UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION In re: Collins & Aikman Corporation, et al.

Chapter 11 Case No. 05-55927 (SWR) (Jointly Administered) Hon. Steven W. Rhodes

Debtors. __________________________________________/

OBJECTION OF VISTEON CORPORATION TO DEBTORS' MOTION FOR ORDER DEEMING RECLAMATION CLAIMS TO BE GENERAL UNSECURED CLAIMS AGAINST THE DEBTORS Visteon Corporation ("Visteon"), by its counsel Dickinson Wright PLLC, submits this Objection to Debtor's Motion for Order Deeming Reclamation Claims to be General Unsecured Claims Against the Debtors (the "Motion"). I. INTRODUCTION

The Debtors filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code on May 17, 2005 (the "Petition Date"). Prior to the Petition Date, Visteon sold various

component parts to the Debtors. Visteon timely served its reclamation demand on the Debtors on May 25, 2005 demanding the return of goods valued at $335,363.89 ("Visteon's Reclamation Claim") shipped to the Debtors within the time period prescribed by 11 U.S.C. 546(c)(1). Debtors filed the present Motion on January 9, 2007 asserting Visteon's reclamation claim has no value due to the existence of a prior lien held by the prepetition secured creditors (the "Prepetition Lenders"). See Debtors' Motion at 4. Despite Debtors' assertion, the

existence of a secured creditor's lien does not render all reclamation claims valueless. Rather, the value of the reclamation claims depends on the source of the funds used to satisfy the secured creditor's lien. Where prior liens are satisfied and/or released as a result of payments from

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sources other than the proceeds of the reclaimed goods, the seller's reclamation claim can be asserted against the traceable surplus proceeds resulting from the sale of the reclaimed goods. To the extent those proceeds were used by the Debtors in operations and not to satisfy the claims of secured creditors, the court should grant the reclamation claimant an administrative priority claim for the value of the goods. In this case, the Prepetition Lenders are to be paid from various sources under the proposed Plan of Reorganization (the "Plan").1 In exchange, the Prepetition Lenders agree to release all of their liens on Debtors' property. The Plan does not indicate whether any of these sources of payment include proceeds of the inventory subject to Visteon's reclamation claim. Moreover, the Debtors admit in the Motion that the Debtors "have sold, used, or otherwise integrated into their operations all of the goods that were the subject of Reclamation Demands." See Debtors' Motion at 16. As a result, the prior liens of the prepetition secured lenders are most likely being paid from sources other than the proceeds of the reclaimed goods. Therefore, Visteon should be allowed an administrative priority claim for the full value of its reclamation claim. Alternatively, Visteon should be entitled to conduct discovery to determine the extent to which the proceeds of its goods have been used to satisfy the claims of the Prepetition Lenders.
1

The Debtors filed the First Amended Joint Plan (the "Plan") on December 22, 2006 and a revised version on January 24, 2007. The Plan provides for the sale of the Debtors remaining assets with the proceeds of those assets becoming part of the PostConsummation Trust. Further, the Plan proposes to pay the Prepetition Lenders from the following sources: (1) its pro-rata share of the Prepetition Facility Distribution, comprised of the cash of the Debtors as of the effective date after the cash payment required by the Plan and retained to enable Debtor to comply with the Customer Agreement have been given effect; (ii) its pro-rata share of the Post-Consummation Trust Beneficial Interests; (iii) its Pro Rata share of 100% of the Tranche A Litigation Recovery Interests; (iv) retention of all adequate protection payments made in respect of the Prepetition Facility; (v) payment of reasonable fees associated with attorneys and financial advisors incurred in connection with the consummation, administration, or enforcement of the Plan; and (vi) the applicable releases and exculpation contained in the Plan.

II. A.

LEGAL ANALYSIS

Visteon has a valid and enforceable reclamation claim for goods delivered to Debtors prior to the petition date

