this objection (the Objection ) to the Corrected First Omnibus Motion of Debtors for Order

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Charlene Poole
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1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE x In re: : Chapter 11 : A123 SYSTEMS, INC., et al., : Case No (KJC) : Debtors. : Jointly Administered : : Re: D.I x OBJECTION OF FISKER AUTOMOTIVE, INC. TO THE CORRECTED FIRST OMNIBUS MOTION OF DEBTORS FOR ORDER UNDER 11 U.S.C. 105(a) AND 365 AND FED. R. BANKR. P AND 6006 AUTHORIZING REJECTION OF EXECUTORY CONTRACTS NUNC PRO TUNC TO THE PETITION DATE Fisker Automotive, Inc. ( Fisker ), by and through its undersigned counsel, hereby files this objection (the Objection ) to the Corrected First Omnibus Motion of Debtors for Order Under 11 U.S.C. 105(a) and 365 and Fed. R. Bankr. P and 6006 Authorizing Rejection of Executory Contracts Nunc Pro Tunc to the Petition Date [Dkt. No. 31] (the Omnibus Motion ) filed by the above-captioned debtors and debtors in possession (the Debtors ). In support of its Objection, Fisker respectfully states as follows: PRELIMINARY STATEMENT A123 Systems, Inc., one of the Debtors ( A123 ), is the exclusive supplier of lithium ion battery packs and modules (the A123 Batteries ) for Fisker s current plug-in hybrid electric vehicle program pursuant to a contract entered into by A123 and Fisker on or about January 13, 2010 (the Fisker Contract ). Notwithstanding the fact that sales under the Fisker Contract admittedly accounted for twenty-six percent (26%) of the Debtors revenue in 2011 and the possibility that a bidder in the Debtors sale process might want the Debtors to assume and assign the Fisker Contract, by the Omnibus Motion the Debtors seek to reject the Fisker Contract as of the Petition Date at a hearing presently scheduled for November 8, 2012, eleven (11) days 1

2 before their proposed auction date and eighteen (18) days before their proposed sale hearing. In so doing, the Debtors will saddle their estates and creditors with a claim of as much as, if not more than, $100 million and severely harm Fisker. Consequently, as demonstrated below, the Debtors have not, and will not, be able to establish a sufficient evidentiary basis for rejecting the Fisker Contract as of the Petition Date. Therefore, the Omnibus Motion with respect to the Fisker Contract should be denied without prejudice to the Debtors seeking the same relief upon the conclusion of the Debtors proposed sale process. BACKGROUND I. THE DEBTORS CHAPTER 11 FILINGS AND THE OMNIBUS MOTION TO REJECT THE FISKER CONTRACT 1. On October 16, 2012 (the Petition Date ), the Debtors each filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the Bankruptcy Code ) in the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court ). 2. The Debtors continue to manage their properties and operate their businesses as debtors in possession pursuant to Bankruptcy Code sections 1107 and No trustee or examiner has been requested in these chapter 11 cases. 3. On the Petition Date, the Debtors filed the Motion of Debtors for Order (I) Under 11 U.S.C. 105(a), 363, 365m 503, 507, and 1146(a), Fed. R. Bankr. P. 2002, 6004, 6006, 9007 and 9014 and Del. Bankr. L.R , and Authorizing and Approving (A) Bidding Procedures in Connection with the Sale of Certain Assets of the Debtors, (B) Stalking Horse Bid Protections, (C) the Form and Manner of Notice of the Sale Hearing and (D) Related Relief; and (II) Under 11 U.S.C. 105(a), 363, 365, 503, 507 and 1146(a), Fed. R. Bankr. P. 2002, 6004, 6006, 9007 and 9014 and Del. Bankr. L.R , and Authorizing 2

