Bankruptcy Expert: GM "Quick Rinse" Bankruptcy Risks "Rinse And Repeat"
April 17, 2009
DETROIT -- Reports have heated up of late that General Motors will file for Chapter 11
bankruptcy in late spring or early summer, emerging as a smaller but viable company in as little as two weeks or two to four months at most in a so-called "quick rinse" bankruptcy.
Both of these scenarios are exceedingly optimistic, say bankruptcy experts at the Detroit-based law firm of Plunkett Cooney. And done too quickly, a GM bankruptcy may become a 'rinse and repeat' bankruptcy," said Doug Bernstein, head of Plunkett Cooney's Banking, Bankruptcy and Creditors' Rights practice group.
"Bankruptcy may indeed be the last, best option to restructure GM because of the multitude of challenges the company faces and its deeply entrenched stakeholders," Bernstein said. "But it's unrealistic to expect that the process will go smoothly and quickly."
Bernstein points out the the company is massive, its operations are complex, and it has thousands of potential claimants and interested parties. "The bankruptcy court will require time to make sure everyone's due process rights are respected, even if they have to make painful sacrifices."
Bernstein added: "Time is not GM's friend in or out of court. But the rights and potentially the livelihoods of employees, dealers, pensioners, suppliers and investors are at stake. It will take time for stakeholder groups to form, lawyers to prepare pleadings, a judge to review them and then make decisions. Rushing the process raises the risks that corners will be cut, due process brushed aside and mistakes made. You don't want to get sidetracked by litigation or see GM's 'quick rinse' become a 'rinse and repeat' bankruptcy."
Bernstein noted that in the first two weeks of the bankruptcy of Delphi Corp., a company formed by spinning off GM's parts operations, nearly 300 individual pleadings were filed with the court. Each one had to be prepared, filed and settled, or argued and adjudicated. And by the way, Delphi filed for Chapter 11 bankruptcy -- in October 2005.
Here's a sample of possible issues facing GM in a bankruptcy:
- Under the bankruptcy code, a judge may set aside collective bargaining agreements. However, there must first be good faith negotiations on a modified contract that have stalled before a company can petition a judge to reject the original agreement.
- Similarly, GM can move to void dealer franchise agreements with court approval. However, it has more than 6,000 dealers who operate under 50 different sets of state franchise laws. Further complicating the matter, many of the dealers' stores carry multiple GM brands, some of which may end up in the rumored "good" GM and others in the "bad" GM whose assets will be liquidated through Section 363 sales.
- Any person with standing has a right to be heard on any issue before the court. That would include GM's 377,000 hourly retirees who would almost certainly object to any effort to curtail their contractual benefits.
- Investment funds that hold GM bonds have a fiduciary responsibility to put the interests of their shareholders first. They won't easily accept terms they believe undervalue their claims. GM's foreign subsidiaries will act to protect their own interests, especially in the anticipated division of GM assets.
- Critical vendor motions will follow the court-granted automatic stay, which prevents suppliers from trying to collect receivables. In addition, GM almost certainly will file preference claims to recover certain payments made to suppliers and vendors during the 90 days prior to the bankruptcy filing. All of these will take time to sort.
- Stakeholders must be given notice when decisions are before the court so they have time to respond. It's not uncommon for overnight express letters to be sent regarding urgent matters. In GM's case, thousands of FedEx and UPS letters might be required.
A Chrysler bankruptcy filing and liquidation, which is a distinct possibility, could further complicate GM's ability to restructure because of the stress it would place on the supplier base, consumer confidence and the overall economy.
"In many districts, bankruptcy courts are at or near their physical capacity to handle their existing case load and all of the associated filings and claims," Bernstein notes. "A bankruptcy courthouse may be a huge building, but a bankruptcy court -- even in Manhattan -- typically includes only a judge, secretary, law clerk and possibly a docket clerk. There is no army of judges and clerks that can be mobilized, unless the code is changed and the courts reorganized."
Those who hope for a short stay in bankruptcy for GM are assuming that many of the major issues can be pre-negotiated, Bernstein said.
"Even if substantial progress is made between now and the government's June 1 deadline, enough of the pieces probably won't be in place to allow a judge to approve a plan in two weeks," Bernstein said. "If everything goes perfectly, and it rarely does, two to four months is doable. But GM's stay in bankruptcy probably will be longer and more costly than many expect. That's OK if you end up with a better plan and a truly viable company."
Posted by Michelle Krebs at 5:50 AM under Analysis , Chrysler , Companies , GM | Comments (0) | digg this | Seed Newsvine
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