Bankruptcy Code Section 546(c)(1) governs Visteon's right to reclaim its goods and provides: Except as provided in subsection (d) of this section, the rights and powers of a trustee under sections 544(a), 545, 547, and 549 of this title are subject to any statutory or common-law right of a seller of goods that has sold goods to the debtor, in the ordinary course of such seller's business, to reclaim such goods if the debtor has received such goods while insolvent, but (1) such a seller may not reclaim such goods unless such seller demands in writing reclamation of such goods (A) before 10 days after receipt of such goods by the debtor; or (B) if such 10 day period expires after the commencement of the case, before 20 days after receipt of such goods by the debtor; and (2) the court may deny reclamation to a seller with such a right of reclamation that has made such a demand only if the court (A) grants the claim of such a seller priority as a claim of a kind specified in section 503(b) of this title; or (B) secure such claim by a lien. The Petition Date is May 17, 2005. Visteon timely served its reclamation demand on the Debtors on May 25, 2005, demanding the return of goods valued at $335,363.89 (the "Reclamation Notice"). Under the Reclamation Notice, Visteon demanded the return of goods that Visteon provided to and received by Debtors within 10 days prior to the Petition Date, or between May 7 and May 17, 2005. Further, Visteon sent the Reclamation Notice on May 25, 2005 via express courier to Debtors, so Debtors received written notice of Visteon's reclamation demand within 10 days after the Petition Date which equates to within 20 days after Debtors'

receipt of the goods. Therefore, Visteon sent the Reclamation Notice to Debtors within the time period prescribed by 11 U.S.C. 546(c)(1). Therefore, pursuant to Section 546(c)(1), Visteon has a valid, enforceable reclamation claim against the Debtors in the amount of $335,363.89.2 B. The floating lien held by the pre-petition secured lenders does not render Visteon's reclamation claim valueless where the pre-petition lenders are being paid from sources other than the proceeds of the reclaimed goods

The Debtors' "prior lien" argument relies upon the assertion that a secured lender whether that lender is pre- or postpetition is a "good faith purchaser" with prior rights in the debtors' prepetition assets. As a result, the Debtors' argue that a reclaiming seller's claim is rendered valueless if the secured lenders claim exceeds the value of the Debtors' assets. However, a reclaiming seller's claim is not automatically extinguished due to the presence of a secured creditor that qualifies as a "good faith purchaser". Rather, at worst, the presence of a secured creditors subordinates the reclaiming seller's claim. In re Houlihan's Restaurant, Inc., 286 B.R. 137 (Bankr. W.D. Mo. 2002)(right to reclaim depends on the value of the excess goods remaining once creditor's claim is paid or released); In re Arlco, Inc., 239 B.R. 261 (Bankr. S.D.N.Y. 1999)(seller's right to reclamation is not automatically extinguished by rights of a good faith purchaser, rather reclaiming seller is simply relegated to some less commanding station). Because a reclaiming seller's claim for return of the reclaimed goods is merely subordinate to a good faith purchaser's interest in the goods, when the prepetition claims of prior lienholders are paid from sources other than the proceeds of the reclaimed goods, the reclamation

Debtors objected to Visteon's Reclamation Notice as untimely and Visteon filed a response to Debtors' objection on September 27, 2005. Debtors objection to Visteon's claim remains unresolved. Debtors filed the present motion seeking to deem all reclamation claims general unsecured claims in lieu of resolving the outstanding objections. See Debtors' Motion at 35.

claims can continue to be asserted against the proceeds of the goods. In re Pester Refining Co. v. Ethyl Corp. (In re Pester Refining Co.), 964 F.2d 842, 848 (8th Cir. 1992). For example, in Pester, the court held that the reclamation claims of the seller had value where the debtor's Plan of Reorganization paid the secured creditors from sources other than the inventory subject to the seller's reclamation claim. In Pester, the debtor filed for bankruptcy two days after the seller delivered 6,000 gallons of gasoline additive to the debtor's refinery in El Dorado, Kansas. Id. at 844. The seller sent a written reclamation demand to the debtor. Id. Although the goods were still on hand and identifiable, they were subject to the perfected security interests of various undersecured creditors. Id. The seller subsequently filed a

reclamation adversary proceeding to recover the goods. Id. The Eighth Circuit began its analysis with the general proposition that the existence of a perfected security interest in the goods does not extinguish the seller's reclamation right to the goods. Id. at 846. Rather, the question for the court was whether the seller's valid reclamation right had value in light of the superior security interest. Examining the reclamation provisions in the Uniform Commercial Code, the court noted that the actions of the secured creditors with respect to the goods will determine the value of the seller's right to reclaim. Id. at 847. Under the UCC, if an undersecured secured creditor forecloses on the goods to be reclaimed and uses the entire proceeds to pay down its secured debt, the seller's reclamation right is extinguished. Even if the buyer has additional assets, the seller's right to reclaim affords it no priority in those assets; it is relegated to its unsecured claim for the purchase price. On the other hand, if the secured creditor releases its security interest in the goods to be reclaimed, the seller may enforce its right to reclaim, even if the resulting reduction in the buyer's assets impairs the secured creditor's position. Id.