3 (A) the Sale of Certain Assets of the Debtors Free and Clear of All Claims, Liens, Liabilities, Rights, Interests and Encumbrances Except for Permitted Encumbrances; (B) the Debtors to Enter into and Perform Their Obligations Under the Asset Purchase Agreement; (C) The Debtors to Assume and Assign Certain Executory Contracts and Unexpired Leases; and (D) Related Relief [Dkt. No. 34] (the Sale Motion ), pursuant to which the Debtors sought approval of certain bid procedures in connection with their proposed sale of substantially all of their assets to Johnson Controls, Inc. ( JCI ). The hearing on the bid procedures portion of the Sale Motion has been adjourned to November 5, By the Sale Motion, the Debtors request approval to hold an auction for substantially all of their assets on November 18, 2012 and a sale hearing with respect to the ultimate sale of their assets be scheduled for November 26, See Sale Motion at On the Petition Date, the Debtors also filed the Omnibus Motion, pursuant to which they seek this Court s approval of their request to reject thirty-five (35) contracts, including the Fisker Contract (as defined below), nunc pro tunc to the Petition Date. The hearing on the Omnibus Motion is set for November 8, II. A123 S CONTRACTUAL RELATIONSHIP WITH FISKER 5. Fisker is a global leader in the manufacturing of luxury plug-in hybrid electric vehicles with extended-range. Its first vehicle, known as the Karma sedan, uses the A123 Batteries as a key powertrain component to provide an eco-friendly, yet upscale, hybrid electric option for today s market. 6. On January 13, 2010, Fisker and A123 Systems, Inc. entered into the Fisker Contract, pursuant to which A123 agreed to be the exclusive supplier to Fisker of the A123 Batteries for the life of certain Fisker Karma plug-in hybrid electric vehicle programs, provided 3

4 that A123 continued to meet Fisker s engineering specifications as well as certain requirements related to performance, quality, durability, and delivery. The Fisker Contract contained a warranty that all products delivered by A123 pursuant to the Fisker Contract would conform to certain product specifications, be merchantable, and be free from defects in material and workmanship. The Fisker Contract contains certain provisions for the award of future programs to A123. By its terms, the Fisker Contract would expire on January 13, 2020, in absence of default. 7. Pursuant to the Fisker Contract, Fisker had purchased and installed approximately 2,600 A123 Batteries into its Karma vehicles prior to the Petition Date. Unfortunately, however, some of the original A123 Batteries were determined to contain potentially defective prismatic cells that can cause premature failure of the affected A123 Batteries. Consequently, in March 2012, A123 publicly announced that it was launching a field campaign to replace the defective A123 Batteries supplied to Fisker. As of the Petition Date, Fisker estimates that approximately 2,000 of the affected A123 Batteries purchased by Fisker have not yet been replaced. 1 OBJECTION I. THE OMNIBUS MOTION SHOULD BE DENIED BECAUSE THE DEBTORS REJECTION OF THE FISKER CONTRACT PRIOR TO THE COMPLETION OF THE SALE PROCESS IS NOT IN THE BEST INTERESTS OF THE DEBTORS ESTATES AND CREDITORS 8. Section 365(a) of the Bankruptcy Code provides that, subject to a court s approval, a trustee may assume or reject any executory contracts or unexpired leases of the debtor. 11 U.S.C. 365(a). In determining whether to assume or reject an executory contract under section 365(a), the trustee must exercise sound business judgment. See Sharon Steel Corp., v. Nat l. Fuel Gas Distrib. Corp., 872 F.2d 36, (3d Cir. 1989); Nostas Assocs. v. 1 To the extent that A123 has A123 Batteries in its possession that are to be supplied to Fisker in connection with the replacement program, Fisker contends that it holds title to such Batteries and that A123 is merely a bailee. 4

5 Costich (In re Klein Sleep Prods., Inc.), 78 F.3d 18, 25 (2d Cir. 1996); Orion Pictures Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir. 1993). In addressing a debtor s motion to assume or reject a contract, courts in the Third Circuit seek to maximiz[e] the return to creditors by permitting a debtor in possession to renounce title to and abandon burdensome property if such action is in the best interests of the estate. In re Trans World Airlines, Inc., 261 B.R. 103, 117 (Bankr. D. Del. 2001) (stating further that section 365 is to function as a mechanism through which severe financial burdens may be lifted ). 9. In the instant case, the Debtors rejection of the Fisker Contract nunc pro tunc as of the Petition Date is not an exercise of sound business judgment because it presupposes a sale to JCI, ignoring the possibility that another bidder may be interested in assuming the Fisker Contract, and imposes on the Debtors estates and creditors a claim of as much as, if not more than, $100 million. Thus, the Omnibus Motion should be denied, without prejudice to the Debtors right to seek the same relief after the conclusion of the sale process. A. Debtors Rejection Of The Fisker Contract Prior To The Conclusion Of The Sale Process Forfeits The Potential Value Of The Fisker Contract And Imposes A Significant Liability On The Debtors Estates 10. The Debtors have the burden to establish that the rejection of a contract will benefit their bankruptcy estates and creditors. See Sharon Steel Corp., 872 F.2d at 39 (upholding the bankruptcy court s approval of the debtors rejection of the contract upon finding that the rejection would benefit the estate ); In re Fleming Companies, Inc., 308 B.R. 689, 691 (Bankr. D. Del. 2004) ( Where the rejection of an executory contract would benefit the estate, rejection is appropriate. ); In re Cent. Jersey Airport Servs., LLC, 282 B.R. 176, 183 (Bankr. D.N.J. 2002) ( [T]he trustee or debtor in possession needs to establish that rejection will benefit the estate. ). As demonstrated below, the Debtors Omnibus Motion provides only conclusory statements as to 5

