the debtors' major suppliers had abruptly
restricted credit, these companies would have been forced into bankruptcy more
quickly and less prepared or unprepared. Once a company starts having its credit
lines reduced, it can greatly affect their ability to [maintain] the marketplace,
thereby pushing them in bankruptcy sooner.
Repealing [section] 503(b)(9) would cause much more uncertainty in the supplier
community. It would make such precautionary damaging actions much smarter
moves for suppliers, to the detriment of debtors. As unsecured creditors, we're
willing to take a reasonable risk but not to an outrageous extent and not if we
think that the money won't ever be paid to us. [Section] 503(b)(9) provides
assurance for suppliers to keep struggling companies afloat, since we can be
certain that whatever we ship in that 20-day period has a good probability of
recovery.
Section 503(b)(9) also provides incremental assurance for companies that don't
provide their suppliers with financial statements. Many of our customers are small
to mid-sized companies that are family-owned or otherwise private and don't
release financial information. If there is no public debt on a company, then the
supplier is essentially shipping into a black hole. There are some customers that

won't even provide financial statement to companies the size of Kraft. We base
our credit decisions for these companies on how they pay and other information in
the industry, but we also rely on section 503(b)(9) administrative claims to give us
the assurance we need to sell to such customers.
[*]
Losing this creditor remedy could drive even more bankruptcies [*] as suppliers
are quicker to become more restrictive or pull credit altogether. The key with
section 503(b)(9) is that it creates greater level of certainty, much greater than
we've had with reclamation [claims]. It encourages trade suppliers, who really are
the lifeline of the company, to continue providing support as it works to
restructure outside of bankruptcy.
I think, in a lot of ways, the supplier class has a much closer relationship to the
debtor in bankruptcy than the bankers and the bondholders do. Ours is a symbiotic
relationship. My company can't sell macaroni and cheese unless we've got shelves
* Language clarified in transcription process.

19


to sell it on, and the customers are less likely to attract shoppers without wellstocked shelves. I think we have a greater vested interest in the survival and
reorganization of our customers, and the debtor wants a strong relationship with
their suppliers because they're going to need us [in order to be] to be successful.
In addition, sellers of goods, who are usually wholesalers, are often asked to
deliver goods to parties other than the debtor. This is known as drop shipping.
Various bankruptcy courts have taken the position that a drop shipment is not
eligible for section 503(b)(9) treatment because the goods were never received by
the debtor. However, if the seller of the goods does not deliver to the party to
which the debtor directs them, this would be a breach of contract. So to withhold
administrative claim status provided by section 503(b)(9) in a situation such as
this is very unfair to unsecured sellers of goods. It would be my suggestion that in

reviewing [section] 503(b)(9), the Commission clarify that this section's treatment
supply to drop shipment transactions.
One key element of the Code that allows debtors and the supplier class to work
together while preserving value for the unsecured creditors is through the
unsecured creditors' committee. I have served on several of these committees and
chaired others, and I can attest to how important they are and worthwhile they can
be when all of the players and their professionals in the case are at the table
working for the best overall outcome.
Firstly, the unsecured creditors' committee serves as an important source of
information about the case to the rest of the unsecured creditor. In the initial
confusion after a bankruptcy filing, it's difficult, especially in a potential
liquidation scenario, to even find out what's going on with the case. The debtor's
lawyers and the bank's lawyers are generally not as communicative with general
unsecured trade creditors as they are with each other and with other secured
lenders, so the OCUC provides unsecured creditors with the information they
need, at least insofar as it's possible, and also offers unsecured creditors a chance
to work out problems that would be more difficult to solve outside of a committee
atmosphere.
I served on the general unsecured creditors' committee for the 2005 Winn-Dixie
chapter 11. In that case, the company's corporate and capital structure made
arranging settlements very complex. Winn-Dixie had formed the company by
buying up regional grocery stores. Some of these stores were signatories on some
of the company's loans and their assets were pledged, but other stores were not
pledged, so there was a question around how to figure out which of these different
types of stores were owed money and were part of the different structures of the
debt.
As a committee, we got together and reorganized with different entities to come
up to an equitable agreement to divide the recovery up fairly, rather than by going
* Language clarified in transcription process.

