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Lithium-ion Battery Manufacturer, A123 Systems, Files for Bankruptcy in Delaware

Posted in Bankruptcy Case Summaries

On October 16, 2012, battery maker A123 Systems, Inc., and various subsidiaries, filed chapter 11 petitions for bankruptcy in the United States Bankruptcy Court for the District of Delaware.  A123 started its business in 2001 seeking to capitalize on the growing use of lithium-ion batteries in transportation and energy systems.  According to papers filed with the Bankruptcy Court, the company first began producing commercial batteries in 2006.  See Declaration of David Prystash in Support of Chapter 11 Petitions and First Day Motions (hereinafter the "Decl.") at *4.  By 2007, A123 began building two additional plants and leasing facilities in China to assemble the batteries.  Id.  A123 went public in September 2009 wherein its shares began trading on the NASDAQ Stock Market.  Decl. at *5. 

At the time the company filed for bankruptcy, A123 employed over 1,700 employees in facilities in the U.S. China and Germany.  The company’s headquarters are based in Waltham, Massachusetts and U.S. manufacturing facilities are located in both Massachusetts and Michigan.  Decl. at *9.  From 2007 to 2011, A123′s revenue grew from $41 million to $159 million.  However, despite the growth in revenue, the company has operated at a loss for every year its been in business.  Decl. at *9.

A123 describes its client base as "industry-leading companies that value and require high battery performance."  Decl. at *12.  One of its larger customers, Fisker, uses A123′s batteries in its Fisker Karma vehicle.  Id. A123 determined in 2011 that some of its battery packs used in the Fisker vehicles had safety issues relating to the battery cooling system.  Although there were no "safety incidents" involving the defective batteries, the company nevertheless had to expend substantial amounts of time and expense correcting the problem.  Decl. at *31. Fisker reduced its orders of A123 batteries in third quarter 2011.  Id.

In 2012, A123′s problems went from bad to worse.  In March the company began replacing batteries containing defective cells produced at its Michigan facility.   The "field campaign" to replace the defective batteries is estimated to cost over $51 million.  Because of this setback, the company expects to continue operating at a loss for the next several quarters.  Decl. at 31.  It was against this backdrop that A123 recently began looking for a buyer of its assets. 

Through a marketing campaign, the company identified several parties that were interested in purchasing certain assets.  Eleven parties signed confidentiality agreements and ten received access to A123′s data room.  Decl. at *33.  Going in to bankruptcy, A123 has secured an agreement with Johnson Controls to receive $72.5 million in debtor in possession financing.  In addition to seeking approval of the debtor in possession financing, the company will seek approval to sell certain, but not all, of its assets to Johnson Controls under an asset purchase agreement.  The company believes it has identified other bidders who are willing to purchase those assets not acquired by Johnson Controls.  Decl. at *35.  At the end of the day, the objective of the bankruptcy proceeding is to sell substantially all assets pursuant to section 363 of the Bankruptcy Code.  Id.

A123 is represented by the law firm Latham & Watkins LLP.

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Jason Cornell is a partner and bankruptcy attorney with the law firm Fox Rothschild LLP.  Jason  practices before the United States Bankruptcy Court for the District of Delaware.  You can reach Jason at 302 427 5512, or jcornell@foxrothschild.com.

For  readers seeking more information concerning Delaware bankruptcy proceedings, below are prior posts I have written that address various bankruptcy-related issues: