IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE
In re
The Hertz Corporation, et al.,1
Debtors.
Chapter 11
Case No. 20-11218 (MFW) (Joint Administration Requested)
DEBTORS’ MOTION FOR ENTRY OF INTERIM AND FINAL ORDERS (I) AUTHORIZING, BUT NOT DIRECTING, THE DEBTORS TO
PAY PREPETITION CLAIMS OF FOREIGN AND CRITICAL VENDORS, (II) CONFIRMING ADMINISTRATIVE EXPENSE PRIORITY STATUS FOR
OUTSTANDING PREPETITION PURCHASE ORDERS, AND (III) GRANTING RELATED RELIEF THERETO
The debtors and debtors in possession (collectively, the “Debtors,” and, together with their non-Debtor affiliates, the “Company”) in the above-captioned cases hereby file this motion (the “Motion”) for entry of an interim order substantially in the form attached hereto as Exhibit
A (the “Interim Order”) and a final order substantially in the form attached hereto as Exhibit B
(the “Final Order,” and together with the Interim Order, the “Orders”) granting the relief described below. In support of this Motion, the Debtors rely upon and incorporate by reference the Declaration of Jamere Jackson in Support of Debtors’ Petitions and Requests for First Day
Relief (the “First Day Declaration”),2 filed concurrently herewith. In further support of the
Motion, the Debtors, by and through their undersigned counsel, state as follows:
1 The last four digits of The Hertz Corporation’s tax identification number are 8568. The location of the
debtors’ service address is 8501 Williams Road, Estero, FL 33928. Due to the large number of debtors in these chapter 11 cases, for which joint administration for procedural purposes has been requested, a complete list of the debtors and the last four digits of their federal tax identification numbers is not provided herein. A complete list of such information may be obtained on the website of the debtors’ proposed claims and noticing agent at https://restructuring.primeclerk.com/hertz.
2 Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in the
RELIEF REQUESTED
1. By this Motion, pursuant to sections 105(a), 363(b), and 503 of title 11 of the United States Code (the “Bankruptcy Code”) the Debtors seek entry of the Interim Order and the Final Order (i) authorizing, but not directing, the Debtors to honor prepetition obligations owed to certain vendors, suppliers, service providers, authorities, and other parties, all as described in more detail below (the “Critical Vendors,” and the claims of such vendors “Critical Vendor Claims”), including the claims of certain vendors located in foreign jurisdictions (the “Foreign Vendors,” and the claims of such vendors “Foreign Vendor
Claims”)3 and (ii) confirming the administrative expense priority status of all undisputed
obligations of the Debtors arising out of outstanding Prepetition Purchase Orders (as defined below). The following table details the amount of Critical Vendor Claims the Debtors seek authority to pay pursuant to this Motion:
Category Estimated Amount To Be Paid Within Interim Period (in millions) Total Estimated Amount To Be Paid (in millions)
U.S. Rental Business Critical Vendors $ 22.3 $ 44.2
U.S. Donlen Critical Vendors $ 9.8 $ 19.6
Foreign Vendors $2.5 $ 5.1
Total: $ 34.6 $ 68.9
2. The Debtors request authority, but not direction, to pay Critical Vendor Claims on the following terms and conditions:
3 For the avoidance of doubt, the term “Critical Vendors” as used in this motion includes Foreign Vendors
a. The Debtors in their sole discretion, subject to the limitations set forth below, will determine which Critical Vendor Claims, if any, will be paid pursuant to the Orders;
b. If a Critical Vendor accepts payment under the Orders, such creditor is deemed to have agreed to continue to provide goods or services to the Debtors during the pendency of these Chapter 11 Cases on Customary Trade Terms (as defined below) and, as necessary to ensure compliance with Customary Trade Terms, the Debtors will be authorized, but not directed, to condition payment pursuant to the Proposed Interim Order or the Proposed Final Order upon entry into a Trade Agreement (as defined below); and
c. If any specified Critical Vendor accepts payment for a prepetition obligation of the Debtors premised on compliance with the above conditions and thereafter fails to comply with the agreed terms or such other terms agreed to by the Debtors, the Debtors reserve all rights to treat any payment made pursuant to the relief granted in the Orders as an unauthorized post-petition transfer and to exercise any and all appropriate remedies.
3. Additionally, the Debtors request that the Orders (a) authorize all applicable banks and other financial institutions (collectively, the “Banks”), when requested by the Debtors, to receive, process, honor, and pay any and all checks, drafts, and other forms of payment, including fund transfers (collectively, the “Payments”), made in connection with the Critical Vendor Claims, whether such Payments were submitted before, on, or after the Petition Date, provided that sufficient funds are on deposit in the applicable accounts to cover such Payments and that any such Bank shall not have any liability to any party for relying on such direction by the Debtors; (b) authorize the Banks to rely on any directions and representations of the Debtors as to which Payments are subject to this Motion, provided that any such Bank shall not have any liability to any party for relying on such directions or representations by the Debtors; (c) authorize, but not direct, the Debtors to issue new postpetition checks or effect new postpetition fund transfers or other new postpetition Payments to replace any checks, drafts, and other forms of payment, including fund transfers, which may be inadvertently dishonored or
rejected; and (d) authorize, but not direct, the Debtors to continue in their ordinary course to make Payments on account of the Critical Vendor Claims.
4. In addition, the Debtors request that the Court schedule a final hearing (the “Final
Hearing”)4 to consider the relief requested herein on a final basis and entry of the Final Order.
5. For the reasons set forth herein, the Debtors submit that the relief requested is in the best interest of the Debtors, their estates, creditors, and other parties in interest.
JURISDICTION, VENUE AND PREDICATES FOR RELIEF
6. This Court has jurisdiction to consider this Motion under 28 U.S.C. §§ 157 and 1334 and the Amended Standing Order of Reference from the United States District Court for the District of Delaware, dated February 29, 2012 (Sleet, C.J.). This is a core proceeding under 28 U.S.C. § 157(b). Venue of these Chapter 11 Cases (as defined below) and this Motion is proper in this District under 28 U.S.C. §§ 1408 and 1409.
7. The predicates for the relief requested by this Motion are sections 105(a), 363(b), and 503 of the Bankruptcy Code, and Rules 6003 and 6004 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”).
8. Pursuant to Rule 9013-1(f) of the Local Rules of Bankruptcy Practice and Procedure of the United States Bankruptcy Court for the District of Delaware (the “Local
Rules”), the Debtors consent to the entry of a final judgment or order with respect to this Motion
if it is determined that this Court lacks Article III jurisdiction to enter such final order or judgment absent consent of the parties.
4 The period between the date this Motion was filed and the Final Hearing is referred to herein as the
“Interim Period.” The Debtors estimate that the Interim Period will last thirty (30) days where such an estimate is required for the purposes of the relief requested herein.
BACKGROUND
I. Overview
9. On May 22, 2020 (the “Petition Date”), the Debtors each commenced with this Court a voluntary case under chapter 11 of the Bankruptcy Code (collectively, the “Chapter 11
Cases”). The Debtors have filed a separate procedural motion requesting that the Chapter 11
Cases be jointly administered. The Debtors continue to operate their businesses and manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. No creditors’ committee has been appointed by the Office of the United States Trustee for the District of Delaware (the “U.S. Trustee”), nor has a trustee or examiner been appointed in these Chapter 11 Cases.
10. The Company is a leading provider of vehicle rentals around the world, serving customers under the Hertz, Dollar, Thrifty, and Firefly brands. The Company and its franchisees operate a total of more than 10,000 locations across North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East and New Zealand. Hertz’s motto, “we’re here to get you there,” reflects the Company’s fundamental function: to help its customers move about and explore, whether close to home or on the other side of the globe.
11. In addition to their vehicle rental businesses, the Debtors offer leasing and fleet management services in the United States and Canada through Debtor Donlen Corporation (“Donlen”) and certain of its subsidiaries. Donlen provides a variety of fleet services to North American companies that operate vehicle fleets of all different sizes, allowing customers to focus on their core businesses while Donlen helps them achieve efficiencies in their fleet operations.
12. With air travel at record levels in 2018 and 2019, the Company was prospering. It reported adjusted corporate EBITDA of $433 million and $649 million in those years,
respectively, and, through the end of 2019, achieved ten consecutive quarters of year-over-year revenue growth. In March of 2020, however, the Company’s business was acutely impacted by reductions in travel and restrictions on movement brought about by the coronavirus pandemic. Whether voluntarily or by government mandate, the air travelers the Company serves largely stopped flying and its local customers largely stopped driving. The effect on the Company’s revenue was devastating.
13. At the same time, the crisis subjected the Company to unanticipated demands on its cash reserves. A sharp and unexpected reduction in used car values precipitated by the coronavirus crisis burdened the Company with a substantial cash payment due April 27, 2020 in connection with its primary U.S. rental fleet financing arrangement. The Company elected not to consume its precious liquidity and did not make that payment. A short forbearance and waiver period allowed the Company to reach accords with creditors in Europe and Australia on additional temporary or permanent waivers. However, it failed to yield a longer-term solution with the Company’s primary U.S. and Canadian creditor groups. Accordingly, the Debtors commenced these Chapter 11 Cases with the goals of stabilizing their operations, assessing their options, and charting a course for a strong future.
14. Additional background and information regarding the Company, including its business operations, its corporate and capital structure, its restructuring activities, and the events leading to the commencement of these Chapter 11 Cases, is set forth in detail in the First Day Declaration.
II. The Debtors’ Critical Vendor Claims
15. The Debtors operate in a highly competitive environment, where certainty, customer satisfaction, and the ability to maintain repeat business are critically important.
Retaining current customers and preserving the ability to bring in new customers will ultimately increase the Debtors’ revenue thereby promoting their efforts to successfully reorganize and preserving the value of the Debtors’ enterprise pending reorganization. Through the course of their business, the Debtors have developed relationships with certain suppliers, service providers, partners, and other parties (namely, the Critical Vendors) whose goods and services are essential to ensuring the Debtors can continue to maintain operations and bring in customers. Such parties would be difficult, and in some cases impossible, for the Debtors to replace.
16. Detailed descriptions of the Critical Vendors of both the Debtors’ rental business (the “Rental Business Critical Vendors”) and the Debtors’ fleet leasing and fleet management services business (the “Donlen Critical Vendors”), are provided below, including explanations as to why failing to pay the prepetition claims of such vendors would likely cause severe disruption to the Debtors’ business.
17. The Debtors seek authority to pay Critical Vendor Claims in the amounts outlined in the chart above. The Debtors are not seeking to pay the amounts listed above immediately or in one lump sum; rather, the Debtors intend to pay these amounts either as they become due and payable in the ordinary course of business or, in most cases, at an even later date to the extent the Debtors can reasonably put off payment without disrupting their business. Accordingly, the Debtors believe they will have sufficient liquidity to pay the Critical Vendor Claims during the administration of these Chapter 11 Cases.
III. The Debtors’ Criteria for Identifying Critical Vendors
18. To determine which vendors the Debtors would seek to pay as Critical Vendors, the Debtors evaluated whether each vendor:
b. cannot be feasibly replaced because it is the sole or limited source for the goods or services it provides;
c. is not otherwise obligated to perform under existing contracts and is likely to cease providing goods or services if its prepetition claims are not paid;
d. provides advantageous pricing or other terms such that replacing the vendor postpetition would result in significantly higher costs to the Debtors;
e. already has an administrative priority claim under section 503(b)(9) of the Bankruptcy Code;
f. will be able to obtain or has already obtained a liens on the Debtors’ property or has possession of the Debtors’ property and will retain such property until payment is made;
g. is a Foreign Vendor that may not recognize the Debtors’ Chapter 11 Cases or the Protections provided by the Bankruptcy Code; and/or
h. would be likely to cause other disruptions to the Debtors’ business if not paid that will outweigh the costs of paying its prepetition claims.
As a result of their review and evaluation, the Debtors have identified the limited subset of vendors that they now seek authority to pay through this Motion.
IV. Descriptions of the Critical Vendors
Rental Business Critical Vendors
19. In their North American rental car business alone, the Debtors rely on approximately 40,000 vendors, suppliers, and other transaction parties to provide the goods and services they require to keep their business operating from day to day. The Debtors evaluated the factors detailed above to reach the small subset of those tens of thousands of vendors that constitute “Critical Vendors.” Based on this evaluation, the Debtors’ Rental Business Critical Vendors generally fit in the following categories, all explained in greater detail below, (1) maintenance, repair, and operations suppliers and service providers, (2) Strategic Partners (as defined below), (3) departments of motor vehicles and related claimants, (4) vendors that perform airport mandated capital expenditures and related environmental fuel systems work, and
(5) other miscellaneous Rental Business Critical Vendors. The Debtors are not seeking to pay every vendor that might fit into such a category, but only those specific vendors that are essential to the Debtors’ business and likely to cause a disruption if they are not paid for their prepetition claims.
Maintenance, Repair, and Operations Suppliers and Service Providers
20. In the ordinary course of business, the Debtors utilize certain goods and service providers to assist with the upkeep, maintenance, and repair of their fleet of vehicles and ensure that they have the necessary goods, materials, and services to facilitate undisrupted operations.
21. The Debtors operate their own vehicle maintenance centers at or near certain business hubs. Such centers are outfitted with sophisticated vehicle diagnostic and repair equipment and are accepted by automobile manufacturers as eligible to perform and receive reimbursement for warranty work. Certain suppliers that provide goods and equipment to these operations are essential to ensuring uninterrupted maintenance and repairs on the Debtors’ fleet either because they provide goods or services on favorable trade terms, in such a quantity, or on such a timeline unavailable from other suppliers. For example, the Debtors regularly require body panels or other parts that are only available from a handful of vendors, including certain vendors that, due to their scale or market position, are able to obtain such parts at reduced pricing from original equipment manufacturers and pass on those savings to the Debtors. The Debtors could not replace such vendors on the terms they provide.
22. Additionally, the Debtors frequently utilize third-party maintenance, repair, and operations services, including for full collision repairs, light repair, and preventative maintenance. They also use services that assist in transporting vehicles to and from the Debtors’ rental locations and third-party body shops or elsewhere as required in the ordinary course of
business. Several of the maintenance, repair, and operations service providers the Debtors seek to pay through this Motion operate on a scale and have the national reach to provide the Debtors with terms (including pricing and credit terms) and coverage that is not available from any other single vendor or even combination of vendors. These vendors have been integrated into the Debtors’ business to such an extent that replacing them would cause significant hardship and result in substantially worse terms for go-forward services provided.
23. Further, in certain geographic areas, the third party maintenance, repair, and operations providers that the Debtors utilize are the only realistic option. If these vendors refused to conduct business with the Debtors due to a missed payment, the Debtors would have no alternatives for these essential services. Additionally, several of the maintenance, repair, and operations suppliers that the Debtors utilize in particular areas are extremely dependent on the Debtors’ business. During the downturn created by the coronavirus pandemic, these suppliers are more reliant than ever on each payment from the Debtors. Failing to make some prepetition payments to such vendors could have disruptive effects on their own business, which in turn would ripple back to negatively impact the Debtors as well as the economy as a whole.
24. The fleet of rental vehicles the Debtors’ maintain is massive, peaking at over 770,000 vehicles in 2019. As such, at any given time a sizable number of the Debtors’ vehicles are located at third-party body shops or maintenance facilities for repairs or maintenance in the ordinary course. The service providers in control of such vehicles could assert possessory liens over them or refuse to release them to the Debtors absent payment. Shippers of parts and equipment could also assert such rights. Further, some suppliers that Debtors already consider Critical Vendors for other reasons have delivered goods to the Debtors within the twenty days preceding the Petition Date and therefore may be entitled to administrative claims under section
503(b)(9) of the Bankruptcy Code. Authorizing payment to such vendors now is only a matter of timing, with the attendant benefit of ensuring the Debtors are able to maintain channels to the parts, suppliers, and equipment, necessary to maintain their fleet.
25. The Debtors also rely on an assortment of other vendors to conduct operations of their fleet. For example, in addition to large-scale vendors, they utilize temporary labor companies to provide a workforce necessary to move vehicles from one location to another to facilitate maintenance, repair, and general upkeep on an ad hoc basis. These vendors count on the Debtors to pay their employees and are likely to refuse to continue allowing the Debtors to tap into their labor pool if they fail to pay outstanding amounts.
26. By this Motion, the Debtors do not seek to pay all maintenance, repair, and operations suppliers and service providers. Instead, the Debtors have considered the criteria listed above in Section III, to determine, in their business judgment, whether missing a payment to a particular vendor would likely cause more expense to the Debtors’ business than simply paying the applicable vendor on account of its prepetition claim. Based on this careful evaluation the Debtors arrived at totals for maintenance repair and operations service providers that have been included in the Critical Vendors Caps listed above. The Debtors seek authority to pay such amounts to avoid disruption to the safe and efficient operation of their fleet.
Strategic Partners
27. A substantial portion of the Debtors’ overall revenues are derived from their marketing and sales partnerships. A key competitive strategy in generating consistent and recurring revenue streams is to maintain and improve upon programs pursuant to which the Debtors are referred business from agents, services, and other companies (collectively, the “Strategic Partners”). The Strategic Partners include certain travel booking companies or other
partners that channel business to the Debtors through promotions and strategic referrals. The Debtors compete fiercely for these referrals and missing payments to certain Strategic Partners could cause such partners to move their business to the Debtors’ competitors or shift away from their preferred offerings of the Debtors’ brands, thereby causing lasting damage to the Debtors’ ability to bring in customers. The Debtors typically owe periodic fees to the applicable partner, including fees based on the amount of rentals booked through these channels.
28. Through this Motion, the Debtors are generally not seeking to pay claims of Strategic Partners’ that are party to long term executory contracts (i.e. the majority of the Debtors’ Strategic Partners). Rather, they intend to rely on the protections of the automatic stay to ensure that Strategic Partners subject to executory contracts continue to perform their obligations and will utilize the assumption process to evaluate these relationships and further resolve claims. The Strategic Partners the Debtors seek to pay through this motion include only those that do not have executory contracts, have contracts that have expired by their terms prior to the Petition Date, or provide the counterparty with a large amount of discretion to minimize their promotion of the Debtors’ brands or otherwise harm the Debtors’ business opportunities. The Debtors have diligently considered these factors and relationships to identify a small subset of prepetition claims of Strategic Partners they cannot avoid paying without risking substantial harm to their business. In order to maintain their ability to market their brands through the reorganization process, the Debtors seek authority to pay select Strategic Partners for their accrued prepetition claims which amounts are included in the Critical Vendors Caps.
Departments of Motor Vehicles and Related Claimants
29. To keep their fleet of vehicles operational in all fifty states and across the globe, the Debtors are required to pay vehicle registration fees to local departments of motor vehicles
(“DMVs”) and similar authorities. If the Debtors fail to pay prepetition registration and related fees, there is a risk they could lose the ability to operate a significant portion of their fleet because they will not receive renewed registrations. For registration payments in process it would be an enormous logistical burden to challenge release of registrations on a DMV-by-DMV basis. Having to do so would be far more disadvantageous to the Debtors’ business than simply paying DMVs for outstanding prepetition claims in the first place (even if they could eventually be persuaded to release registrations absent prepetition payment). The Debtors also seek authority to pay prepetition claims of related claimants, including certain servicers that facilitate DMV processing for similar reasons.
Airport Mandated Capital Expenditures and Environmental Fuel Systems Work
30. The Debtors utilize certain third-party vendors to complete infrastructure projects related to their airport locations and ensure that such projects and other work at airport locations meet environmental compliance and regulatory standards, including work on rental facility fuel systems. These projects are generally mandated by the authorities that operate airports. Moreover, the Debtors are typically required to post performance bonds with respect to such required capital projects. Certain of the vendors the Debtors utilize to complete these infrastructure projects already have or may be entitled to mechanics liens. If such vendors are not paid and refuse to perform work on ongoing projects, the Debtors’ ability to operate at key airport locations would be jeopardized.
Miscellaneous Rental Business Critical Vendors
31. The Debtors have determined that certain of the tens of thousands of vendors they utilize in the ordinary course of their rental car business that do not fit neatly into one of the categories described above are Critical Vendors for similar reasons. Such vendors include
corporate and procurement card providers (but only to the extent their prepetition claims are not covered through the Debtors’ concurrently filed Wages Motion),5 technology service providers
(but only in rare situations where such vendors do not have executory contracts and could cause enormous disruption to the Debtors’ business by failing to perform), third party aggregators that service utilities (but only to the extent of their service fees and charges), and certain other essential service providers that the Debtors have determined in their careful evaluation qualify as Critical Vendors. Amounts owed to such vendors are included in the Critical Vendors Caps.
Donlen Critical Vendors
32. In addition to their rental business, the Debtors offer leasing and fleet management services in the United States and Canada through Donlen. Donlen’s customers are typically companies with a fleet of vehicles utilized by their employees. Donlen’s programs include administration of preventive vehicle maintenance, advisory services, fuel management, accident management, and other complementary services. In addition, Donlen provides specialized consulting and technology expertise that allows Donlen and its customers to model, measure, and manage fleet performance more effectively and efficiently.
5 Through the Debtors’ corporate card program, their employees corporate credit cards are issued to the
Debtors’ employees in each employee’s own name. Employees use their corporate cards to pay for business expenses incurred in carrying out their assigned roles, including business travel expenditures. Employees are personally liable on such cards and the Debtors reimburse charges incurred thereon. The Debtors seek authority to pay such reimbursable expenses on the corporate cards through their concurrently filed Debtors’ Motion For Entry of Interim and Final Orders (A) Authorizing, But Not Directing, the Debtors to: (I) Pay Prepetition Wages and Compensation; (II) Continue Certain Employee Incentive and Expense Programs; (III) Continue Certain Employee Benefit Programs; (B) Authorizing All Banks to Honor Prepetition Checks for Payment of Prepetition Employee Obligations; and (C) Granting Other Related Relief (the “Wages Motion”). Separately, the Debtors’ employees utilize credit cards in connection with procurement expenses (“P Cards”). Replacing the Debtors’ P Card system would be burdensome and cause disruption to their procurement operations. By this Motion the Debtors seek to pay amounts related to P Cards and service fees and charges related to both P Cards and corporate cards.