20


through a big litigation and discovery process. Without the unsecured creditors'
committee at the table, such a process would have driven up legal costs and
forced the case to drag on for much longer than was ultimately necessary.
The creditors' committee also gives the unsecured creditor's class the ability to
push back against bigger lenders, providing us with an important mechanism for
balancing out the divergent interests of multiple parties. Our work on the
unsecured creditors' committees in the Fleming case and the Bi-Lo case allowed
us to extract valuable concessions from the secured lenders, specifically in the
form of a carve-out for reclamation claims in Fleming and other concessions in
the Bi-Lo case that allowed unsecured creditors to receive payment in some form
while giving the secured lender what they needed to keep Bi-Lo operating. Bi-Lo
successfully reorganized even with these concessions made to the unsecured and
actually purchased Winn-Dixie last year.
I can't imagine why, with the history of successful creditor committee
contributions, anyone would want to consider eliminating this committee from the
Code. In my experience, they provide a necessary counterpoint to the influence of
secured creditors, one that provides unsecured creditors with better recoveries and
helps create going concern value for the debtor.
With that, I'd like to thank the Commission again in offering a chance for our
community to testify, and I would be happy to answer any questions. Thank you.
Berman:

Thank you very much. Questions from the Commissioners? Mr. Brandt?

Bill Brandt:

My name is Bill Brandt. In addition to serving at DSI, as many of my fellow

Commissioners know, I'm also the chair of the nation's largest state-sponsored
bond issuing agency, so I see this from the creditor side as well.
I speak only for myself and not for the Commission, certainly not for the ABI, but
I think all of you should know that since we began this process about a year ago
now or a little bit more, we have had a fair amount of secured lenders coming
before us to talk about the nature of the practice and how it's changed and that the
claims trading and the debt trading and the rest of it has become integral of U.S.
economy and that we are to take our measure of that before we change the Code.
All of us at the Commission want to thank all of you for coming, this is one of the
best turnouts we've had. Again, speaking for myself, I have written sections of the
Bankruptcy Code, as some of you know, and I have been involved with political
side of this for a long time, I can assure you that there's probably likely no
possibility that the creditors' committee will see a sunset in any revisions we do. I
can also tell you that while all of us have struggled with the central mission of the
Bankruptcy Code, [we] go back and look at an equilibrium that was achieved in
the '80s and '90s, when there were reorganizations and restructures in the truest
sense, and many of us believe that the history of this perhaps will move on from

* Language clarified in transcription process.

21


there to the way that the reorganizations are now done in the United States. Our
task is not to go back to the tides of history but to find a way to reset the
equilibrium so, as the lenders and witnesses have talked about, it will continue to
provide credit support to endeavors that need that in order to survive.
We thank you very much for that testimony. I think I want to leave all of you with
the message, more than a question, that we indeed are not inclined to mess with
section 503(b)(9). In fact, we may well find a way to strengthen it. We have

talked about, and some of the lenders, a few of you whom are here and this will
probably touch your hearts, but we talked about a surcharge. One of the issues
that's been debated among the Commission is the fact that secured lenders have
rights and revenues outside of bankruptcy court in foreclosure and state court that
common creditors don't have. If you're going to avail yourself of the bankruptcy
process, perhaps a way of resetting the equilibrium is to find some way to make
sure that the unsecured creditors are in for a piece of the reorganization no matter
how that's done now. We're not sure how we get there. We're not sure that will be
in the final recommendations to be made.
But I want to assure you that the transformation we see from reclamation [claims]
with administrative claims is important. We also wrestle with the issue of the
timing of the payment of those administrative claims. We understand that just to
be given an administrative claim and then to be told wait two or three years to see
how the case works out may not be what we had in mind. We don't have an
answer for that. But I think I speak for the Commission in general when I say that
none of us are predisposed one way or the other. We understand the equilibrium
needs to be reset. We've got some great scholars and great practitioners and great
political people on this Commission, and we will try and find a way and without
the input we have here today from the NACM, I suspect we'd be in far worse
shape trying to do so, so I thank you all for doing so.
May I ask one [*} question before I turn off my mic, and that is if the reclamation
[claims], as you suggest, and as I suspect, have become so worthless in actual
practicality, is there a way to strengthen [section] 503(b)(9) beyond just
administrative claim, if the witnesses would give us as an offering in a way that
might induce you to either extend further credit or to be more involved in the
process. Mr. Calahan [*]?
Calahan:

Thank you. I think one of the ways to strengthen it would be that we could file our
[section] 503(b)(9) claims as part of our proof of claim form without having to

assert it in court. If we just had it automatically addressed in that manner, I think
it would just help a lot. I think it would save a great deal of cost to the court and
certainly appease our minds a little bit on how importantly lenders and others are
going to address our [section] 503(b)(9) claims.

* Language clarified in transcription process.

22


Brandt:

Some of us, of course, are now moving to elect trying filing of claims, as with
regards to small cases, without a claims agent. But if you just file your proof of
claim [*], if it essentially sits there as an administrative claim, I'm trying to find a
trigger mechanism, and it may well be that it winds up being an administrative
claim, but if you actually want to get value accredited to your case or the filing of
a case, you'll need to do more for a trigger mechanism, it strikes me, than just to
file a proof of claim. You may need to actually be at court to pursue a revenue.

Calahan:

I think that would be one benefit of having a strong creditors’ committee that can
take out those claims and assert that in court. But if you're not certainly in the
committee or if you don't have committee, then you don't have a means to really
have your [section] 503(b)(9) claims acknowledged.

Berman:

Ms. Williamson?

Deborah Williamson: My name is Deborah Williamson. I'm one of the Commissioners. Two or
three questions and they are not necessarily related. Mr. Calahan and Mr.
McNamara, you both mentioned funding for creditors' committees. Where could
the money come from? The case that you mentioned had no DIP loan. I'm just
curious. I understand the importance of having a creditors' committee, but what
do you think the funding should come from?
Calahan:

I believe the funding should come from the estate. All of the committees I've
participated on, the professionals have been funded by the estate. In the examples
that I gave you, the other committee members, we looked at trying to backstop
counsel to represent the committee. Some of those other participants may very
well file bankruptcy themselves as a result of this proceeding. I don't know if that
has been a correct thing to do for Cargill to have jumped in there and paid all of
the attorney fees because I think there has to be some equitable distribution
among unsecured creditors related to those types of expenses. But that was one of
the barriers that we had because some of the unsecured were facing or would
possibly face bankruptcy as a result.

Williamson:

That's my first question, but in the facts that you gave, there was no DIP loan, and
it sounded like there was no excess property which the creditor or the committee
could take from. Are you suggesting that a statutory surcharge against the secured
creditor to always favor the creditors' committee? That's what I'm trying to
understand.

Berman:

If I can, Mr. Calahan, where is the mechanism to put the funds in the favor of
professional?

Brandt:

If I could answer the question, something like a surcharge. If it is written in the
Bankruptcy Code that the committees that were needed to be formed were paid
regardless of the security structure, maybe that would suffice for a suggestion on
your part?

* Language clarified in transcription process.

23


Calahan:

Surcharge sounds great.

Williamson:

Putting aside the constitutional aspects of something like that, that's the question
that I paint. Nine times out of 10, there is a committee. Nine times out of ten there
is a DIP and there is a Cargill. The situation you are talking about is when there
was no DIP and that, what I understood, you were relying on existing credit, an
existing secure credit. It's just I don't know where the source of the money would
come from under those facts, which I think are probably the exception not the
rule. Would you agree?

Calahan:

Most likely.

Williamson:

Then my second question, which is unrelated to that of unsecured creditors, is
again talking about [section] 503(b)(9) and strengthening [section] 503(b)(9).
There is some tension between [section] 503(b)(9) in the statute and the courtmade remedy of creditors that are necessary, like in your case. How do you
believe that [section] 503(b)(9) is going to strengthen or address the tension that
other people, other commentators have pointed out regarding the every creditor
becomes a necessary creditor or it seems like every creditor has in some cases?