6 why the Fisker Contract should be rejected as of the Petition Date. Consequently, absent an evidentiary showing of particularized facts demonstrating that the Fisker Contract will provide no benefit to the Debtors estates and creditors, the Omnibus Motion should be denied. See In re Riodizio, Inc., 204 B.R. 417, 426 (Bankr. S.D.N.Y. 1997) (holding that the record was insufficient to determine whether the debtor should be permitted to reject a particular contract where, having outlined only some of the relevant benefits and burdens of the contract at issue, the debtor had failed to quantify the rights and obligations under the contract or to provide an evidentiary basis to support the decision to reject). 11. In the Omnibus Motion, the Debtors assert that the contracts listed on Exhibit A of the Omnibus Motion (the Rejected Contracts ), including the Fisker Contract, are below market, forcing the Debtors to perform under the contracts at a net loss, and include burdensome warranty obligations, primarily associated with the Debtors automotive solutions group, that are no longer beneficial to the Debtors going-forward business. See Omnibus Motion 8. The Debtors do not, however, allege specific facts in the Omnibus Motion about the Rejected Contracts in general or the Fisker Contract in particular. For example, although the Declaration of David Prytash in Support of Chapter 11 Petitions and First Day Motions [Dkt. No. 4] (the Prytash Declaration ), states that the Fisker Contract constitutes twenty-six percent (26%) of the Debtors income, see Prytash Declaration 30, the Omnibus Motion makes no attempt to identify or quantify the purported burdens that would be imposed on the Debtors if the Fisker Contract were assumed or performed during the time the sale process is conducted. Absent such a showing, the Court cannot determine that the Debtors have exercised sound business judgment. 12. Indeed, it appears that the only reason that the Fisker Contract is being rejected as of the Petition Date is because the stalking horse bidder, JCI, has determined that it does not 6

7 want to assume the Fisker Contract as is and seeks to obtain leverage with respect to the Fisker relationship. Specifically, as both A123 and JCI know, Fisker has no near-term alternative supplier of the A123 Batteries used for the Karma program in the amounts that Fisker requires. Consequently, the rejection of the Fisker Contract as of the Petition Date appears to be solely for the purpose of providing JCI with significant negotiating leverage. That reason does not, however, demonstrate that the rejection of the Fisker Contract by the Debtors as of the Petition Date is a sound exercise of the Debtors business judgment because JCI s leverage provides no further value to the Debtors and the rejection of the Fisker Contract without exploring alternative solutions risks imposing significant claims against the value the Debtors receive in the sale process. 13. Specifically, as debtors and debtors in possession, the Debtors have a fiduciary obligation to maximize value for their creditors and other stakeholders. See In re Mushroom Transp. Co., Inc., 382 F.3d 325, 339 (3d Cir. 2004) ( In Chapter 11 cases where no trustee is appointed,... the debtor-in-possession... enjoys the powers that would otherwise vest in the bankruptcy trustee... [including] the trustee s fiduciary duty to maximize the value of the bankruptcy estate.... The debtor-in-possession s fiduciary duty to maximize includes the duty to protect and conserve property in its possession for the benefit of creditors. ) (internal citations omitted). To do so, the Debtors have two obligations with respect to the course they have chosen: (i) to maximize the value they receive in the sale process, and (ii) to minimize the claims against the value they realize from the sale of their assets. By seeking to reject the Fisker Contract as of the Petition Date, the Debtors have essentially deprived all other bidders of the opportunity to assume the Fisker Contract (as is or as may be amended) and the revenue stream generated under the Fisker Contract. The Debtors have also tilted the auction in favor of JCI and 7