33. Donlen provides fleet management services to approximately 250,000 vehicles. Donlen leases approximately 110,000 of the total number of vehicles under its management. The remainder of the vehicles managed by Donlen are owned or separately financed by its customers.
34. Donlen uses its economies of scale to acquire services and products at lower rates and on better terms than its customer could get for themselves. When Donlen’s customers need to make any expenditure on account of their vehicles, they go to their preferred provider, which in turn bills Donlen for the service. Donlen charges its customers for the full amount it is invoiced from the vendor, sometimes with additional upcharges. Donlen pays its vendors by passing on amounts collected from customers. Upon payment, Donlen receives rebates from applicable vendors. These rebates are one of Donlen’s primary sources of revenue. If Donlen does not pay its vendors by passing on the fees and charges collected by customers, it will not receive rebates.
35. Due to the unique nature of Donlen’s operations, paying suppliers and service providers on account of their prepetition claims is not only essential for the typical reasons chapter 11 debtors seek to pay critical vendors, but also because the Donlen’s business model is largely based upon the ability to pass through fees collected for customers to vendors in exchange for rebates. Moreover, all of Donlen’s vendors understand that this pass through business model is the structure under which Donlen operates. Donlen would have particular difficulty explaining to its vendors why it cannot pay them for services they already provided to Donlen customers for which Donlen has already billed its customers and collected fees. Vendors’ perception that Donlen is refusing to pass through fees that Donlen has already collected from customers makes it more likely that Donlen’s vendors will refuse to carry on business with Donlen than typical vendors.
36. Additional reasons exist for paying the prepetition claims of each of the categories of Donlen Critical Vendors discussed below. Specifically, Donlen seeks to pay the prepetition claims of: (1) maintenance, repair, and operations suppliers and service providers; (2) upfitters; (3) DMVs, other vehicle regulatory entities, tolling authorities, and related service providers, (4) the company’s fuel card service provider; and (5) other miscellaneous Donlen Critical Vendors. Substantially all of the prepetition claims of Donlen Critical Vendors are of the pass through nature described above.
Maintenance, Repair, and Operations Suppliers and Service Providers
37. Donlen utilizes an array of third parties to perform necessary maintenance, repair, and operations work on its customers’ fleets. As with the maintenance, repair, and operations vendors discussed above, many of the vendors in this category are irreplaceable because of the favorable terms they offer, their geographic locations, or the timeline and scale of their operations, goods, or services. Further, Donlen’s business is based on its promise that it will make fleet management easy and efficient for its customers. Donlen’s mission is to ensure its customers can get the goods and services they need when they need them and allow Donlen to take care of the rest. If Donlen’s relationships with maintenance, repairs, and operations vendors suddenly deteriorate due to missed prepetition payments, such vendors may refuse to service Donlen customer vehicles. Being turned away by preferred providers would likely cause Donlen’s customers go elsewhere for fleet management and leasing services in the future thereby inflicting lasting damage to Donlen’s trusted name.
38. Additionally, as with the other Donlen Critical Vendors, although Donlen is billed directly by maintenance, repair, and operations vendors in the ordinary course of business to receive preferential rates; the amounts paid for such services are passed on in full to the Donlen
customers that receive the service in question. The national maintenance, repair, and operations vendors Donlen relies on to service its customers’ vehicles are also key providers of the rebates that serve as one of Donlen’s primary sources of revenue. As such, damage to these relationships would have an significant impact to Donlen’s fundamental business far beyond the already significant burden or impossibility of replacing these vendors on similar terms.
Fuel Card Service Provider
39. Donlen also provides fuel cards to its customers. Donlen’s customers use those fuel cards to fill up their tanks at nearly any gas station. As with its other services, Donlen fronts the payment for its customers’ fuel card charges and passes those costs through to such customers on a monthly basis. To provide the service Donlen uses a third-party fuel card provider. If Donlen fails to make certain payments to the third-party fuel card provider, such provider will likely act aggressively to limit Donlen’s credit limit, refuse to continue to service Donlen’s customers, or cause other disruption to Donlen’s business. The Debtors estimate that it would take three to four months to find a suitable replacement fuel card provider for Donlen’s business. In the interim, there would be severe disruptions to Donlen’s customers who rely on the fuel cards. The Debtors seek to pay certain prepetition obligations owing to the fuel card provider to avoid this disruption, which could cause Donlen to lose future business from a significant number of frustrated customers.
DMV, Vehicle Regulatory Charges, Tolls, and Related Claims
40. Donlen offers its customers convenient management of their vehicle registration, tolling, and regulatory needs. Like Donlen’s other services it fronts the fees for registration, tolling, and other expenses accrued to keep its customers’ vehicles on the road without violating applicable law. In addition, Donlen uses third-party vendors to facilitate registration renewal,
tolling, and ensure its customers’ fleets are up to regulatory standards. Donlen’s failure to remain current with respect to registration requirements and tolling fees could potentially lead its customers to get citations for improper registration or otherwise leave them unable to operate their vehicles. Accordingly, failure to pay prepetition charges to authorities and the third parties that facilitate such registration and tolling payments as well as regulatory compliance could leave Donlen without the means to ensure its customers can safely and legally operate their fleets.
Upfitters
41. As noted, Donlen leases approximately 110,000 vehicles to its customers. When Donlen provides new vehicles to such customers, it gives them the option to add features and customize the leased vehicles to fit their needs. Donlen utilizes certain vendors known as upfitters to make these vehicle improvements. Upfitters typically receive vehicles from the original vehicle manufacturers and customize those vehicles according to the customer’s specifications. Vehicles are already subject to master lease agreements with Donlen while upfitters are making requested customizations. Moreover, because customers order their vehicles to specification from Donlen, the master leases are priced to include the initial vehicle cost plus any additional amount attributable to upfitting that is to be completed.
42. If prepetition amounts are not paid to upfitters in possession of leased vehicles, they could assert possessory liens over vehicles and refuse to release them to Donlen’s customers. The inability to provide customers with vehicles to the specifications they requested pursuant to their leases could cause unhappy customers to go elsewhere for future fleet leasing and fleet management services and damage Donlen’s reputation for reliability, all causing lasting harm to Donlen’s business.
Other Key Suppliers and Service Providers
43. The Critical Vendors Caps also include prepetition amounts owed to certain other vendors or suppliers that do not fit neatly into one of the categories described above, including other ancillary service providers that Donlen employs during the life of its customers vehicles.
Foreign Vendors
44. The Company operates a global business. It has corporate and franchise rental car locations in North America, Europe, Latin America, Africa, Asia, Australia, the Caribbean, the Middle East, and New Zealand. Indeed, 8,200 of the Company’s 12,400 rental locations are outside of the United States. Although only the Company’s North American subsidiaries filed for protection under chapter 11 of the Bankruptcy Code, the Debtor entities still owe claims to vendors that operate entirely abroad. The Foreign Vendors include, (1) vendors that service the Canadian Debtor entities, have operations in Canada, and a lack of ties to the United States; and (2) vendors that are based abroad but are owed prepetition amounts by a U.S. Debtor.
45. The Canadian Debtors deal with essential service providers and suppliers that lack ties to the United States and experience with chapter 11 proceedings. These Canadian Vendors are less likely to respect the protections of the Bankruptcy Code and pose a risk of causing further disruptions to the Debtors’ Canadian rental or fleet management and leasing operations by taking action against the Debtors without regard to the automatic stay and other Bankruptcy Code protections.6 Additionally, certain of the U.S. Debtors owe amounts to vendors that
operate entirely abroad in connection with the Company’s foreign business. If these Foreign
6 For the avoidance of any doubt, the Debtors maintain that the automatic stay and other Bankruptcy Code
protections do apply to all Foreign Vendors, even those with little or no connection with the United States. Indeed, to confirm those protections globally, the Debtors are contemporaneously filing Debtors’ Motion For Entry Of An Order (I) Restating and Enforcing the Worldwide Automatic Stay, Anti-Discrimination Provisions, and Ipso Facto Protections of The Bankruptcy Code, (II) Approving the Form and Manner of Notice, and (III) Granting Related Relief (the “Global Stay Motion”). However, there is still a heightened risk that Foreign Vendors nonetheless may refuse to recognize these Chapter 11 Cases and cause disruptions to the Debtors international business.
Vendors are not paid on account of their prepetition claims, these entities are likely to cause severe disruptions to the Debtors’ foreign non-Debtor subsidiaries without regard to the automatic stay, thereby harming the Company’s enterprise as a whole.
46. Many of the Foreign Vendors fit in the vendor categories described above and warrant payment as Critical Vendors for the same reasons. Due to the nature of the Foreign Vendors and the likelihood that many may not respect the stay, however, the Debtors have been more expansive in the types of vendors included in the Foreign Vendors total.
BASIS FOR RELIEF
I. Payment of Critical Vendor Claims Is Authorized by the Bankruptcy Code
47. The Court may authorize the Debtors’ payment of the Critical Vendor Claims pursuant to section 363(b) of the Bankruptcy Code. Section 363(b)(1) authorizes courts, after notice and hearing, to permit a debtor to “use, sell, or lease, other than in the ordinary course of business, property of the estate.” See 11 U.S.C. § 363(b)(1); see also Dai-Ichi Kangyo Bank,
Ltd. v. Montgomery Ward Holding Corp. (In re Montgomery Ward Holding Corp.), 242 B.R.
147, 153 (D. Del. 1999); In re Ionosphere Clubs, Inc., 98 B.R. 174, 175 (Bankr. S.D.N.Y. 1989) (finding that a sound business justification existed to pay prepetition wages and stating, “[s]ection 363(b) gives the court broad flexibility in tailoring its orders to meet a wide variety of circumstances”); In re James A. Phillips, Inc., 29 B.R. 391, 397 (S.D.N.Y. 1983) (relying upon section 363 as a basis to allow a contractor to pay the prepetition claims of suppliers who were potential lien claimants). For a court to apply section 363(b), the debtor must “articulate some business justification, other than mere appeasement of major creditors . . . .” In re Ionosphere
Clubs, 98 B.R. at 175 (ruling that debtor’s payment of prepetition claims was necessary to
Air, Inc.), 416 F.3d 229, 238 (3d Cir. 2005) (stating that “[o]vercoming the presumptions of the
business judgment rule on the merits is a near-Herculean task”). Once a debtor has articulated a valid business justification, the business judgment rule is applied to the Debtors’ decision.
Official Comm. of Subordinated Bondholders v. Integrated Res., Inc. (In re Integrated Res., Inc.),
147 B.R. 650, 656 (S.D.N.Y. 1992) (quoting Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985)).
48. For the reasons discussed on a category-by-category basis above, the Debtors believe that the goods and services provided by the Critical Vendors are vital to the Debtors’ continuing business operations, and that the failure to pay the Critical Vendor Claims would have a material adverse impact on the day-to-day operations of the business and would very likely disrupt the Debtors’ ability to continue to rent vehicles during the Chapter 11 Cases, in the case of the Rental Business Critical Vendors or continue to provide quality fleet leasing and management services, in the case of the Donlen Critical Vendors. If certain Critical Vendors are unwilling to provide goods or services postpetition or enter into new or renewed arrangements with the Debtors because of unpaid prepetition claims, then the Debtors’ operations will materially suffer, compromising the value of the Debtors’ estates to the detriment of all creditors. 49. Moreover, section 105(a) of the Bankruptcy Code authorizes the Court to “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title.” See 11 U.S.C. § 105(a). A bankruptcy court’s use of its equitable powers to “authorize the payment of pre-petition debt when such payment is needed to facilitate the rehabilitation of the debtor is not a novel concept.” In re Ionosphere Clubs, 98 B.R at 175. “Under 11 U.S.C. § 105, the court can permit pre-plan payment of a pre-petition obligation when essential to the continued operation of the debtor.” In re NVR L.P., 147 B.R. 126, 127 (Bankr. E.D. Va. 1992)
(citing Ionosphere Clubs, 98 B.R. at 177). For the reasons described above and in light of the Debtors’ need to preserve the going concern value of their businesses, the relief requested in this Motion is proper and should be granted. Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017) (noting that courts are authorized to approve orders allowing payment of prepetition claims because it is necessary for the debtors to have a successful reorganization).
50. The paramount goal of the parties in interest during these Chapter 11 Cases is protecting the value of the Debtors’ business by avoiding damaging operational disruptions. The maintenance of the Debtors’ businesses during these Chapter 11 Cases is crucial to the Debtors’ ability to preserve their business as a going concern, which provides enhanced value for the benefit of all of the Debtors’ stakeholders. The Debtors are also not seeking authority to pay all Critical Vendor Claims immediately, but only in their discretion to pay in the ordinary course of business undisputed amounts that come due on terms consistent with prepetition practice. Thus, the Debtors believe the relief requested is narrowly tailored to and consistent with the paramount goal of chapter 11 to preserve value by “facilitating the continued operation and rehabilitation of the debtor.” In re Ionosphere Clubs, 98 B.R. at 176.
51. In addition to using the Court’s equitable powers under section 105(a), the Court may also rely on the “doctrine of necessity.” The doctrine of necessity is a well-established doctrine that permits a court to authorize the payment of certain pre-plan prepetition claims when payment is necessary to the continued operations of a debtor’s business and restructuring efforts.
See In re Lehigh & New Eng. Ry. Co., 657 F.2d 570, 581 (3d Cir. 1981) (holding that court may
authorize payment of prepetition claims if such payment is essential to continued operation of debtor); In re Ionosphere Clubs, 98 B.R. at 176 (recognizing that the doctrine of necessity is derived from “the existence of the judicial power to authorize a debtor in a reorganization case to
pay pre-petition claims where such payment is essential to the continued operation of the debtor”); In re Just for Feet, Inc., 242 B.R. 821, 826 (D. Del. 1999) (stating that where a debtor “cannot survive” absent payment of certain prepetition claims, the doctrine of necessity should be invoked to permit payment).
52. Here, the relief sought is vital for the Debtors’ successful reorganization. If the Debtors cannot pay the Critical Vendors, the negative impact would likely be almost immediate as certain of the Critical Vendors, on whom the Debtors depend, could immediately withdraw services and cease to provide necessary goods. Such an occurrence would impair a successful reorganization and hamper viability following the Debtors’ emergence from these Chapter 11 Cases. Further, for the reasons described above, the Debtors are ill-equipped or unable to switch to other vendors or suppliers on short notice and therefore face significant risk if certain prepetition amounts cannot be paid. Accordingly, the Debtors have concluded that if they do not pay the Critical Vendors, the value of the Debtors’ estates will be reduced by amounts in excess of the amounts that the Debtors seek authorization to pay through this Motion.
