Assessing the chrysler bankruptcy

Michigan Law Review

Volumn 108, Issue 5, 2010, Pages 727-772

  Roe, Mark J ^a   Skeel, David ^a  

^a UNIVERSITY OF PENNSYLVANIA   (United States)

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EID: 77949988576     PISSN: 00262234     EISSN: None     Source Type: Journal    
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References (115)

1. "The Governmental Entities loaned the Debtors at least $4 billion prepetition, and nearly $5 billion postpetition, all of which is a secured debt obligation of the Debtors." In re Chrysler LLC (Chrysler I), 405 B.R. 84, 108 (Bankr. S.D.N.Y. 2009), aff'd, 576 F.3d 108 (2d Cir. 2009), vacated by 78 U.S.L.W. 3359 (Dec. 14, 2009). In addition, governmental entities provided $6 billion in secured loans to New Chrysler. Id. at 92. Sticklers for form might state that Chrysler did not exit in 42 days, but is still, as of this writing, in Chapter 11. In form, that is correct, but in substance the car operations left Chapter 11 via the sale, 42 days after filing.
2. In the face of continuing complaints after the Chrysler reorganization was completed, Chrysler said it would accept claims for future products-liability lawsuits, but held fast to walking away from lawsuits in place at the time of the reorganization. Chrysler Revises Stance on Liability, N.Y. Times, Aug. 28, 2009, at B2.
3. Tom Hals, Chrysler secured creditor to fight "illegal" plan, Reuters, May 7, 2009.
4. Tom Hals, Chrysler secured creditor to fight "illegal" plan, Reuters, May 7, 2009.
5. Lou Whiteman, Buffett warns of Chrysler cramdown ramifications, TheDeal.com, May 5, 2009, http://www.thedeal.com/dealscape/2009/05/buffett_warns_of_chrysler_cram.php.
6. Lou Whiteman, Buffett warns of Chrysler cramdown ramifications, TheDeal.com, May 5, 2009, http://www.thedeal.com/dealscape/2009/05/buffett_warns_of_chrysler_cram.php.
7. These were not isolated comments in capital markets. Cf. Nicole Bullock, Painful lessons for lenders in Chrysler debacle, Fin. Times, May 7, 2009. Bullock interviewed the financial players: "Given that so much of total borrowing across all asset classes is first lien in nature, the damage that would occur to the economy as a result of higher first lien borrowing costs resulting from lenders requiring a higher return to compensate them for an unknown interpretation of claim priorities could be substantial," says Curtis Arledge, co-head of US fixed income at BlackRock, Inc. "It is particularly important at this stage of the distressed cycle for lenders to have confidence in pre-existing contracts and rules. We are entering a period of record corporate defaults and the need for bankruptcy financing and financing for distressed companies will only continue to grow," says Greg Peters, global head of credit research at Morgan Stanley. "People are pretty comfortable with the bankruptcy rules. What they are trying to do in the Chrysler situation is unprecedented," says Jeff Manning, a managing director specialising in bankruptcy and restructuring at Trenwith Securities, the investment bank. "This isn't the way the game is supposed to be played. " . . . Steve Persky, managing director of Dalton Investors, a Los-Angeles-based hedge fund that specialises in distressed debt[,] . . . [says] "Now there is a new risk: government intervention risk[.]" . . . "And it is very hard to hedge." Id.
8. Ind. State Police Pension Trust v. Chrysler LLC (In re Chrysler LLC) (Chrysler II), 576 F.3d 108, 118 (2d Cir. 2009) (rejecting concerns about the failure to comply with Chapter 11's protections with the statement that the "bankruptcy court's findings constitute an adequate rebuttal"), vacated by 78 U.S.L.W. 3359 (Dec. 14, 2009). How much force is left in the Second Circuit's judgment after the Supreme Court vacated it is yet to be determined. See infra text accompanying notes 95-98.
9. In re Gen. Motors Corp., 407 B.R. 463, 497-98 (Bankr. S.D.N.Y. 2009).
10. Ashby Jones & Mike Spector, Creditors Cry Foul at Chrysler Precedent, Wall St. J., June 13, 2009, at B1 ("It's going to happen," [Peter Kaufman, president of investment bank Gordian Group LLC, said, questioning the sui generis view]. "The excuse that [the auto cases] are 'special circumstances,' I'm sure [is] right until the next time it's a 'special circumstance.'").
11. Affidavit of Ronald E. Kolka in Support of First Day Pleadings 27, 39, In re Chrysler LLC (Chrysler I), 405 B.R. 84 (S.D.N.Y. 2009) (No. 09 B 50002 (AJG)), 2009 WL 1266134 [hereinafter "Kolka Affidavit"].
12. Affidavit of Ronald E. Kolka in Support of First Day Pleadings 27, 39, In re Chrysler LLC (Chrysler I), 405 B.R. 84 (S.D.N.Y. 2009) (No. 09 B 50002 (AJG)), 2009 WL 1266134 [hereinafter "Kolka Affidavit"]. 30, 35.
13. Chrysler I, 405 B.R. at 92, 108.
14. Section 1129 priorities contemplate that secured creditors obtain the value of their security, that unsecured creditors be paid before stockholders, that intercreditor contractual priorities be respected, and that creditors at the same level obtain the same proportion of their claim paid. Creditors can consent to deviations from priority, via a vote of the affected creditor class. An individual creditor can sometimes upset a class-approved deal via § 1129(a)(7), which requires that any non-consenting creditor receive as much under the plan as the creditor would get if the debtor were liquidated under Chapter 7. For those unfamiliar with the basic priority structure of § 1129, it is outlined in bankruptcy casebooks and treatises. See, e.g., Mark J. Roe, Bankruptcy and Corporate Reorganization 87-117 (2d ed. 2007); Elizabeth Warren & Jay Lawrence Westbrook, The Law of Debtors and Creditors 396-402 (6th ed. 2009).
15. The judge can cram the plan down on objecting creditors by finding that the objecting creditors obtained their due under a § 1129 plan, thereby allowing the judge to confirm the plan, notwithstanding the creditors' dissent.
16. Walter J. Blum, The Law and Language of Corporate Reorganization, 17 U. Chi. L. Rev. 565, 572 (1950) ("[Reorganization value] is a fictional value . . . . It is set by the estimates of persons who are not standing back of them with a willingness to invest their own funds.")
17. Kerry O'Rourke, Valuation Uncertainty in Chapter 11 Reorganizations, 2005 Colum. Bus. L. Rev. 403, 427 (2005)
18. Mark J. Roe, Bankruptcy and Debt: A New Model for Corporate Reorganization, 83 Colum. L. Rev. 527 (1983).
19. Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1069 (2d Cir. 1983).
20. Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1069 (2d Cir. 1983). at 1071.
21. (quoting Protective Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 450 (1968)).
22. Douglas G. Baird & Robert K. Rasmussen, Chapter 11 at Twilight, 56 Stan. L. Rev. 673 (2003)
23. Douglas G. Baird, The New Face of Chapter 11, 12 Am. Bankr. Inst. L. Rev. 69, 73 (2004) ("[S]ales are now part of the warp and woof of [C]hapter 11 practice. Of the 10 largest [C]hapter 11s of 2002, eight used the bankruptcy court as a way of selling their assets to the highest bidder, whether piecemeal or as a going concern.")
24. Lynn M. LoPucki & Joseph W. Doherty, Bankruptcy Fire Sales, 106 Mich. L. Rev. 1, 24-25 (2007) (sharply criticizing sales).
25. Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983).
26. Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983).
27. Clyde Bergemann, Inc. v. Babcock & Wilcox Co. (In re Babcock & Wilcox Co.), 250 F.3d 955, 960 (5th Cir. 2001) ("Braniff stands . . . for the proposition that the provisions of § 363 permitting a trustee to use, sell, or lease the assets do not allow a debtor to gut the bankruptcy estate before reorganization or to change the fundamental nature of the estate's assets in such a way that limits a future reorganization plan.")
28. Craig A. Sloane, The Sub Rosa Plan of Reorganization: Side-stepping Creditor Protections in Chapter 11, 16 Bankr. Dev. J. 37 (1999) (surveying cases through 1999).
29. Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating LLC), 478 F.3d 452, 466 (2d Cir. 2007) (quoting In re Braniff Airways, 700 F.2d at 940). Two years earlier, the Southern District of New York rejected a sale, stating that "it is well established that section 363(b) is not to be utilized as a means of avoiding Chapter 11's plan confirmation procedures. Where it is clear that the terms of a section 363(b) sale would preempt or dictate the terms of a Chapter 11 sale, the proposed sale is beyond the scope of section 363(b) and should not be approved under that section." Contrarian Funds, LLC v. Westpoint Stevens, Inc. (In re Westpoint Stevens, Inc.), 333 B.R. 30, 52 (S.D.N.Y. 2005).
30. In re Iridium, 478 F.3d at 464.
31. Institutional Creditors of Cont'l Air Lines, Inc. v. Cont'l Air Lines, Inc. (In re Cont'l Air Lines, Inc.), 780 F.2d 1223, 1228 (5th Cir. 1986) (emphasis added); cf. In re Crowthers McCall Pattern, Inc., 114 B.R. 877, 885 (Bankr. S.D.N.Y. 1990).
32. Scott D. Cousins, Chapter 11 Asset Sales, 27 Del. J. Corp. L. 835, 839-40 (2002). Multiple circuits have explicitly required that these conditions be satisfied prior to a § 363 sale. Id.
33. H.R. Rep. No. 95-595, at 227 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6186-87; H.R. Doc. No. 93-137, pt. 1, at 256 (1973).
34. David Arthur Skeel, Jr., The Nature and Effect of Corporate Voting in Chapter 11 Reorganization Cases, 78 Va. L. Rev. 461, 497-501 (1992) (recommending that such consent be required).
35. 11 U.S.C. § 1126(e) (2006).
36. In re Allegheny Int'l, Inc., 118 B.R. 282, 289 (Bankr. W.D. Pa. 1990) (quoting In re P-R Holding Corp., 147 F.2d 895, 897 (2d Cir. 1945)); see also In re Dune Deck Owners Corp., 175 B.R. 839, 845 (Bankr. S.D.N.Y. 1995); cf. In re Iridium Operating LLC, 478 F.3d 452, 465 (2d Cir. 2007) (emphasizing that only a single creditor objected).
37. In re Adoption of Guidelines for the Conduct of Asset Sales, General Order M-331 (Bankr. S.D.N.Y. Sept. 5, 2006), available at http://www.nysb.uscourts.gov/orders/m331.pdf.
38. In re Adoption of Guidelines for the Conduct of Asset Sales, General Order M-331 (Bankr. S.D.N.Y. Sept. 5, 2006), available at http://www.nysb.uscourts.gov/orders/m331.pdf. at 7.
39. Debtor's Supp. Brief in Support of Motion for Order Pursuant to Section 363 of the Bankr. Code, In re Lifestream Techs., Inc. (Bankr. D. Nev. Dec. 5, 2006) (No. BK-S-06-13589 BAM) (noting that principal lender agreed to give 25 percent of any overbid to unsecured creditors and to extend the auction for four additional weeks).
40. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 457 (1999).
41. Chrysler I, 405 B.R. at 96-97.
42. Id. at 92. VEBA is the acronym for the trust that handles the retiree health benefits-the voluntary employees' benefit association.
43. Or decided that the security was worth less and the difference was the portion allocable for the deficiency claim.
44. The valuation submitted by Chrysler's experts gave a range of $900 million to $3.2 billion, with a likely recovery to the first liens of between $654 million and $2.6 billion. See Motion of Debtors and Debtors in Possession, Pursuant to Sections 105, 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006, Chrysler I, 2009 WL 1227661.
45. E.g., In re New York, New Haven & Hartford R.R., 4 B.R. 758, 773 (D. Conn. 1980) ("The parties urge acceptance of the valuation procedures . . . which best conform to their views of the applicable law and which, coincidentally, establish the most favorable standing with respect to their own cause.").
46. Chrysler I, 405 B.R. at 97.
47. Id. The problem may lie with the plan opponents. They did not have their own valuation ready to put before the judge in the first week of bankruptcy, as the plan proponents did.
48. The dissenting creditors did, however, contest the credibility of the valuation and the advisory-opinion author's incentives. See Brief of Appellants Indiana State Police Pension Trust et al., at *15-19, Chrysler II, 2009 WL 1560029 ["Brief of Indiana State Police Pension Trust"].
