No big deal: The GM and chrysler cases in context

American Bankruptcy Law Journal

Volumn 83, Issue 4, 2009, Pages 531-548

  Lubben, Stephen J ^a  

^a SETON HALL UNIVERSITY   (United States)

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EID: 77149120441     PISSN: 00279048     EISSN: None     Source Type: Journal    
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References (137)

1. In the case of Canada, financial assistance came from both the federal and provincial (Ontario) governments.
2. E.g., In re General Motors Corp" 407 B. R. 463 (Bankr. S. D. N. Y. 2009).
3. Ralph Nader and Robert Weissman, Obama's CM Plan Looks Like a Raw Deal, May 29, 2009, http://online.wsj.com/article/SBI24355327992064463html
4. Richard A. Epstein, The Deadly Sins of the Chrysler Bankrupcy, May 12, 2009, http://www.forbes.com/2009/05/11/chrysler-bankruptcy-mortgage- opinions-columnists-epstein. html
5. Ann Woolner, Chrysler Mows Down Debtholders' Claims in Court, June 5, 2009, http://www.bloom berg.com/apps/news?pid=20601039&refer=columnist- woolner&sid=aN-5hvV-xqHM.
6. Todd J. Zywicki, Chrysler and the Rule of Law, May 13, 2009, http://online.wsj.com/article/SBI242 17356836613091-html ("Fleecing lenders to pay off politically powerful interests, or governmental threats to reputation and business from a failure to toe a political line? We might expect this behavior from a Hugo Chávez").
7. Because of the newness of this issue, few academics have published formal articles on these issues. Instead, they have engaged these issues in the form of testimony and editorial writings, which I respond to herein.
8. Norma Cohen, Bank Lending to Private Companies Slips, June 24, 2009, http://www.ft.com/cms/s/0/8174765a-6058-1 1de-a09b-00144feabdc0. html
9. See In re General Motors Corp" 407 B. R. 463, 484 (Bankr. S. D. N. Y. 2009) (There are no merger partners, acquirers, or investors willing and able to acquire GM's business. Other than the U. S. Treasury and EDC, there are no lenders willing and able to finance GM's continued operations. Similarly, there are no lenders willing and able to finance GM in a prolonged chapter 11 case.").
10. For an example of the latter, see David Brooks, The?Quagmire Ahead, N. Y. TIMES, June 1, 2009 (arguing that "the Obama plan rides roughshod over the current private investors").
11. U. S. C. § 363 (b) (authorizing a trustee to sell property of the estate outside the ordinary course of business) & (f) (authorizing a sale free and clear of various interests). In a chapter 11 case, 11 U. S. C. § 1123 (a) (5) (B) also authorizes sales under a reorganization plan.
12. See text accompanying note 17 infra. When a sale occurs prior to confirmation of a plan, it is commonly referred to as a "§ 363 sale, " and this article uses that common terminology to distinguish a sale outside the plan confirmation context.
13. 12Douglas G. Baird & Robert K. Rasmussen, Chapter 11 at Twilight, 56 STAN. L. REV. 673, 674 (2003).
14. See also Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., 128 S. Ct. 2326, 2331 n. 2 (2008).
15. How Chrysler Bankruptcy Is Different, April 30, 2009, http://www.msnbc.msn.com/id/305O7O66/(quoting Professor Skeel). In this article Skeel argues that government's role in the case is unprecedented in bankruptcy history, a contention which seems to neglect the Penn Central case in the 1970s.
16. See In re Penn Central Transportation Co., 596 F.2d 1127, 1149 (3d Cir. 1979) ("The sheer size of the expenses of administration, the unprecedented scope and number of compromises preceding adoption of the Plan, and legislative intervention are all factors which require a unique approach....").
17. I411 U. S. C. § 364 (authorizing post-petition or "DIP" lending). In chapter 11, the debtor retains possession or control of its bankruptcy estate, because no trustee is appointed, and is referred to as the "debtor in possession" or the "DIP." 11 U. S. C. § 1107 (a).
18. See David A. Skeel, Jr., The Past, Present and Future of Debtor-In-Possession Financing, 25 CRDOZO L. REV. 1905, 1920-29 (2004).
19. 15Rachael M. Jackson, Comment, Responding to Threats of Bankruptcy Abuse in a Post-Enron World: Trusting the Bankruptcy Judge as the Guardian of Debtor Estates, 2005 COLUM. BUS. L. REV. 451, 452 (2005).
20. 11 U. S. C. § 1107 (a).
21. John J. Hurley, Chapter 11 Alternative: Section 363 Sale of all of the Debtor's Assets Outside a Plan of Reorganization, 58 AM. BANKR. L. J. 233, 24-41 (1984) (Noting, more than twenty years ago, that "it has become generally accepted that section 363 (b) empowers a trustee or debtor in possession to sell all of the property of the debtor outside a plan of reorganization. ").
22. 11 U. S. C. § 1123 (b) (4).
23. Cf. Timothy D. Cedrone, A Critical Analysis Of Sport Organization Bankruptcies In The United States And England: Does Bankruptcy Law Explain The Disparity In Number Of Cases?. 18 SETON HALL J. SPORTS & ENT. L. 297, 310-12 (2008) (explaining the chapter 11 plan process).
24. See J. Vincent Aug. et al., The Plan of Reorganization: A Thing of the Past?, 13 J. BANKR. L. & PRAC. 3, 4-5 (2004) ("A Section 363 sale is generally the preferred method for selling assets because it is quicker and less expensive, and provides a quick fix to address continuing losses, rapidly depleting assets, and loss of cash flow.").
25. Jason Brege, An Efficiency Model of Section 363 (b) Sales, 92 VA. L. REV. 1639, 1650 (2006).
26. 22The phrase was first used in In re Braniff Airways, Inc., 700 F.2d 935, 940 (5th Cir. 1983), but seems to add little to the discussion.
27. 23James J. White, Death and Resurrection of Secured Credit, 12 AM. BANKR. INST. L. REV. 139, 161-63 (2004).
28. 24Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983).
29. 25Ind. State Police Pension Trust v. Chrysler LLC (In re Chrysler LLC), 576 F.3d 108, 115 (2d Cir. 2009).
30. See, eg., In re Babcock and Wilcox Company, 250 F.3d 955 (5th Cir. 2001) ;
31. In re Continental Air Lines, Inc. 780 F.2d 1223 (5th Cir. 1986) ;
32. see also In re Gulf Coast Oil Corp., 404 B. R. 407 (Bankr. S. D. Tex. 2009).
33. 27The rule that each layer of debt be paid in full, starting with the most senior debt, before any junior claim receives any recovery. See generally Douglas G. Baird & Thomas H. Jackson, Bargaining After the Fall and the Contours of the Absolute Priority Rule, 55 U. CHI. L. RE. 738 (1988).
34. 28Motorola, Inc. v. Official Comm. of Unsecured Creditors and J. P. Morgan Chase Bank, N-A. (In re Iridium Operating LLC), 478 F.3d 452, 466 (2d Cir. 2007). To be sure, Iridium involved a settlement under FRBP 2019, and it is unclear whether the flexibility shown in the case should be extended to a straightforward absolute priority analysis, where the parties' relative positions are uncontested. On the other hand, the Iridium court declined to adopt the holding of Official Unsecured Creditors' Comm. v. Stern
35. (In re SPM Mfg. Corp.), 984 F.2d 1305, 1307, 1312 (1st Cir. 1993), which allows senior lenders to "gift" recoveries to lower classes, because of the dispute in Iridium over the lenders' liens. Thus, if the holding of Iridium does not apply, SPM still might.
36. Cf. Stephen J. Lubben, Delaware's Irrelevance, 16 A. B. I. L. REV. 267 (2008).
37. See In re O'Brien Environmental Energy, Inc., 181 F.3d 527, 530 (3rd Cir. 1999).
38. See C. R. Bowles & John Egan, The Sale of the Century or a Fraud on Creditors?: The Fiduciary Duty of Trustees and Debtors in Possession Relating to the "Sale" of a Debtor's Assets in Bankruptcy, 28 U. MEM. L. RE. 781, 805-36 (1998).