53. In addition, maintaining favorable trade terms with the Critical Vendors is in the best interests of all parties in interest in these Chapter 11 Cases. In particular, the Motion enables the Debtors to condition providing payments on account of prepetition Critical Vendor Claims on Critical Vendors agreeing to continue to provide goods or services on Customary Trade Terms (or other accommodation deemed acceptable to the Debtors in their business judgment). It also gives the Debtors the flexibility to require vendors to enter into Trade Agreements to ensure those terms are maintained. Maintaining such favorable trade terms will avoid unnecessary expense during the Chapter 11 Cases. Further, not only will it prevent the disruptions caused by attempting to replace essential providers of goods and services, but also
the detrimental impact of having to acquire goods and services on worse terms—if such goods and services are available elsewhere in the quality and on the scale in which debtors require them at all. In turn, the Debtors will be able to preserve liquidity and ensuring that they are better-positioned to sustain operations while reorganizing. Such terms also allow the Debtors to avoid the inherent operational inefficiencies of paying cash on demand and managing billing processes for numerous vendors that might require cash in advance or shorten their payment terms if the Debtors fail to pay amounts that accrued prepetition in the ordinary course of business. Accordingly, pursuant to sections 105(a) and 363(b) of the Bankruptcy Code and the doctrine of necessity, the Court should grant the relief requested herein.
54. The Debtors’ proposals are similar to the relief granted in other chapter 11 cases commenced in this jurisdiction. See, e.g., In re Bluestem Brands, Inc., Case No. 20-10566 (MFW) (Bankr. D. Del. Mar. 30, 2020); In re Cosi, Inc., No. 20-10417 (BLS) (Bankr. D. Del. Mar. 17, 2020); In re RentPath Holdings, Inc., Case No. 20-10312 (BLS) (Bankr. D. Del. Mar. 10, 2020); In re VIP Cinema Holdings, Inc. No. 20-10345 (MFW) (Bankr. D. Del. Mar. 9, 2020);
In re DURA Automotive Systems, LLC, No. 19-12378 (KBO) (Bank. D. Del. Nov. 19, 2019); In re Bumble Bee Parent, Inc., et al., No. 19-12502 (LSS) (Bankr. D. Del. Dec. 19, 2019); In re Destination Maternity Corp., No. 19-12256 (BLS) (Bankr. D. Del. Nov. 12, 2019); In re Joerns WoundCo Holdings, Inc., No. 19-11401 (JTD) (Bankr. D. Del. July 25, 2019); Pernix Sleep, Inc.,
Case No. 19-10323 (CSS) (Bankr. D. Del. Mar. 22, 2019); In re Checkout Holding Corp., No. 18-12794 (KG) (Bankr. D. Del. Jan. 10, 2019); In re Budget Grp., Inc., No. 02-13152 (MFW)
(Bankr. D. Del. July 30, 2002) (granting, among other standard critical vendors relief, authority to pay DMV registration obligations).7
II. Additional Bases for Payment of Certain Critical Vendor Claims
Certain Critical Vendor Claims are Administrative Expenses
55. As discussed above, certain of the Critical Vendors may already be entitled to administrative priority under section 503(b)(9) of the Bankruptcy Code for goods delivered to the Debtors in the ordinary course of business within 20 days before the Petition Date. Section 503(b)(9) of the Bankruptcy Code provides that claims for goods delivered to the Debtors in the ordinary course of business within 20 days before the Petition Date are administrative expense claims. See 11 U.S.C. § 503(b)(9). The Debtors are therefore required to pay such claims in full to confirm a chapter 11 plan. See id.; 11 U.S.C. § 1129(a)(9)(A) (requiring payment in full of claims entitled to administrative expense priority).
56. Instead of paying claims of Critical Vendors that are already entitled to § 503(b)(9) administrative priority on the effective date of a plan, the Debtors seek authority to pay such vendors during the pendency of these Chapter 11 Cases as they become due. The Bankruptcy Code requires, and any plan must provide for, payment in full of administrative expense claims on the plan effective date, or as soon as practicable thereafter. Thus, payment of Critical Vendor Claims entitled to priority under section 503(b)(9) of the Bankruptcy Code under the Orders will effect only a change in the timing of such payments, not the amounts or priority thereof.
57. Courts in this jurisdiction frequently authorize payment of vendor claims entitled to administrative priority pursuant to section 503(b)(9) of the Bankruptcy Code. See, e.g., In re
7 Because of the voluminous nature of the order cited herein, such orders have not been attached to this
Bumble Bee Parent, Inc., et al., No. 19-12502 (LSS) (Bankr. Del. Dec. 19, 2019); In re DURA Automotive Systems, LLC, No. 19-12378 (KBO) (Bank. D. Del. Nov. 19, 2019); In re Joerns WoundCo Holdings, Inc., No. 19-11401 (JTD) (Bankr. D. Del. July 25, 2019); In re Mattress Firm, Inc., No. 18-12241 (CSS) (Bankr. D. Del. Oct. 26, 2018) (same); In re Southeastern Grocers, LLC, No. 18-10700 (MFW) (Bankr. D. Del. Apr. 23, 2018) (same); Prenix Sleep, Inc.,
Case No. 19-10323 (CSS) (Bankr. D. Del. Mar. 22, 2019) (same).8
Certain Critical Vendors Are Lien Claimants
58. In operating their businesses, the Debtors rely on service providers including third party mechanics as well as the upfitters, in the case of Donlen’s business, to facilitate maintenance, repair, upkeep, and improvements to their fleets. As noted, some of these service providers are in possession of the Debtors parts or vehicles as of the Petition Date. If they are not paid for amounts that accrued prepetition, they may claim possessory liens under applicable state law (collectively, the “Possessory Liens”). Pursuant to Bankruptcy Code section 362(b)(3), the act of perfecting such Possessory Liens, to the extent consistent with Bankruptcy Code section 546(b),9 is expressly excluded from the automatic stay otherwise imposed by
Bankruptcy Code section 362(a). Similarly, as discussed above, certain contractors that the Debtors utilize in connection with infrastructure and other projects at airports and otherwise have already or may assert mechanics liens (such claimants together with holders of Possessory Liens, the “Lien Claimants”).
8 Because of the voluminous nature of the order cited herein, such orders have not been attached to this
Motion. Copies of these orders are available upon request to the Debtors’ proposed counsel.
9 Under Bankruptcy Code section 546(b), a debtor’s lien avoidance powers “are subject to any generally
applicable law that . . . permits perfection of an interest in property to be effective against an entity that acquires rights in such property before the date of perfection.” 11 U.S.C. § 546(b)(1)(A).
59. To protect their asserted lien rights, certain Lien Claimants may refuse to release goods in their possession unless and until their prepetition claims have been satisfied. Additionally, under section 363(e) of the Bankruptcy Code, the Lien Claimants may be entitled to adequate protection of their liens, which may impose additional costs on the Debtors’ estates. Therefore, notwithstanding the automatic stay imposed by Bankruptcy Code section 362, the Lien Claimants (a) may be entitled to assert and perfect liens against the Debtors’ property, which would entitle them to payment ahead of other general unsecured creditors in any event, and (b) may hold the property subject to the asserted Possessory Liens pending payment, to the direct detriment of the Debtors and their estates.
60. Accordingly, the Debtors seek authority, in their discretion, to pay Critical Vendors that are also Lien Claimants for their prepetition services rendered to the Debtors. Courts in this jurisdiction frequently authorize similar relief. See, e.g., In re Bluestem Brands,
Inc., Case No. 20-10566 (MFW) (Bankr. D. Del. Mar. 30, 2020); In re Bumble Bee Parent, Inc., et al., No. 19-12502 (LSS) (Bankr. Del. Dec. 19, 2019); In re Destination Maternity Corp., No.
12256 (BLS) (Bankr. D. Del. Nov. 12, 2019); In re DURA Automotive Systems, LLC, No. 12378 (KBO) (Bank. D. Del. Nov. 19, 2019); In re Joerns WoundCo Holdings, Inc., No. 19-11401 (JTD) (Bankr. D. Del. July 25, 2019); Pernix Sleep, Inc., Case No. 19-10323 (CSS) (Bankr. D. Del. Mar. 22, 2019); In re Mattress Firm, Inc., No. 18-12241 (CSS) (Bankr. D. Del. Oct. 26, 2018).10
10 Because of the voluminous nature of the order cited herein, such orders have not been attached to this
III. Payment of Foreign Vendors Is Necessary to Avoid Disruptions to the Debtors’ Operations
61. As indicated above, approximately $5.1 million of the Critical Vendors Cap is on account of claims of Foreign Vendors located in non-U.S. jurisdictions who deal with Canadian or U.S. Debtor entities to facilitate the Company’s foreign operations. These Foreign Vendors are likely not well versed with U.S. chapter 11 bankruptcy cases and may have limited contacts with the United States. Put another way, such Foreign Vendors do not transact business on a regular basis with companies that have filed for chapter 11 and are unfamiliar with the scope of a debtor-in-possession’s authority to conduct its business.
62. As a result, failing to make payments on account of prepetition claims to Foreign Vendors could provoke them to seek enforcement of possessory and other liens before a foreign court on account of their prepetition claims, commence a foreign insolvency proceeding, refuse to perform under contracts or leases, or otherwise hinder and delay the continued operation of the Debtors’ foreign rental and fleet management and leasing businesses. Although the Debtors would vigorously dispute any contention that the Foreign Vendors are not subject to this Court’s jurisdiction, the risk that, absent payment, Foreign Vendors will refuse to provide essential goods and services is too great. Irrespective of the accuracy of any Foreign Vendor’s belief regarding the reach of the automatic stay and other Bankruptcy Code protections, the consequences of such actions may be detrimental. Payment of Foreign Vendors avoids these risks and the attendant disruption.
63. This Court frequently recognizes the special concerns with respect to Foreign Vendors outlined above and authorizes payment of their prepetition claims. See, e.g., In re
Bluestem Brands, Inc., Case No. 20-10566 (MFW) (Bankr. D. Del. Mar. 30, 2020); In re RentPath Holdings, Inc., Case No. 20-10312 (BLS) (Bankr. D. Del. Mar. 10, 2020); In re VIP
Cinema Holdings, Inc. No. 20-10345 (MFW) (Bankr. D. Del. Mar. 9, 2020); In re DURA Automotive Systems, LLC, No. 19-12378 (KBO) (Bank. D. Del. Nov. 19, 2019); In re Bumble Bee Parent, Inc., et al., No. 19-12502 (LSS) (Bankr. D. Del. Dec. 19, 2019); Forever 21, Inc.,
No. 19-121222 (KG) (Bankr. D. Del. Oct. 28, 2019).11
IV. Customary Trade Terms Should Apply to All Payment of Critical Vendors
64. To avoid opportunism by Critical Vendors and to preserve the Debtors’ operations and the value of their estates, the Debtors also request authority to condition the payment to Critical Vendors upon the respective Critical Vendor’s agreement to maintain or reinstate customary trade terms, practices, and programs (including, but not limited to, credit limits, pricing, cash discounts, timing of payments, allowances, rebates, normal product mix and availability, and other applicable terms and programs) during the pendency of these Chapter 11 Cases that are at least as favorable as the trade terms most favorable to the Debtors existing in the twelve months before the Petition Date or such other trade terms acceptable to the Debtors (the “Customary Trade Terms”). As necessary to ensure that the Critical Vendors comply with the Customary Trade Terms, the Debtors seek authorization, but not direction, to send a letter (once executed, a “Trade Agreement”) substantially in the form attached hereto as Exhibit C, or otherwise adjusted to best suit the Debtors’ needs, to the Critical Vendors along with a copy of the order granting this Motion.
65. The Debtors also propose that if a Critical Vendor, after receiving a payment on account of its Critical Vendor Claim, does not maintain or reinstate Customary Trade Terms or other terms agreed to by the Debtors in their business judgment for the pendency of the Chapter
11 Because of the voluminous nature of the order cited herein, such orders have not been attached to this
11 Cases, then any payments made to such a Critical Vendor after the Petition Date may be, in the Debtors’ discretion, treated as an unauthorized post-petition transfer as to which the Debtors may exercise any and all appropriate remedies.
V. Confirmation of Administrative Expense Status of Prepetition Purchase Orders is
Appropriate and Necessary to the Debtors’ Reorganization
66. Furthermore, as of the Petition Date, the Debtors have certain prepetition purchase orders (the “Prepetition Purchase Orders”) outstanding with various third party vendors and suppliers (the “Prepetition Purchase Order Vendors”) for goods or services ordered by the Debtors that have not yet been delivered or provided to the Debtors. These Prepetition Purchase Order Vendors may be concerned that, because the Debtors’ obligations under the Prepetition Purchase Orders arose before the Petition Date, such obligations will be treated as general unsecured claims in these Chapter 11 Cases. Accordingly, certain Prepetition Purchase Order Vendors may refuse to provide goods or services to the Debtors purchased pursuant to the Prepetition Purchase Orders unless the Debtors issue substitute purchase orders postpetition or obtain an order of the Court (i) confirming that all undisputed obligations of the Debtors arising from the postpetition delivery of goods or services subject to Prepetition Purchase Orders are afforded administrative expense priority status under section 503(b) of the Bankruptcy Code and (ii) authorizing the Debtors to satisfy such obligations in the ordinary course of business.
67. It is necessary to the uninterrupted operation of the Debtors’ business that obligations owed under the Prepetition Purchase Orders for goods or services delivered or provided postpetition be explicitly granted administrative expense status. Pursuant to section 503(b)(1)(A) of the Bankruptcy Code, obligations that arise in connection with the postpetition delivery of necessary goods and services are afforded administrative expense priority status.
See, e.g., Chateaugay Corp. v. LTV Steel Co. (In re Chateaugay Corp.), 10 F.3d 944, 956 (2d
Cir. 1993) (“[A] claim will be afforded priority ‘only to the extent that the consideration supporting the claimant’s right to payment was both supplied to and beneficial to the debtor-in-possession in the operation of the business.’”) (quoting Trustees of Amalgamated Ins. Fund v.
McFarlin’s, Inc., 789 F.2d 98, 101 (2d Cir. 1986)); In re Tropicana Entm’t, LLC, No. 08-10856
(KJC), 2015 Bankr. LEXIS 3499, at *17 (Bankr. D. Del. Oct. 14, 2015) (internal quotation omitted) (“[Pursuant to] Bankruptcy Code § 503(b)(1)(A), the Court may allow as administrative expenses, the actual, necessary costs and expenses of preserving the estate, including wages, salaries, commissions for services rendered after the commencement of the case.”); In re
Blockbuster Inc., No. 10-14997 (BRL), 2010 Bankr. LEXIS 4977, at *8-9 (Bankr. S.D.N.Y. Oct.
27, 2010) (final order ruling that “Debtors’ undisputed obligations . . . that arise from the postpetition delivery of materials, goods, and services that were ordered in the prepetition period shall have administrative expense priority status pursuant to section 503(b) of the Bankruptcy Code.”). Thus, the granting of the relief requested herein will not provide the Prepetition Purchase Order Vendors with any greater priority than they otherwise would have if the relief were not granted, and will not prejudice any other parties in interest.