49. Neil King, Jr. & Jeffrey McCracken, USA Inc.: U.S. Forced Chrysler's Creditors To Blink, Wall St. J., May 11, 2009, at A1.
50. Neil King, Jr. & Jeffrey McCracken, USA Inc.: U.S. Forced Chrysler's Creditors To Blink, Wall St. J., May 11, 2009, at A1.
51. Business-media hype about government pressure on the lenders to accede to the government's plan is beside the point. See, e.g., Michael J. de la Merced, Creditors Opposing Chrysler's Overhaul Plan End Alliance, N.Y. Times, May 9, 2009, at B2. While not admirable if the acts occurred, such pressure isn't needed to make the case that a conflicted vote was in play. That some pressure was put on the banks is clear. While the administration may wisely have not explicitly reminded the banks, "[l]awmakers weren't so shy. Rep. Gary Peters [D-Mich.] . . . wrote to the bank CEOs listing their [bailout] loans and asking them to extinguish most of Chrysler's debt." King & McCracken, supra note 44. These considerations could also have discouraged the banks from proposing alternatives to the government's favored transaction. Since the big banks were unpopular then, they had a conflicted position even without the government in play, as they had reason not to be tough with Chrysler, its operations, and its employees, to reduce the chance that public opinion would turn further against the big banks. Once the secured facility's controlling lenders had repaid the Treasury, their renewed freedom to move independently of government opinion was noticed. Robin Sidel, Loan Paid, J.P. Morgan Swagger Returns, Wall St. J., July 15, 2009, at C1 ("J.P. Morgan Chase & Co., freed from the government's strictures after repaying $25 billion in federal money, is back to playing hardball [with the government].").
52. H.R. Rep. No. 95-595, at 411 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6367; see also In re Dune Deck Owners Corp., 175 B.R. 839, 845 n.13 (Bankr. S.D.N.Y. 1995).
53. In re Allegheny Int'l, Inc., 118 B.R. 282, 289 (Bankr. W.D. Pa. 1990) (quoting In re P-R Holding Corp., 147 F.2d 895, 897 (2d Cir. 1945)).
54. 7 Collier on Bankruptcy 1126.06[1] (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2009); cf. In re Holly Knoll Partnership, 167 B.R. 381, 385 (Bankr. ED. Pa. 1994) (favorably quoting similar statement in prior edition of Collier on Bankruptcy).
55. For a succinct history of the good faith provision, see Patrick D. Fleming, Credit Derivatives Can Create a Financial Incentive for Creditors to Destroy a Chapter 11 Debtor: Section 1126(e) and Section 105(a) Provide a Solution, 17 Am. Bankr. Inst. L. Rev. 189, 200-09 (2009).
56. While we focus here on § 1129(a)(8)-based consent as a basis for approving the sale, the Chrysler court considered the ostensible consent of Chrysler's senior creditors in deciding whether to release their liens pursuant to § 363(f)(2) when the assets moved over to New Chrysler; if not, New Chrysler would be subject to the liens. Consent was considered under the senior creditors' loan agreement, which arguably allowed the creditors' agent-JP Morgan Chase, as it happens, one of the major lenders-to release collateral and sell it, even without the consent of the creditors. First, the court understood that a threshold issue was whether there was a valid sale. (It concluded that there was and that there was no sub rosa plan embedded in the sale-mistakenly in our view.) The court then wondered whether it had jurisdiction to resolve any intercreditor, state-law-based dispute and offered the no-evidence-of-being-incapable-of-resisting-the-Treasury standard indicated in the text. It viewed the creditor class as a single creditor, with its agent consenting. Hence, it didn't need to look behind that agent's consent and even wondered whether it had jurisdiction to do so. But the dissenting creditor argued that the agreement required each affected party to consent to a release of collateral. Even if the agent's consent sufficed under the loan agreement, however, once the sale is a sub rosa plan because it de facto determined distributions, case law demands that the § 363 sale either be abandoned (Braniff) or comply with § 1129 (Continental). Creditors would vote by their dollar claims and individually under § 1129(a)(8) (the agent would not cast the sole vote on behalf of the creditor class), with those votes subject to § 1126(e) exclusion, and individual creditors would have § 1129(a)(7) rights. The § 363 result removes the collateral from the bankrupt estate under § 363(f), if the sale itself is otherwise proper, but neither validates the transaction's other terms nor justifies the treatment of the products-liability and other claims left behind in Old Chrysler.