Schirmang:

In my experience, we have not had, at least in my industry, [*] we haven't had that
many instances. There have been few. Most recently, [a creditor in] the Bi-Lo case
down South was seen as wholesale business so was a critical vendor, I believe,
but they were supplying all of the groceries to the company, so it did make some
sense, and they had some very elaborate contractual arrangements that contribute
to it. I can see where there are situations where that makes sense, but by and large,
I would think they would be more the exception than the rule. I hope that helps.

Williamson:

I think it answers.

Berman:

Mr. Markus?

Jim Markus: I noticed one of the observations was that losing [section] 503(b)(9) could drive
more bankruptcies. I've actually experienced these at the opposite in two cases
where we had successful out-of-court restructurings that were rushed into
bankruptcies because some of the lenders wanted to avail themselves of their
[section] 503(b)(9) rights so they could leapfrog their unsecured constituents. I'm
wondering if any of you would have an issue if while we're going to preserve the
[section] 503(b)(9) status, if we would also preserve the notion that those
creditors shouldn't have the rights to file involuntary bankruptcies so that they can
in fact leapfrog all the unsecured creditors.
Schirmang:

Not knowing more of the specifics around the case, it's hard to get my arms
around that. I think I understand the concept, but in most cases, I would think that
unsecured creditors would be [assured], if there is a way to make them feel

* Language clarified in transcription process.

24


comfortable with an assignment for benefit of creditors or some kind of an out-ofcourt workout where their rights are still protected.
Berman:

I think the problem becomes if you're going to assert your [section] 503(b)(9)
rights, are you truly a general unsecured creditor? If that's the case, should you be
allowed to assert some right greater than a general unsecured creditor to affect the
greater recovery? Is that a fair?

Markus:

I think the way I try to phrase the issue is, outside of bankruptcy a special remedy
that's protecting the vendor within 20 days may not exist, so when you are
availing yourself of an involuntary [case], you're effectively trying to create
greater rights than you would have in an out-of-court workout. It seems that one
of the tradeoffs for giving these greater rights is to not allow those creditors to
leapfrog the other unsecured creditors who don't have a [section] 503(b)(9) right.

Schirmang:

Couldn't you incorporate that right into the court workout?

Markus:

It just doesn't exist though if you're viewing this through bankruptcy. Again, I'm
just trying to balance the tensions between the view of the trade vendor that's
providing services from the trade vendor that's providing goods.

Berman:

If you're, in fact, doing an out-of-court workout, a good old-fashioned meeting of
creditors and working out a program, you could define a class of the [section]
503(b)(9) creditor as of the date certain and give them the treatment. But that's a
consensual program versus what we're talking about here, which is outside the
bankruptcy, that right doesn't exist, and that's the concern.

Markus:

One other question. In all bankruptcies before BAPCPA, there was always a
notion of paying administrative claims as you go post-petition through projects
and DIP financing orders. I'm wondering if you've seen any kind of distinction

post-BAPCPAs to whether a [section] 503(b)(9) administrative claim gets treated
differently than the post-petition vendor has provided.

Schirmang:

I think sometimes those are the same parties. I think you could, working through
the committee, with the debtor, you can get [section] 503(b)(9) paid during the
pendency of the case and return for extension of current credit and then it just
rolls into credit confirmation, and the cycle keeps going. We've done that in the
food industry. We even did it before BAPCPA with reclamation claims where we
would negotiate with the debtor their agreement to honor reclamation claims and
pay it during the pendency of the case and return for ongoing credit. Basically
they were paying us out of our own money, if you will.

Bruce Nathan: I also think in many chapter 11s with [section] 503(b)(9) claims paid earlier, it's
bristling to a critical vendor order not necessarily based on the creditor's [section]
503(b)(9) credits motion for using that claim.
* Language clarified in transcription process.

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