06.05.09
Making Sense of GM
One of the most-interesting things about the whole GM and Chrysler bankruptcies: the public, including journalists, don’t understand bankruptcy law, hence they can’t even begin to make sense of what’s going on. If you can get past a few typos, one business law professor has done a pretty good job of distilling the Chapter 11 issues and explaining some troubling developments (it also serves as a pretty good primer on Chp. 11 Reorganization Plan procedures).
Chapter 11 features, features, a well tested “plan approval” procedure. First, managers, and it that fails, then groups of investors, propose a “plan” for the reorganization of the bankrupt company. The plan compromises the claims of the lower tranches of debt (usually turning debt into equity and giving shareholders a token residual equity position for their shares) so that the company becomes solvent (the operating profit now can pay the remaining debt obligations on time). The bankruptcy judge must be convinced the plan is viable (or he will send the company into Chapter 7, a liquidation) and divides the investors into classes. Those classes whose claims are “impaired” by the plain — they are not receiving full payment on their obligations — vote by class on the plan (the vote seeks two majorities, one by number of creditors voting and one by the amount of the claims being voted). Some secured creditors, with high priority, may not vote because they are not impaired. If enough classes vote in favor, the judge has the option of “cramming down” the plan on those classes that do not. If the plan “passes,” the company emerges from Chapter 11. A 363 sale is an emergency sale of the company, proposed by management and approved by the judge, before any plan has been proposed, let alone passed. A 363 sale can be an end run around the entire Chapter 11 procedure. Once the company is sold, the Chapter 11 turns into an Chapter 7 — the proceeds of the deal are the only thing left to do for the court. Over twenty years ago, the Circuit Courts recognized that a 363 sale was a method of avoiding Chapter 11 procedures and thus they restricted the process with a threshold — the assets must be time sensitive (like vegetables in a railroad car). Here we see the government doing the same thing — they are avoiding the Chapter 11 procedure, to avoid the claims of those pesky creditors that are not going along with the government’s version of the a workout, by selling the companies first and quickly in 363 sales. The argument is that the companies must move quickly or lose all their customer. Yet last month was both companies best sales month in several months — after the bankruptcies were either announced or known. These 363 sales are, in essence, total cram downs without a vote. The danger? Managers sell the company cheap to reward themselves and their go along creditor buddies (read, the UAW and the government as debt holder here). Bankruptcy judges, eager to avoid a year of hearings and decisions, and eager to “save” jobs of employees by keeping the company doors open, have a strong incentive to go alone. In these cases, first Fiat and now a Chinese company (and the government itself in buying the “new GM”) are getting too sweet a deal in these 363 sales. In the government’s case, the sweet deal is an avoidance of the difficult question of whether the “new GM” will survive – whether it should be thrown into a Chapter 7. Taxpayers and unsecured, non-union creditors are taking the hit.