57. Chrysler I, 405 B.R. at 103-04. More precisely, it concluded that the evidence to the contrary-that the banks lacked volition-was speculation.
58. In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003).
59. Order, Pursuant to Sections 105, 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006, at 18, Chrysler I, 2009 WL 1360869 ["Order Approving Bidding Procedures"].
60. Motion of Debtors and Debtors in Possession, Pursuant to Sections 105, 363 and 365 of the Bankruptcy Code and Bankruptcy Rules 2002, 6004 and 6006 at 46, Chrysler I, 2009 WL 1227661 ["Motion of Chrysler to Approve Bidding Procedures"].
61. General Order M-331 [of the Southern District's Bankruptcy Court], supra note 32, at 3 (Bidding procedures "must not chill the receipt of higher and better offers . . . ."); see also In re President Casinos, Inc., 314 B.R. 784, 786 (Bankr. E.D. Mo. 2004) ("Structured bid procedures should provide a vehicle to enhance the bid process and should not be a mechanism to chill prospective bidders' interests."). More generally, as the Supreme Court has said, "the best way to determine value is exposure to a market." Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 457 (1999). That implies a real exposure to the market, not one designed to chill market reaction.
62. Qualified bid requirements aim to "eliminate potential overbidders who are not serious about purchasing the debtor's assets, ensure the sale can be rapidly closed if an overbidder should purchase the assets, and ensure that the net purchase price is higher than the original bid should overbidding occur." Ronald L. Liebow, Steven F. Werth, N. Lynn Hiestand, Jeffery Steinle, and Alexa Palival, Distressed Asset Sales: Selling and Acquiring Assets from the Debtor's Estate, Practicing Law Institute Commercial Law and Practice Handbook Series, PLI Order No. 5989, at 85, 87 (Mar.-Apr. 2005).
63. The Chrysler auction differed starkly in this respect from the sale of TWA's assets to American Airlines, which some have cited as an analogue to Chrysler. The bidding procedures in TWA explicitly invited "alternative transactions" and bids for any part of the company. In re Trans World Airlines, Inc., No. 01-00056(PJW), 2001 WL 1820326, at *6 (Bankr. D. Del. Apr. 2, 2001).
64. Kenneth Ayotte & David A. Skeel, Jr., An Efficiency-Based Explanation for Current Corporate Reorganization Practice, 73 U. Chi. L. Rev. 425, 465-67 (2006).
65. Chrysler I Order Approving Bidding Procedures, supra note 54, at *6, *20.
66. Brief for Debtors-Appellees Chrysler LLC, et al., Chrysler II, 2009 WL 1560030, at *22-24.
67. Serena Saitto, Fiat Will 'Never' Walk Away From Chrysler, CEO Says, Bloomberg.com, June 8, 2009, http://www.bloomberg.com/apps/news?pid=20601087&sid=aS_6UyCqIJmA. The record before the court included the concession.
68. David E. Sanger & Bill Vlasic, Chrysler's Fall May Help Obama to Reshape G.M., N.Y. Times, May 2, 2009. The Treasury itself, and not FIAT, created the June 15 deadline in its DIP financing. If it wanted to extend a few weeks, while the plan was adequately vetted under § 1129 for compliance, it could have. FIAT would, the indicators strongly suggest, have waited. Given that the Treasury was sponsoring the Chrysler rescue, it's unlikely it would have walked away disgruntled if it had to wait a few more weeks for a real auction. Still, alternate scenarios had uncertain outcomes if the delay got out of hand: one economic advisor, who opposed any Chrysler bail-out, believes that without FIAT the government would not have bailed Chrysler out. Ryan Lizza, The Political Scene-Inside the Crisis, THE NEW YORKER, Oct. 12, 2009, 80, 95.