39. In re Financial News Network, Inc., 980 F.2d 165, 169 (2d Cir. 1992) (holding that the Bankruptcy Court may consider additional evidence pertaining to a bid after the official close of bidding, stating that "we have observed that '[f]irst and foremost is the notion that a bankruptcy judge must not be shackled with unnecessarily rigid rules when exercising the undoubtedly broad administrative power granted him under the [Bankruptcy] Code"")
40. (quoting In re Lionel Corp., 722 F.2d 1063, 1069 (2d Cir. 1983)).
41. In re Food Barn Stores, Inc., 107 F.3d 558, 565 (8th Cir. 1997).
42. In re Chung King, Inc., 753 F.2d 547, 549 (7th Cir. 1985).
43. See, e.g., Corp. Assets, Inc. v. Paloian, 368 F.3d 761 (7th Cir. 2004) ;
44. In re Financial News Network, Inc., 126 B. R. 152 (S. D. N. Y. 1991) ;
45. In re Wintex, 158 B. R. 540 (D. Mass 1992) ;
46. In re Edwards, 228 B. R. 552 (Bankr. E. D. Pa. 1998).
47. 36http://lopucki.law.ucla.edu/
48. 57A complete list of cases is attached as Appendix A to my testimony before the TARP Congressional Oversight Panel, available at http://cop. senate.gov/hearings/library/hearing-072709-detroithearing.cfm.
49. 38Douglas G. Baird & Robert K. Rasmussen, Private Debt and the Missing Lever of Corporate Governance, 154 U. PA. L. REV. 1209, 1229 (2006).
50. 39Jay Lawrence Westbrook, The Control of Wealth in Bankruptcy, 82 TEX. L. REV. 795 (2005).
51. Cf. Lynn M. LoPucki & Joseph W. Doherty, Bankruptcy Fire Sales, 106 MICH. L. REV. 1 (2007).
52. In re Eddie Bauer Holdings, Inc., et al., Case No. 09-12099 (Bankr. D. Del. 2009).
53. In re Filene's Basement, Inc., et al. Case No. 09-11525 (Bankr. D. Del. 2009).
54. In re Ritz Camera Centers, Inc., Case No. 09-10617 (Bankr. D. Del. 2009).
55. 44Baird & Rasmussen, Missing Lever, supra note 38, at 1239-40.
56. *3 (D. Del. May 20, 2002).
57. See In re Trans World Airlines, Inc, 322 F.3d 283, 288-90, 293 (3d Cir. 2003).
58. 46In Chrysler, where the ability to credit bid was most relevant, the dissenting lenders had no independent right to credit bid; indeed they were arguably not even secured creditors when acting independently. Instead, all of the security interests in this loan were held by a collateral trustee, for the benefit of all lenders. Under the loan documents, the trustee was instructed to take orders from the agent bank upon default - Chase. At the Chrysler sale hearing, the government testified that Chase had been told it could credit bid if it did not like the deal. The dissenting lenders, representing less than 5% of the total loan, had no right under the loan documents to override Chase's decision in this regard. The government certainly could have explained this before the sale hearing, as the apparent inability to credit bid appeared to represent a problem with these cases. Stephen Lubben, Chrysler & Credit Bidding, Again, May 29, 2009, http://www.creditslips.org/creditslips/2009/ 05/chrysler-credit-bidding-again. html.
59. See Bruce A. Markell, Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations, 44 STAN. L. REV. 69, 121-22 (1991).
60. U. S. C. § 1129. Cf. John D. Ayer, Rethinking Absolute Priority After Ahlers, 87 MICH. L. REV. 963, 969-70 (1989).
61. 49Bruce A. Markell, A New Perspective on Unfair Discrimination in Chapter 11, 72 AM. BANKR. L. J. 227, 228 (1998).
62. 50Douglas G. Baird & Robert K. Rasmussen, The End of Bankruptcy, 55 STAN. L. REV. 751, 751 (2002) ("Corporate reorganizations have all but disappeared. Giant corporations make headlines when they file for Chapter 11, but they are no longer using it to rescue a firm from imminent failure. Many use Chapter 11 merely to sell their assets and divide up the proceeds").
63. 51Stephen J. Lubben, The "New and Improved" Chapter 11, 93 KY. L. J. 839, 841-]42 (2005) ("[I]t is not clear that this development promotes social welfare. Rather, lender control may only benefit lenders.").
64. 52Harvey R. Miller & Shai Y. Waisman, Is Chapter 11 Bankrupt?, 47 B. C. L. REV. 129, 156-57 (2005).
65. 53Lubben, Stephen J., Systematic Risk & Chapter 11 (May 4, 2009). TEMPLE LAW REVIEW, 2009; Seton Hall Public Law Research Paper No. 1399015. Available at SSRN: http://ssrn.com/abstract=1399 015.
66. Ind. State Police Pension Trust v. Chrysler LLC (In re Chrysler LLC), 576 F.3d 108, 112 (2d Cir. 2009).
67. In re Chrysler LLC, 405 B. R. 84, 92 (Bankr. S. D. N. Y.)
68. affd, 576 F.3d 108 (2nd Cir. 2009).
69. Pensum Funds Lose Chrysler Fight in District Court, May 26, 2009, http://www.reuters.com/article/euPrivateEquityNews/idUSTRE54O4M320090526
70. Se Beal Sav. Bank v. Sommer, 865 N. E.2d 1210, 1216 (N. Y. 2007) ("[L]anguage in the agreements confirms that the Lenders contemplated unified action by the Administrative Agent. The Agent does not perform merely mechanical or technical functions but rather has a broad grant of power.").
71. In re Chrysler LLC, 405 B. R. 84, 104 (Bankr. S. D. N. Y.)
72. affd, 576 F.3d 108 (2d Cir. 2009).
73. In re General Motors Corp., 407 B. R. 463, 482-83 (Bankr. S. D. N. Y. 2009).
74. Id. at 495-96.
75. Id. at 496.
76. 62Douglas R. Baird, The New Face of Chapter 11, 12 AM. BANKR. INST. L. REV. 69, 80-82 (2004).
77. Cf. In re Dial-A-Mattress Operating Corp., 2009 Bankr. LEXIS 1801 (Bankr. E. D. N. Y. June 24, 2009) (approving § 363 sale to newly created corporation).
78. *11 (Bankr. D. Del. Apr. 2, 2001).
79. 65Indeed, the Lehman Brothers sale was completed in even less time, with no government involvement. Stephen J. Lubben, The Sale of the Century and Its Impact on Asset Securitization: Lehman Brothers, 27 AM. BANKR. INST. JOURNAL No. 10, page 1 (2009).
80. In re Chrysler LLC, 405 B. R. 84, 87 (Bankr. S. D. N. Y.), aff d, 576 F.3d 108 (2nd Cir. 2009).
81. E.g., David A. Skeel, Jr., Creditors' Ball: The "New" New Corporate Governance in Chapter 11, 152 U. PA. L. REV. 917, 935-38 (2003).
82. 68Barry E. Adler, Bankruptcy Primitives, 12 AM. BANKR. INST. L. REV. 219, 224-25 (2004).
83. See Barry E. Adler & Ian Ayres, A Dilution Mechanism for Valuing Corporations in Bankruptcy, 111 YALE L. J. 83, 101-03 (2001) ; Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 COLUM. L. REV. 527, 559 (1983).
84. 70http://www.law.uchicago.edu/faculty/epstein
85. 71Richard A. Epstein, The Deadly Sins of the Chrysler Bankrupcy, May 12, 2009, http://www.forbes.com/2009/05/11/chrysler-bankruptcy-mortgage- opinions-columnists-epstein. html.
86. The full quote is "President Obama-no bankruptcy lawyer-twisted the arms of the banks that have received TARP money to waive their priority."
87. Id. As I discuss infra text accompanying notes 89-90, the "strong arming" argument is a contention without any supporting evidence.
88. 73Stephen Lubben, The Absolute Priority Rule?, June 9, 2009, http://www.creditslips.org/creditslips/2009/06/the-absolute-priority-rule.html
89. 74Ramifications of Auto Industry Bankruptcies, Part III: Hearing Before the Subcomm. On Commercial and Administrative Law of the H. Comm. On the Judiciary, July 22, 2009, http:///judiciary.house. gov/hearings/pdf/ Baird090722pdf (Statement of Douglas G. Baird) (hereafter "Baird Testimony").
90. 75Baird Testimony, supra note 74, at 5.
91. Dissident Chrysler Lenders Step Up Opposition, May 5, 2009, http://www.forbes.com/feeds/afx/2O09/05/O5/afx6380833.html
92. 77For example, Mark Roe in the commentary I discuss infra text accompanying notes 111-13.
93. See text accompanying notes 32-35 supra.
94. 79Gillian Tett, The Liquidity Pipes Remain Clogged, August 6, 2009, http://www.ft.com/cms/s/0/33 dbf8a6-82a3-1 lde-ab4a-00144feabdcO.html
95. 80That is, forgiven their debt in exchange for the companies' assets. 11 U. S. C. § 363 (k).
96. 81Christopher Scinta, Chrysler Auction Approved, Clears Way for Fiat Deal, May 6, 2009, http://www.bloomberg.com/apps/news?pid=20601103&sid= aCWc52-2KMYs&refer=us
97. 82Joe Bolger and Tom Bawden, Daimler Sells Chrysler to Private Equity, May 14, 2007, http://business.timesonIine.co.uk/tol/business/ industry-sectors/engineering/article 1786611.ece
98. 83Baird Testimony, supra note 74, at 5-6.
99. 84AIFP Hearing, Congressional Oversight Panel, July 23, 2009, http://cop. senate.gov/documents/testimony-072709-adlerpdf (written statement of Barry E. Adler) (hereafter "Adler testimony").
100. Adler Testimony, supra note 84, at 4 (discussing the Chryslers case).
101. 86Motorola, Inc. v. Official Comm. of Unsecured Creditors and J. P. Morgan Chase Bank, N. A. (In re Iridium Operating LLC), 478 F.3d 452, 466 (2d Cir. 2007).
102. U. S. C. § 1129 (b) (l) ("if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan not withstanding the requirements of such paragraph if... ") ;
103. see also 11 U. S. C. § 1129 (a) (8) (requiring all classes to accept the plan).
104. 88Adler Testimony, supra note 84, at 5 (emphasis added).
105. See G. Eric Brunstad, Jr. & Mike Sigal, Competitive Choice Theory and the Unresolved Doctrines of Classification and Unfair Discrimination in Business Reorganizations Under the Bankruptcy Code, 55 BUS. LAW. 1, 24-32 (1999).
106. 90Dawn Kopecki, Bank of America Among Worst for Loan Modifications, Aug. 4, 2009, http://www.bloomberg.com/apps/news?pid= 20601103&sid=a7kYntqozaKo
107. E.g., In re D&F Construction, Inc., 865 F.2d 673, 676 (5th Cir. 1989).
108. In re Arden Properties, Inc., 248 B. R. 164, 173-74 (Bankr. D. Az. 2000).
109. 93It also explains why Mark Roe and David Skeel's concerns about the violation of Northern P. R. Co. v. Boyd, 228 U. S. 482 (1913), are misplaced: Boyd has no direct applicability under current law when the dissenting creditor is secured. Roe, Mark J. and Skeel, David A., Assessing the Chrysler Bankruptcy (September 7, 2009). U of Penn Law School, Public Law Research Paper No. 09-17;
110. U of Penn, Inst for Law & Econ Research Paper No. 09-22;
111. Harvard Law and Economics Discussion Paper No. 645;
112. Harvard Public Law Working Paper No. 09-42. Available at SSRN: http://ssrn.com/abstract=1426530.
113. 94Although many courts have concluded that § 1122 requires classification be based on the nature of the claims rather than on the nature or interests of the holders of the claims, there is Second Circuit authority suggesting that the interests of the claim holder may provide a basis for separate classification. In re Chateaugay Corp, 89 F.3d 942 (2d Cir. 1996).
114. 95Nick Buknkley, GM. Bankruptcy Plan Clears Bondholder Hurdle, May 30, 2009, http://www.ny times.com/2009/05/31/business/31 gm.html
115. U. S. C. § 1129 (b) (1).
116. In re Kliegl Bros. Universal Electric Stage Lighting Co., 149 B. R. 306, 309 (Bankr. E. D. N. Y. 1992) (allowing separate classification and treatment of union claim) ;
117. see also In re Coram Healthcare, Corp., 315 B. R. 321, 349 (Bankr. D. Del. 2004) ("Numerous courts have held that separate classification and treatment of trade claims is acceptable if the separate classification is justified because they are essential to a reorganized debtor's ongoing business.") ; Markell, Unfair Discrimination in Chapter 11, supra note 49, at 241.
118. In re Chateaugay Corp., 89 F.3d 942 (2d Cir. 1996).
119. 99As noted, supra, under section 6.12 of the Chrysler collateral agreement, Chase, as agent, has the power to release the liens granted under the loan agreements. Indeed, upon default the agent has full control over any "Collection Enforcement Action, " defined to include "exercising any other right or remedy under the [UCC]... or under any Bankruptcy Law or other applicable law." This is not a problem created by TARP, the Bankruptcy Code, or the federal government, but by the loan agreement to which the lenders themselves voluntarily agreed to be bound.
120. 100Jena McGregor, CEOs On the Economic Crisis, Oct. 15, 2008, http://www.businessweek.com/careers/managementiq/archives/2008/10/ ceos-on-the-cou.html
121. 101H. Judiciary Comm, May 21, 2009, http://judiciary.house.gov/hearings/ pdf/Skeel090521pdf (testimony of David A. Skeel, Jr.).
122. l02David A. Skeel, Jr., Why the Chrysler Deal Would Horrify a New Dealer, May 8, 2009, http://www.american.com/archive/2009/may-2009/why-the- chrysler-deal-would-horrify-a-new-dealer.
123. 103DAVID A. SKEEL, JR., DEBT'S DOMINION: A HISTORY OF BANKRUPTCY LAW IN AMERICA 48-70 (2001).
124. 104In particular, receiverships involved the initiation of a foreclosure action by a secured lender, the credit bid by that secured lender of its claim, and the transfer of the debtor's assets to a new shell corporation, capitalized as agreed by the prior holders of the debtor's securities. EDWARD SHERWOOD MEAD, CORPORATION FINANCE 406-12 (rev. ed. 1920) (describing the process used to commence a receivership).
125. See Stephen J. Lubben, Railroad Receiverships and Modem Bankruptcy Theory, 89 CORNELL L. REV. 1420, 1445-51 (2004).
126. l06David A. Skeel, Jr., Vem Countryman and the Path of Progressive (and Populist) Bankruptcy Scholarship, 113 HARV. L. REV. 1075, 1089 (2000) (footnote omitted).
127. 107Stephen J. Lubben, Out of the Past: Railroads & Sovereign Debt Restructuring, 35 GEO. J. INT'L L. 845, 850 (2004).
128. See also In re Wabash Valley Power Ass'n, 72 F.3d 1305, 1314 (7th Cir. 1995) ("In its origins, the absolute priority rule was a judicial invention designed to preclude the practice in railroad reorganizations of "squeezing out' intermediate unsecured creditors through collusion between secured creditors and stockholders (who were often the same people).").
129. 108This is particularly clear from the American Enterprise Institute paper, supra note 102.
130. See In re Chrysler LLC, 405 B. R. 84, 105-06 (Bankr. S. D. N. Y.)
131. affd. 576 F.3d 108 (2nd Cir. 2009).
132. 110Stephen Lubben, What Did the Indiana Funds Want?, June 10, 2009, http://www.creditslips.org/creditslips/2009/06/what-did-the-indiana-funds- want.html
133. 111Or, alternatively, that the creditors should have received a bailout too - a policy question, and not one that demonstrates a violation of the Bankruptcy Code or the "rule of law."
134. 112Mark Roe, The Chrysler Bankruptcy Sale: An Assessment, June 15, 2009, http://www.law. harvard.edu/news/2009/06/15-roe.html
135. 113A. Mechele Dickerson, Privatizing Ethics In Corporate Reorganizations, 93 MINN. L. REV. 875, 908-09 (2009).
136. 114David E. Sanger, The 31-Year-Old in Charge of Dismantling G. M., May 31, 2009, http://www.ny times.com/2009/06/01/business/01deese.html
137. See George W. Kuney, Let's Make it Official. Adding an Explicit Preplan Sale Process as an Alternative Exit from Bankruptcy, 40 Hous. L. Rev. 1265, 1267-68 (2004).