Although they said it could not be done, headlines now proclaim that
Chrysler and
General Motors have navigated the bankruptcy process in
record speed. Indeed, new companies have “emerged” from each bankruptcy case. However, both bankruptcy cases are still pending (see
here and
here), and much more still needs to be done in each bankruptcy case, basically to take care of things that were left behind after the respective sales of the companies to new entities.
The lightning speed with which a sale was conducted in each bankruptcy case, and from which new companies emerged, begs the question — why aren’t all cases completed so quickly? Many bankruptcy practitioners believe the answer is that the Bankruptcy Code does not allow it. Hence, the debate has begun.
Several things have offended the sensibilities of bankruptcy purists, and I count myself as one. First, the expedited sale process, which allowed Chrysler and GM to sell its best assets to new companies, was essentially the whole reorganization process of the chapter 11 case. As such, it should have been done through the chapter 11 plan confirmation process — not a “
363 sale.” Section 363 of the Bankruptcy Code does permit bankruptcy debtors to sell assets, with court approval, outside of the ordinary course of business. But that section, many would argue, is not appropriate for what happened in Chrysler and GM.
A second disturbing precedent set in Chrysler involved the group of bondholders who opposed the sale to Fiat et. al. in that case. The bondholders argued that the sale resulted in some unsecured creditors receiving more than other unsecured creditors. A bedrock principal of bankruptcy is that like-creditors must all be treated the same way. That is, all general unsecured creditors must receive the same treatment. If one unsecured creditor gets 10%,
ALL unsecured creditors must get 10%. The bondholders in Chrysler
claimed that did not happen.
Finally, although not directly related to the sale of assets, it was also disturbing in each case that the debtor was able to
reject dealership agreements with their dealers. The Bankruptcy Code does allow debtors in bankruptcy to reject “burdensome contracts.” Under dealership agreements, however, dealers buy cars and parts from the manufacturer, often at terms favorable to the manufacturer that are dictated by the dealer franchise agreement. How is that a burden to Chrysler or GM? Where’s the burden is selling cars and parts to a captive market? Nevertheless, the Bankruptcy Court allowed both companies to reject hundreds of dealership agreements.
It is clear that the purchasers here — Fiat, union pension plans, and the Canadian and US governments in Chrysler, and mostly the US government in GM — dictated the results in each case. One can debate whether the result was necessary to preserve jobs, or that is was good for the economy as a whole. But many bankruptcy practitioners think it was done at a very high price — in contravention of the Bankruptcy Code.
Were justice and fairness in these cases sacrificed on the altar of the economy? Should they be?