69. In re Summit Global Logistics, Inc., 2008 Bankr. LEXIS 896 at *31 (Bankr. D.N.J. Mar. 26, 2008)
70. Chrysler II, 576 F.3d at 114 ("[A]n automobile manufacturing business can be within the ambit of the 'melting ice cube' theory . . . .").
71. Michael McKee, Chrysler Bankruptcy May Not Dent Economy as Cutbacks Were Set, Bloomberg.com, May 5, 2009, http://www.bloomberg.com/apps/news?pid=20601110&sid=aOofvGXOZKk4 ("[Due to weak demand,] Chrysler probably would have had to shut down temporarily anyway, said Mark Zandi, chief economist at Moody's Economy.com . . . . Chrysler, which filed for the fifth-biggest U.S. bankruptcy last week, already had been . . . closing factories because of the industry's slump.").
72. In re Chrysler I, 405 B.R. at 99 (emphasis added). The Second Circuit truncated its discussion of this crucial issue, saying only: "As Bankruptcy Judge Gonzalez found, all the equity stakes in New Chrysler were entirely attributable to new value-including governmental loans, new technology, and new management-which were not assets of the debtor's estate." Chrysler II, 576 F.3d at 118. While it's easy to attribute the FIAT stock interest as arising from new value, it's not easy to see the 55 percent VEBA stock ownership as arising from new value as opposed to past services to Old Chrysler.
73. See Motion of Chrysler to Approve Bidding Procedures, supra note 55, at Exhibit A: Master Transaction Agreement among FIAT S.p.A., New CarCo Acquisition LLC, Chrysler LLC and the other Sellers identified herein.
74. United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986), which is typically referred to as Gleneagles, its lower court name.
75. The older, classic case invoking the principle is Pepper v. Litton, 308 U.S. 295, 305 (1939).
76. For a transaction summary, see Motion of Chrysler to Approve Bidding Procedures, supra note 55, 58; for full details, see id., Exhibit A. See also Kolka Affidavit, supra note 11. FIAT did not receive 35 percent of the New Chrysler stock right away, but a smaller amount, with the difference to be given later if targets are met. Because the numbers in the balance sheet in the text have been widely reported, we have kept these as is.
77. 11 U.S.C. § 1129(b)(2)(B) (2006). Similarly, consider the analogous transaction, prepetition. If the bankrupt-to-be sold assets in a prebankruptcy transaction that required the buyer to assume some of the bankrupt's debts, the other creditors could in the ensuing bankruptcy avoid that transfer as being a preference and recover the transferred assets for the benefit of all creditors.
78. The presumption could be rebutted, with the judge turning to process. If, say, an old creditor bids for the firm in a § 363 sale and wins in an open, contested, and clean auction without bidding preconditions and with true arm's-length bidders, then the judge should consider the presumption rebutted: there's been an open auction and the old creditors bid the firm away from outsiders.
79. The back-of-the-envelope calculation is this: Chrysler's old balance sheet had $40 billion in debt. Creditors with $30 billion of that debt reappear largely intact in the New Chrysler's balance sheet. A few gave new value, most did not.
80. When a bankrupt TWA sold its assets to American Airlines in 2002-a sale thought to represent a Chrysler precedent-American assumed most of TWA's pension obligations and the capital leases on its airplanes, as well as $638 million of its trade debt. But a large portion of its trade debt was not assumed, American did not pick up TWA's other unsecured debt, and TWA's creditors and shareholders did not receive any stock. For discussion of two other cases sometimes mentioned as similar to Chrysler, see infra note 79.
81. Critical vendors are suppliers that are vital to the debtor's business. Courts permit the debtor to jump them in the payment queue on the theory that disrupting their relationship with the bankrupt would cost the bankrupt more than paying them. See Mark A. McDermott, Critical Vendor and Related Orders: Kmart and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, 14 Am. Bankr. Inst. L. Rev. 409 (2006).
82. United Sav. Ass'n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365 (1988) (holding that an undercollateralized secured creditor is not entitled to interest payments during the bankruptcy's pendency).
83. The § 1114 bonus to the retirees' claims would cover the period of the reorganization itself, which is typically a two-year affair, not more. And Chrysler's desperate shape could have led the bankruptcy court to reduce the § 1114 payment obligation. 11 U.S.C. § 1114(h) (2006).