The Eighth Circuit then examined the treatment of the secured creditors' claims in the Plan of Reorganization to determine how the claims were satisfied. Id. at 848. The Court determined that the secured creditors opted to release their security interests in the chemical the seller sought to reclaim "in exchange for payments from sources other than the proceeds of those chemicals." Id. The Court held the "because the secured creditors released their superior liens and satisfied their claims from unrelated assets and income sources, the Bankruptcy Court properly valued [the seller's] right to reclaim at the full invoice price of the chemicals." Id. As a result, the Eighth Circuit affirmed the decision of the Bankruptcy Court to give the seller an administrative expense priority claim or replacement lien for the full value of its right to reclaim. Id. at 848-49. Other courts have followed the principles set forth by the Eighth Circuit in Pester and found that a seller's reclamation claim had value where the prior lien holders were paid through other sources. For example, in In re Phar-Mor, Inc., 301 B.R. 482 (Bankr. N.D. Ohio 2003), the debtor's prepetition lender held a security interest in the debtor's prepetition inventory and the proceeds of that inventory. The postpetition DIP financing facility paid in full the debtor's obligations to the prepetition lenders. In exchange, the prepetition lenders security interest was released upon payment and the debtor granted a new security interest in the proceeds of its prepetition inventory to the DIP lender rather than transferring its security interest to the DIP lender. The court held that since the "prior" lien of the prepetition lenders had been released, the reclaiming seller were entitled to assert the full value of their reclamation claims. In priority terms, the reclaiming seller stands behind the insolvent buyer's secured creditors who have security interests in the goods subject to reclamation demands. Accordingly, if the buyer's secured creditor releases its security interest in the goods to be reclaimed, the seller may enforce its right to reclaim. In the

bankruptcy context, the secured creditor's decision determines the value of the seller's right to reclaim. Id. at 496-97. Furthermore, the court determined that "the debtor's decision to grant a security interest in inventory to a subsequent secured lender cannot defeat a seller's reclamation rights if the seller asserted its rights before the security interest is granted." Id. at 497. See also, In re Georgetown Steel Company, L.L.C., 318 B.R. 340, 348 (Bankr. D.S.C. 2004)(holding reclaiming sellers entitled to administrative expense claims where the secured creditors were paid in full or otherwise released claims to the reclaiming sellers' goods through lack of objection to the relief sought by the sellers). In this case, the Debtors' argue that all reclamation claims should be deemed general unsecured claims because the Prepetition Lenders were undersecured on the Petition Date and will not be receiving the full amount of their secured claims through the Plan. However, as Pester and Phar-Mor indicate, the court must determine whether Visteon's goods or proceeds have been used to satisfy the claims of the secured creditors. Like Pester, the security interests of the undersecured Prepetition Lenders in this case will be satisfied and released through the Debtors' Chapter 11 Plan and not through Visteon's good or the proceeds of Visteon's goods. As in Pester and Phar-Mor, Visteon's reclamation claim survives where its reclaimed goods or proceeds have not been used to satisfy the claims of the secured creditors. As a result, Visteon is entitled to an administrative priority claim in the amount of its valid reclamation claim pursuant to 11 U.S.C. 546(c)(2). C. The Court should permit discovery to determine the source of payments to the Prepetition Lenders

Debtors admit in the Motion that they "have sold, used or otherwise integrated into their operation all of the goods that were the subject of Reclamation Demand." See Debtor Motion at 16. However, Debtors' Motion fails to indicate whether the proceeds of the reclamation 7

collateral has been used to fund its continuing operations or has been used to pay down the debt owed to the Prepetition Lenders. Thus, at a minimum, the Court should permit the parties to engage in discovery to determine the source of payments to the Prepetition Lenders. To the extent the Prepetition Lenders claims have been paid the proceeds of the Visteon's goods, then Visteon concedes that its reclamation claim should be adjusted accordingly. III. CONCLUSION

For the foregoing reasons, this Court should deny Debtors' Motion for Order Deeming Reclamation Claims to be General Unsecured Claims Against the Debtors. At a minimum, this Court should permit Visteon and the Debtors to engage in discovery to determine whether the proceeds of Visteon's goods have been paid to the Prepetition Lenders.

Dated: February 7, 2007

Respectfully Submitted,

DICKINSON WRIGHT PLLC By: _/s/ Michael C. Hammer Michael C. Hammer (P41705) Attorneys for Visteon Corporation 301 E. Liberty, Suite 500 Ann Arbor, MI 48104 (734) 623-7075 mhammer@dickinsonwright.com
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