Kodak's Chapter 11 Bankruptcy Proceeding: How Could It Affect You? - unset
Many of our clients, both current and former Kodak employees, as well as vendors who do business with Kodak, have asked us how Kodaks Chapter 11 Bankruptcy Proceeding will affect them.
Although each clients situation may be different and the actual answer to that question may not be known until the bankruptcy is concluded, set forth below are some general guidelines and information which can assist you in evaluating your situation and potential options.
This information is not intended to provide you with any specific legal advice. Should you desire legal counsel with regard to your particular circumstance, you may contact one of our attorneys who will be pleased to assist you.
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GENERAL KODAK BANKRUPTCY INFORMATION
1. What affect will the Kodak bankruptcy have on its operations?
Kodak and its United States subsidiaries have filed petitions under Chapter 11 of the Bankruptcy Code. In Chapter 11, a company is permitted to continue operations under the supervision of a Creditors Committee and the Bankruptcy Court while it attempts to reorganize. The company is benefitted by the automatic stay, which generally prohibits action by creditors to collect their pre-bankruptcy claims. In most Chapter 11 cases, the debtor continues to operate as a "debtor-in-possession," although it is possible to have a trustee appointed to assume responsibility for operations. If the company is not progressing toward a reorganization and settlement of its debts within a reasonable time, operations could cease, and the company could be forced to liquidate. Reorganization generally includes sale of non-essential assets to fund expenses of the case and dividends to creditors.
2. Approximately how long will the Kodak bankruptcy take?
Many companies that file Chapter 11 have a sale of assets arranged prior to filing. They file Chapter 11 to clear title to the assets, which can be difficult or impossible for a debt-laden company outside of bankruptcy. These are referred to as "pre-packaged cases." Pre-packaged Chapter 11 cases are often completed in six months or less. Kodaks Chapter 11 is not a pre-packaged case. Kodak has stated that its reorganization is largely dependent upon the sale or license of its intellectual property and that it expects to emerge from Chapter 11 in 2013. Other companies, most notably Nortel Networks, have successfully used the proceeds of sale of intellectual property to fund a dividend to creditors. Some companies that have stayed in Chapter 11 too long have been unable to cover the expense of a Chapter 11 case, resulting in liquidation.
INFORMATION FOR SUPPLIERS OF KODAK
3. What are the rights and obligations of Kodak suppliers?
Suppliers to Kodak on open account are not obligated to sell to Kodak in the Chapter 11 case. Suppliers on contracts may be required to honor their contracts and continue to supply Kodak. The bankruptcy filing by itself does not give a supplier the right to cancel a contract. The Bankruptcy Code grants priority in payment to suppliers that provide goods to Kodak post-bankruptcy and within twenty days prior to bankruptcy. While these priorities enhance the likelihood of payment, they do not guaranty it. Kodak is seeking to grant "critical vendor" status to certain suppliers of its choosing. Critical vendor status, if authorized by the Bankruptcy Court, also enhances the chances of payment but does not assure payment. Critical vendors will be asked to grant post-bankruptcy credit and other concessions to Kodak in exchange for payment of their pre-bankruptcy claims. The terms of any critical vendor agreement should be reviewed by the suppliers attorney in advance.
4. How are ongoing contracts with Kodak handled within the bankruptcy proceeding?
Contracts that are not fully performed at the time of the bankruptcy filing (January 19, 2012) are generally subject to assumption or rejection by Kodak within the bankruptcy case. If the contract is assumed, Kodak will be required to cure defaults, including pre-bankruptcy payment defaults. If the contract is rejected, the other party is entitled to file a claim for damages. The damages claim is a general unsecured non-priority claim. The standard for assumption or rejection is prudent business judgment. Thus, a contract for essential supplies is likely to be assumed, and a contract that Kodak is losing money on is likely to be rejected. Kodak may also try to renegotiate contracts in the Chapter 11 case, using the possibility of rejection as leverage.
5. What is the procedure to file claims against Kodak?
Claims are filed on an official form promulgated by the Bankruptcy Rules. Each claim must contain backup, such as invoices and delivery receipts. The nature of the claim and any priority in payment that the creditor is entitled to must be specified in the claim. All claims are filed under penalty of perjury. The Bankruptcy Court will set a deadline for filing claims, and Kodak will be required to provide sufficient notice of the deadline to all of its creditors. Once the claim filing deadline has passed, Kodak will have an opportunity to object to any claim that it believes to be too high or invalid.
6. How are preferences handled in a bankruptcy case?
Payments made by Kodak or any of the filing subsidiaries within 90 days prior to the filing date of January 19, 2012 may be subject to return as preferences. There are many elements and defenses to the preference law, so a creditor should consult with counsel before returning any payment. Even if a payment is a preference and there is no defense, a settlement can usually be made for less than return of the entire payment. Preference claims are made at the end of the bankruptcy case, so a cooperative relationship with Kodak during the bankruptcy case is no assurance that the creditor will not be sued at the end of the case for return of payments made within the 90 day preference period. If a preference is returned, the creditor has a general unsecured non-priority claim for the amount returned.
INFORMATION FOR KODAK RETIREES
7. Will Kodaks bankruptcy affect retiree health benefits?
Because Kodak has already cut back its retiree health benefits, we have assumed that the plan document allows Kodak to do so. If that is true, the bankruptcy will not affect Kodaks right to further cut back retiree health benefits in the future. Obviously, Kodak will be under more pressure to discontinue those benefits in bankruptcy. A copy of the plan document should be requested by any retiree who is faced with this issue.
8. How will Kodaks bankruptcy affect retirement plans?
Kodaks defined benefit plan ("KRIP") is not fully funded according to the Pension Benefit Guaranty Corporation ("PBGC") web site. However, most defined benefit plans are in a similar situation. If Kodak cannot continue to make contributions or if the PBGC decides the plan is in trouble, PBGC could take over the plan. In that case, the PBGC would only pay the benefit guaranteed by law.
The 401(k) plan balance ("SIP") as of the date of bankruptcy is fully protected. Future employer contributions could be cut.
All non-qualified benefits, including without limitation, excess benefit plans ("KERIP" and "KURIP") and non-qualified deferred compensation, are unfunded and subject to the claims of the general creditors of the company. Accordingly, the participants in those plans are general unsecured creditors with respect to their benefits.
Because of the complexity of Kodaks qualified and non-qualified retirement benefits, this information is general in nature, and each participant should seek advice with respect to their specific situation.
9. Does the Kodak bankruptcy affect severance payments and benefits I may be receiving or might receive should I be laid off in the future?
Involuntarily laid off employees currently receive a severance benefit under Kodaks Severance Plan. The severance payments generally equals one and a half (1) weeks of pay for every year of service. Provided the Severance Plan is covered under Kodaks ERISA Pension Plan, these payments are generally protected.
However, going forward Kodak could elect to modify its Severance Plan. Therefore, although under the current plan Kodak employees who are involuntarily terminated are eligible for a severance benefit, there is no guaranty that benefit will continue in the future.
INFORMATION FOR CURRENT KODAK EMPLOYEES
10. What affect could the Kodak bankruptcy have upon current Kodak employees?
Current employees will continue to receive their wages and benefits during their employment tenure. However, irrespective of the bankruptcy, Kodak as an employer-at-will, has the prerogative to change employee wages and benefits prospectively.
Some employees have asked whether they should terminate their employment at Kodak. Generally speaking, we would not recommend that course of action. Voluntarily termination of your employment would result in your immediate loss of wages and benefits, ineligibility for unemployment insurance benefits and the loss of any potential Kodak severance benefits. The old adage, "It is easier to find a job when you have a job," is also a consideration.
11. What action should I take as a result of the Kodak bankruptcy?
Stay informed. Bankruptcy proceedings can be a long and frustrating process. Many of the consequences of the Kodak bankruptcy will be outside of your control. However, if you are required to make decisions which could affect your rights in the Bankruptcy proceeding, you may want to obtain legal counsel to assist you.
Take control of those matters under your control. You may want to be proactive by meeting with your financial advisor to evaluate your personal financial situation and plan. You should also consider updating your estate plan to make sure that it meets your current needs and objectives (i.e. Wills, Trusts, Powers of Attorney, Living Wills and Health Care Proxies, estate tax planning, protection of assets from potential long term nursing home costs, etc.).
2012 Woods Oviatt Gilman LLP