84. Robert Guy Matthews, W.L. Ross Firm to Buy LTV Assets for $125 Million, Wall St. J., Feb. 28, 2002, at A6 ("Wilbur Ross, head of the private investment firm bearing his name, said he thinks he could keep the steel mills operating profitably because he won't have to assume all of LTV's [$4.78 billion in] debt. . . . Nor will W.L. Ross pick up LTV's so-called legacy costs-healthcare and other benefits for the company's 85,000 retirees.")
85. Wilbur L. Ross, Letter to the Editor, Bankruptcy Is a Darwinian Process, Wall St. J., June 19, 2009, at A14 ("[When our International Steel Group acquired] Bethlehem Steel and LTV Steel Co. . . . unsecureds got zero and the bankruptcy court actually had terminated retiree health benefits. . . . [Y]et [we] started a VEBA with $50 million and a future profit-sharing formula.").
86. Order Authorizing (I) Sale of Certain of the Debtors' Assets Free and Clear of Liens, Claims and Encumbrances, (II) Assumption and Assignment of Certain Executory Contracts, and (III) Assumption of Certain Liabilities, In re Bethlehem Steel Corp. (Bankr. S.D.N.Y. Apr. 23, 2003) (Nos. 01-15288 (BRL) through 01-15302, 01-15308 through 01-15315 (BRL)); Gus G. Sentementes, Court OKs Bethlehem's Sale to ISG, Balt. Sun, Apr. 23, 2003, at 1D. While the buyer picked up a smaller chunk of the presale obligations in Bethlehem, making it less reorganization-like than Chrysler, the validating auction had some of the same defects as in Chrysler.
87. Bethlehem Steel Corporation, 10-Q Quarterly Report 4 (March 31, 2003), available at http://www.getfilings.com/o0000909518-03-000316.html.
88. A full buyout would have obviated the bankruptcy distortions, but created other policy problems. Credit markets might have seen a class of large industrial firms as too big to fail, making it privately sensible for credit to flow to those firms rather than to other sectors of the economy.
89. Bank of Am. Nat'l Trust & Sav. Ass'n v. 203 N. LaSalle St. P'ship, 526 U.S. 434, 458 (1999).
90. The $3.75 billion is the majority creditors' pro rata share of the $5 billion sale price (three-fourths of $5 billion is $3.75 billion). The $2.25 billion is the value of the concessionary terms the shareholders give the majority. The shareholders obtain $2.75 billion, some from the tort claimants and some from the minority lenders.
91. See Editorial, DIPping Into Delphi, Wall St. J., June 16, 2009, at A14. The case is In re Delphi Corp. (Bankr. S.D.N.Y.) (No. 05-44481 (RDD)).
92. Peter Lattman, Judge Orders Auction in a Rebuke to Delphi Plan, Wall St. J., June 11, 2009, at B1.
93. Mike Spector, Delphi Lenders Poised to Wrest Control of Firm Over U.S. Plan, Wall St. J., July 28, 2009, at B1.
94. See Expedited Motion for Order, In re Delphi Corp., (Bankr. S.D.N.Y. July 20, 2009) (No. 05-44481 (RDD)). The motion explained: If the Debtors are unable to obtain confirmation of the Modified Plan, the Debtors have committed to seeking approval of the transactions set forth in the Master Disposition Agreement pursuant to a sale under section 363 of the Bankruptcy Code independent of and not pursuant to, or contingent on, any plan of reorganization. Id. at 7. In contrast, the Circuit Court in Continental ordered its district court to reconsider its prior approvals in the case because the court likely lacked statutory authority to approve transactions outside of a reorganization plan "if the [objectors] could have defeated a plan of reorganization containing the [transactions]." Institutional Creditors of Cont'l Air Lines, Inc. v. Cont'l Air Lines, Inc. (In re Cont'l Air Lines, Inc.), 780 F.2d 1223, 1228 (5th Cir. 1986); see also Sloane, supra note 23, at 49 ("[A] transaction that cannot be approved as part of a plan should not be approved outside of a plan.").
95. However, with many assumed liabilities in schedules filed under seal, the full extent of the carryover is not easy to assess.