68. Similar relief to that requested herein has been granted in other chapter 11 cases in this district. See, e.g., In re Joerns WoundCo Holdings, Inc., No. 19-11401 (JTD) (Bankr. D. Del. July 25, 2019); In re Tidewater Inc., No. 17-11132 (BLS) (Bankr. D. Del. June 13, 2017) In
re The NORDAM Grp., Inc., No. 18-11699 (MFW) (Bankr. D. Del. Aug. 29, 2018) (same); In re The Bon-Ton Stores, Inc., No. 18-10248 (MFW) (Bankr. D. Del. Feb. 6, 2018) (same); In re TK Holdings Inc., No. 17-11375 (BLS) (Bankr. D. Del. July 26, 2017) (same).
VI. Cause Exists to Authorize the Debtors’ Financial Institutions to Honor Electronic Fund Transfers
69. The Debtors also request that all applicable banks and other financial institutions be authorized, when requested by the Debtors in their sole discretion, to receive, process, honor, and pay any and all Payments made by the Debtors related to the Critical Vendor Claims, so long as sufficient funds are available in the applicable accounts to make the Payments.
70. To stabilize the Company’s operations, and to smoothly transition into chapter 11, it is imperative that the Debtors normalize their business. Failure to do so would result in extremely adverse business effects. Under the Debtors’ existing cash management system, the Debtors represent that wire and other electronic bank transfer requests can be readily identified as relating to an authorized payment made on account of Critical Vendor Claims. Accordingly, the Debtors believe that unauthorized wire and electronic bank transfer requests will not be honored inadvertently and that all applicable financial institutions may rely on the representations of the Debtors as to which wire or electronic bank transfers are made and authorized to be paid in accordance with this Motion without any duty of further inquiry and without liability for following the Debtors’ instructions.
RESERVATION OF RIGHTS
71. The Debtors reserve all rights. Without limiting the generality of the foregoing, nothing contained herein is or should be construed as: (a) an admission as to the validity, extent, perfection, priority, allowability, enforceability, or character of any claim or any security interest which purportedly secures such claim or other asserted right or obligation, or a waiver or other limitation on the Debtors’ ability to contest the same on any ground permitted by bankruptcy or applicable non-bankruptcy law; (b) a waiver of the Debtors’ or any appropriate party in interest’s rights to dispute the amount of, basis for, or validity of any claim against the Debtors; (c) a
promise to pay any claim; (d) a waiver of any claims or causes of action which may exist against any creditor or interest holder; (e) an assumption or rejection of any executory contract or unexpired lease pursuant to section 365 of the Bankruptcy Code, and nothing herein otherwise affects the Debtors’ rights under section 365 of the Bankruptcy Code to assume or reject any executory contract or unexpired lease with any party subject to this Motion; (f) granting third-party beneficiary status or bestowing any additional rights on any third third-party; or (g) being otherwise enforceable by any third party. Further, and without limiting the generality of the foregoing, (y) the Debtors expressly reserve all of their rights to contest any Critical Vendor Claims, and (z) if the Court grants the relief sought herein, any payment made pursuant to the Court’s order is not and should not be construed as an admission as to the validity of any Critical Vendor Claims or as a waiver of the Debtors’ rights to subsequently dispute such claims.
IMMEDIATE RELIEF IS NECESSARY TO AVOID IMMEDIATE AND IRREPARABLE HARM
72. For a debtor to obtain relief to make pre-plan payments within 21 days of the Petition Date, it must establish that such payments satisfy the requirements mandated by Bankruptcy Rule 6003—namely, that the relief requested is necessary to avoid “immediate and irreparable harm.” Immediate and irreparable harm exists when, absent the requested relief, a debtor’s prospect of reorganizing is threatened or a swift diminution in the value of the debtor’s estate is likely. See In re Ames Dep’t Stores, Inc., 115 B.R. 34, 36 n.2 (Bankr. S.D.N.Y. 1990) (finding that “immediate irreparable harm” exists where loss of the business threatens ability to reorganize). The Third Circuit has interpreted the language “immediate irreparable injury” in the context of preliminary injunctions and has instructed that irreparable injury is a continuing harm that cannot be adequately redressed by final relief on the merits and for which money damages cannot provide adequate compensation. See, e.g., Norfolk S. Ry. Co. v. City of Pittsburgh, 235 F.
App’x 907, 910 (3d Cir. 2007) (citing Glasco v. Hills, 558 F.2d 179, 181 (3d Cir. 1977)). Furthermore, the harm must be shown to be actual and imminent, not speculative or unsubstantiated. See, e.g., Acierno v. New Castle Cty., 40 F.3d 645, 653-55 (3d Cir. 1994).
73. Here, as more fully detailed above, immediate and irreparable harm would result without the relief requested herein because failure to pay the Critical Vendors could result in such vendors refusing to provide essential goods and services to the Debtors thereby operations and causing lasting damage to their customer and partner relationships. This needless disruption to the Debtors’ business and added risk to the success of their operations can be avoided if the debtors are permitted to pay Critical Vendors in the ordinary course as their claims become due during the Interim Period. For these reasons, the Debtors submit that the relief requested in the Orders is essential to prevent immediate and irreparable harm to the Debtors’ operations and preserve the ongoing value of the Debtors’ business and thus stakeholder recoveries.
WAIVER OF BANKRUPTCY RULE 6004(a) AND 6004(h)
74. To implement the foregoing successfully, and given the nature of the relief requested herein, the Debtors respectfully request a finding that (x) the notice requirements under Bankruptcy Rule 6004(a) are met and (y) the 14-day stay under Bankruptcy Rule 6004(h) is waived. Such waiver is warranted here because payment of the Critical Vendor Claims is essential to prevent potentially irreparable harm to the Debtors’ business, value, and ability to reorganize.
NOTICE
75. Notice of this Motion has been provided to the following parties, or, in lieu thereof, their counsel: (i) the U.S. Trustee; (ii) the U.S. Notes Agent; (iii) the Senior Credit Agreement Agent; (iv) the administrative agent under the ALOC Facility; (v) the successor
trustee under the Promissory Notes; (vi) the U.S. ABS Agent; (vii) the indenture trustee under the HFLF ABS Notes; (viii) the administrative agent and collateral agent under the U.S. Vehicle RCF; (ix) the indenture trustee under the European Vehicle Notes; (x) the administrative agent and collateral agent under the European ABS Notes; (xi) the indenture trustee and collateral agent under the Hertz Canadian Securitization Notes; (xii) the lender under the Donlen Canada Securitization Program; (xiii) the administrative agent and the security trustee under the Australian Securitization Notes; (xiv) the lender under the New Zealand RCF; (xv) the lender under the U.K. Financing Facility; (xvi) holders of the fifty (50) largest unsecured claims against the Debtors (on a consolidated basis); (xvii) the Internal Revenue Service; (xviii) the Securities and Exchange Commission; (xix) the United States Attorney for the District of Delaware; (xx) any such other party entitled to notice pursuant to Local Rule 9013-1(m); (xxi) the state attorneys general for all states in which the Debtors conduct business; and (xxii) any such other party entitled to receive notice pursuant to Bankruptcy Rule 2002. The Debtors submit that, in view of the facts and circumstances, such notice is sufficient and no other or further notice need be provided.
NO PRIOR REQUEST
76. No previous request for the relief sought herein has been made by the Debtors to this Court or any other court.
CONCLUSION
WHEREFORE, for the reasons set forth herein, the Debtors respectfully request that the Court grant the relief requested in this Motion, the Interim Order, the Final Order, and such other and further relief as is just and proper.