8 against those bidders that might wish to work with Fisker in the sale process and thereby provide the Debtors with a higher or better offer by way of higher value for their assets, smaller claims against that value or some combination of both. 2 Indeed, by rejecting the Fisker Contract as of the Petition Date the Debtors have done nothing but assured that an additional claim of $50 to 100 million or more will be asserted against the net sale proceeds the Debtors ultimately receive. 14. Specifically, because A123 has acknowledged that the original A123 Batteries were defective and, thus, that it was in breach of the warranty provisions of the Fisker Contract, Fisker presently holds a claim against the Debtors estates for both third-party indemnification and breach of that warranty. Based on the number of battery packs and modules that are expected to fail, Fisker would hold a claim in excess of $52 million. Indeed, that is exactly why A123 embarked upon the replacement program in March to mitigate its damages. The Debtors rejection of the Fisker Contract and its repudiation of its undertaking to replace the defective A123 Batteries, will thus result in the Debtors estates being liable for a contract rejection damage claim in excess of $63 million as well as the $52 million claim related to the defective A123 Batteries, which claim may be entitled to administrative status regardless of whether or not the Fisker Contract is rejected. 3 Therefore, the Debtors rejection of the Fisker Contract will have a 2 Nor may the Debtors argue that they have not foreclosed this possibility because a potential buyer may still come in before the hearing on the Omnibus Motion. As set forth below, to obtain nunc pro tunc relief on the Omnibus Motion as the Debtors have requested, their intent to reject must be unequivocal. See below. 3 In the event the A123 Batteries continue to be defective postpetition, the Debtors rejection of the Fisker Contract will not eliminate Fisker s claim for an administrative expense against the estates pursuant to section 503(b). See Reading Co. v. Brown, 391 U.S. 471, 485 (1968) (holding that damages resulting from the negligence of a [debtor] acting within the scope of his authority give[s] rise to actual and necessary costs within the meaning of section 503(b); In re Res. Tech. Corp., 662 F.3d 472, 476 (7th Cir. 2011) (stating that [t]ort liability is an expense of doing business, like labor or material costs, and should be treated the same way); In re Hayes Lemmerz Int l, 340 B.R. 461, 480 (Bankr. D. Del. 2006) (concluding that contract claims should be treated as were the tort claims in Reading Co and, thus, as administrative expense claims). 8

9 direct and significant negative impact on creditors recoveries in these cases and may well result in the Debtors administrative insolvency Furthermore, in the event the Court grants the Omnibus Motion, there is a significant likelihood that Fisker s ongoing business and operations will be severely disrupted and harmed. Specifically, as set forth above, A123 is currently the sole supplier of battery packs and modules for the Fisker Karma, which means that there is no other alternative supplier that, in the near term, can meet Fisker s production requirements for battery packs for the manufacture of new vehicles or provide battery packs and modules to allow Fisker to replace the defective A123 Batteries sold by A123 to Fisker if any as they fail. Consequently, the rejection of the Fisker Contract represents an immediate threat of significant disruption and harm to Fisker;s business, with a corresponding negative impact on Fisker s lenders, suppliers, customers, employees, and investors. Thus, for this reason as well, the Debtors request to reject the Fisker Contract as of the Petition Date should be denied without prejudice to the Debtors requesting the same relief after the conclusion of the sale process if the Fisker Contract is not assumed. 5 4 Fisker does not waive, and expressly reserves, its right to contend that the purchaser of the Debtors assets will be liable for any warranty claims as a successor in interest to A123 or otherwise. 5 Although this court has previously stated that [i]n determining the benefit to the estate, the burden or impact that rejection will have on a nondebtor party is not a factor to be considered in determining the propriety of a decision to reject, In re Exide Technologies, 340 B.R. 222, 245 n. 33 (Bankr. D. Del. 2006) appeal denied, judgment aff'd, BK (KJC), 2008 WL (D. Del. Feb. 27, 2008) vacated and remanded, 607 F.3d 957 (3d Cir. 2010); see also In re Trans World Airlines, 261 B.R. at 122 (refusing to consider the interests of the non-debtor party despite the fact that rejection of the contract at issue would close one branch of the non-debtor s business because a denial would foreclose the chance for a section 363 sale for the debtor); In re Wheeling- Pittsburgh Steel Corp., 72 B.R. 845, 847 (Bankr. W.D. Pa. 1987) (electing not to consider the effect of rejection on the non-debtor utility), the potential for significant harm to Fisker and its creditors and stakeholders at least justifies denying the Omnibus Motion with respect to Fisker without prejudice to the Debtors pursuing such relief at the conclusion of the sale process. Cf. N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 525 (1984) (holding that the special nature of the rights implicated, as well as the significant harm that could be done by rejecting such an agreement under section 365, required the Court to balance the equities of the parties, rather than merely look at the effect on the debtor). 9

10 B. The Debtors Purported Justification For Rejecting The Fisker Contract Nunc Pro Tunc As Of The Petition Date Does Not Warrant Such Extraordinary Relief 16. Although it is within this Court s equitable powers to enter an order granting the Debtors request to deem the rejection of the Fisker Contract effective as of the Petition Date, such an order is appropriate only as long as it promotes the purposes of section 365(a). Thinking Mach. Corp v. Mellon Fin. Servs. Corp. #1 (In re Thinking Mach. Corp.), 67 F.3d 1021, 1028 (1st Cir. 1995). Indeed, such nunc pro tunc relief should be granted only when the balance of equities preponderates in favor of such remediation. Id.; see also In re Chi-Chi s, Inc., 305 B.R. 396, 399 (Bankr. D. Del 2005) (stating that only after balancing the equities in a particular case, should the court approve a retroactive rejection ). More importantly, in In re Fleming Co., Inc., Judge Walrath explained that such extraordinary relief is permitted only in certain circumstances... [and] when the principles of equity so dictate. In re Fleming Co., Inc., 304 B.R. 85, 96 (Bankr. D. Del. 2003) (citing In re CCI Wireless, LLC, 279 B.R. 590 (Bankr. D. Colo. 2002) and In re Valley Media, No (PJW), 2003 WL (Bankr. D. Del. Aug. 14, 2003)), and held that, [t]o grant nunc pro tunc rejection, the Debtors must have stated an unequivocal intent to reject the leases. Id. 17. Here, the Debtors have failed to establish that the extraordinary remedy of retroactive relief is justified for two reasons. First, in the Omnibus Motion the Debtors did not express the required unequivocal intent. Indeed, nowhere in the Omnibus Motion did the Debtors waive their right to withdraw, amend, or modify the Omnibus Motion or modify the relief to remove some of the proposed Rejected Contracts. Nor could they, as their fiduciary duty to obtain the highest or otherwise best value in the sale process requires Debtors to leave 10

11 open the possibility that some or all of the proposed Rejected Contracts might be assumed by a potential bidder. 18. Second, the Debtors have not carried their burden to demonstrate that rejection of the Fisker Contract as of the Petition Date promotes the purposes of section 365(a) and that the balance of equities weighs in favor of entry of a nunc pro tunc order. In particular, the Debtors only justification for such extraordinary relief appears in footnote four where the Debtors allege that nunc pro tunc relief is appropriate in order to stem any argument from a Contract counterparty that administrative obligations have accrued under the Contracts on or after the Petition Date. See Omnibus Motion 9, n.4. Such a conclusory allegation is simply insufficient. Instead, the Debtors should be put to the burden of demonstrating that the alleged administrative claim the Debtors believe they are avoiding by rejecting the Fisker Contract on the Petition Date is more real and burdensome than the actual damage claim that will result and the potential benefit that the estates might gain if the Fisker Contract is assumed by the ultimate purchaser. RESERVATION OF RIGHTS 19. Fisker reserves the right to amend, modify, or supplement this Objection prior to the conclusion of the hearing on the Omnibus Motion, including any adjourned hearing, and further reserves the right to assert additional objections at such hearing. 11

12 CONCLUSION WHEREFORE, Fisker respectfully requests that this Court deny the Omnibus Motion and find that rejection of the Fisker Contract is not in the best interests of the estates and grant such other relief as this Court deems necessary and proper. Dated: October 30, 2012 New York, New York /s/ Gregg M. Galardi Gregg M. Galardi (DE ) DLA PIPER LLP (US) 919 North Market Street Wilmington, Delaware Telephone: Facsimile: Daniel G. Egan (pro hac vice pending) DLA PIPER LLP (US) 1251 Avenue of the Americas New York, New York Telephone: Facsimile:

Case CSS Doc 147 Filed 09/18/14 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE.

Case CSS Doc 147 Filed 09/18/14 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE. Case 14-11987-CSS Doc 147 Filed 09/18/14 Page 1 of 7 IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE In re: FCC HOLDINGS, INC., et al., 1 Debtors. Chapter 11 Case No. 14-11987 (CSS)