96. Whether that means that outsiders knew not to bother or that the insiders' deal was the most efficient one is hard to evaluate with neither an § 1129 process nor any actual competing bids on differing terms. And, the Delphi testing of the price for the insiders' preferred deal may have been incomplete, because the winning bidders credit bid their existing debt. But the judge's widely quoted willingness to accommodate bidders on the proposed deal suggests a testing of the price.
97. In re Dewey Ranch Hockey, LLC, 406 B.R. 30, 42 (Bankr. D. Ariz. 2009); see also Jones & Spector, supra note 10 ("[Chrysler's] restructuring is altering the bankruptcy landscape well beyond the auto industry. Within days . . . a lawyer in the bankruptcy case of the National Hockey League's Phoenix Coyotes invoked Chrysler in trying to push through the speedy sale of the team.").
98. Again, while this might ameliorate the bankruptcy priority situation, it would distort capital markets by expanding expectations that a too-big-to-fail class of industrial firms could easily draw capital away from other sectors of the economy.
99. In re Gen. Motors Corp., 407 B.R. 463, 497 (Bankr. S.D.N.Y. 2009).
100. In re Gen. Motors Corp., 407 B.R. 463, 497 (Bankr. S.D.N.Y. 2009). at 504.
101. Id. at 505. The Supreme Court subsequently vacated the Second Circuit's opinion, casting doubt on this portion of GM. See infra notes 96-98 and accompanying text.
102. Chrysler II, 576 F.3d at 117-18. The Second Circuit treated sub rosa analysis as inapplicable so long as the sale "does not specifically 'dictate,' or 'arrange' ex ante, by contract, the terms of any subsequent plan." Id. at 118 n.9 (emphasis omitted). That was the announced standard, but a fair reading of the transaction's terms is that Chrysler failed to meet even that easy-to-meet standard. One can hope that even in the Second Circuit, bankruptcy courts will use their ample discretion to avoid parallels to Chrysler, by incorporating makeshift remedies into § 363 sales. The Chrysler opinions unwisely allowed a bidding process that discouraged alternative bidders, and they ignored the protection that would be available under § 1129. But they do not require these features in Second Circuit § 363 sales.
103. Compare US Supreme Court Drops Bombshell Summary Disposition Vacating 2d Circuit's Chrysler Decision, http://www.bankruptcylitigationblog.com/archives/us-supreme-court-cases-us-supreme-court-drops-bombshell-summary-disposition-vacating-2d-circuits-chrysler-decision.html, with http://www.creditslips.org/creditslips/2009/12/i-know-its-over-.html.
104. Bankruptcy Code, § 363(m).
105. Charles A. Sullivan, On Vacation, 43 Houston L. Rev. 1143, 1154 (2006).
106. Barry Adler's concept that a § 363 sale should use the state merger and acquisition process should improve the process. Barry E. Adler, A Reassessment of Bankruptcy Reorganization after Chrysler and General Motor 19 (NYU Law, Economics and Organization working paper, Jan. 2010), available at http://ssrn.com/abstract=1530011.
107. David A. Skeel, Jr., Debt's Dominion: A History of Bankruptcy Law in America 48-70 (2001).
108. The receiverships were structured as pseudo-"sales" of the company to a portion of its existing creditors and shareholders. Creditor consent was not solicited. The process was devised from ordinary foreclosure sales, with the parties pretending to conduct a foreclosure sale, but in reality effecting a restructuring by selling the assets to a group of the preexisting investors. Id. at 56-59.
109. 228 U.S. 482 (1913).
110. 228 U.S. 482 (1913).
111. Jerome N. Frank, Some Realistic Reflections on Some Aspects of Corporate Reorganization, 19 Va. L. Rev. 541, 555 (1933) (calling the equity receivership sale "a mockery and a sham"). "A sale at which there can be only one bidder," Frank complained, "is a sale in name only." Id.
112. William O. Douglas, Democracy and Finance 185 (1940) (concluding that "plans of reorganization were frequently dictated by a single interest-by a closely knit inside group; primarily in the interests of that group").
113. U.S. Sec. and Exch. Comm'n, Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees (1937).
114. See, e.g., Skeel, supra note 100, at 109-23.
115. Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106 (1939).