Chrysler's Politicized Bankruptcy a Warm-Up for GM
May 06, 2009
By Bill Visnic
Watching and analyzing as the increasingly contentious Chrysler bankruptcy unfolds, a Detroit-area legal expert on bankruptcy and creditors' rights reckons the charged atmosphere surrounding Chrysler's trip to bankruptcy court is a warm-up act for the headline show: the bankruptcy of much-larger General Motors Corp.
Although the Chrysler bankruptcy already has generated something only slightly less than a full-blown political firestorm and is proceeding with questionable ethical and legal departures from established bankruptcy conventions, "We may well face it again in a month," as GM's bankruptcy deadline nears, said Doug Bernstein, a partner in the Bloomfield Hills, Michigan, legal firm Plunkett Clooney and head of the firm's Banking, Bankruptcy and Creditors' Rights practice group.
Moreover, despite the protestations of President Obama and other politicians and players, Bernstein says Chrysler's bankruptcy was a foregone conclusion. It was the only way to decisively and economically terminate the franchise agreements of its 3,200 dealers.
"That's why GM's bankruptcy is a necessity, too," he said.
Bernstein agrees there's fascination in the controversy surrounding the events that led up to Chrysler's bankruptcy -- namely, the role of so-called "rogue" investors that refused to accept the government's offer to pay about one-third the value of some $6.9 billion in senior secured Chrysler debt. It was that refusal that President Obama, calling them "speculators," publicly chastised and blamed for ultimately forcing Chrysler into receivership.
The most important question now is whether the political dust-up surrounding the situation will generate a high-level legal dissent that might jeopardize the much-needed speed of Chrysler's bankruptcy -- a speed that surely will be vital in a potential GM bankruptcy as well.
Bernstein says it's mostly a matter of how much real capital -- as well as political and legal capital -- the dissident investor group wishes to expend on making its point.
"How much [money] do they want to spend?" to challenge the Chrysler bankruptcy proceedings, Bernstein asks. Perhaps equally important, he says, are the ramifications of an appeal that dangerously slows the process. He says a pesky appeal now may come back to hurt any of the involved investors, legal firms or even individual attorney, if they need a favor from the bankruptcy court in the future.
Who's Zooming Who?
Accusations of political concerns trumping the legal started practically at the moment the president finally got around to announcing Chrysler was seeking bankruptcy protection.
Most intriguing was a highly charged accusation by a lawyer for the investors who rejected the government's shabby secured-lender payback plan: Thomas Lauria, the lead attorney for the dissident investors, said Steve Rattner of the Obama administration's Auto Industry Task Force strong-armed one of the group, an investment bank, by threatening to use the White House press corps to defame the bank.
Several government sources and the bank, Perella Weinberg Partners, repudiated Lauria's account of the situation, but in announcing the bankruptcy, the president himself went out of his way to excoriate the investors, saying they refused to make the same "sacrifices" as other Chrysler stakeholders and that he "did not stand" with the position of the group.
Plunkett Clooney's Bernstein doesn't necessarily stand with the president's intimation that holding out for one's lawful claim was somehow un-American. Upon hearing of the situation, Michigan Congressman John Dingell, normally a reasonable voice, made a threat markedly better-documented than that alleged to the Task Force's Rattner, promising the investors ("rogue hedge funds") "will now be dealt with accordingly in bankruptcy court."
"There is nothing wrong with a lender exercising their rights," countered Bernstein, adding that an investor "shouldn't be penalized for taking a good-faith position."
He continued by saying, "I don't disagree with the premise the auto industry is important to the economy. It's a noble thing [to try ensure every chance for Chrysler to recover]."
But as for the Chrysler bankruptcy's evident subjugation of long-held bankruptcy-law precedents and conventions -- namely, pressuring senior secured lenders to relinquish their legal and constitutionally guaranteed property rights, or forcing them to take a back seat to other stakeholders (including those with unsecured interests) -- Bernstein has one answer.
"It's dangerous."
"Questionable" Is the New "Ethical"
America's Investor Emeritus, Warren Buffett, also reportedly concurred, saying that subventing of secured-lenders' rights in bankruptcy could inject a fresh chill through the nation's still-unthawed credit markets.
It's simple. If lenders see the protections legally and historically afforded them in bankruptcy proceedings can be shredded at will by the executive branch, there's not much security in loaning to corporations.
Has the Obama administration's handling of the Chrysler bankruptcy been, as suggested, illegal or unconstitutional -- or at the very least, unethical?
"Who knows what, in truth, is going on behind the scenes?" asked Bernstein.
He said the long-established "bias" in bankruptcy court is to give the debtor every opportunity to right the ship. But that shouldn't extend to "impairing the rights of others."
363 = Quick (Maybe)
The Chrysler bankruptcy employs section 363 of the U.S. Bankruptcy Code, largely to help speed the process. Bernstein said almost all Chapter 11 bankruptcies involve section 363 and that when there is a known "stalking horse" buyer -- in Chrysler's case, Italy's Fiat S.p.A. -- it "usually is a pretty quick bankruptcy."
But whether that means -- regardless of the outcome of the dissident investors' potential objections -- Chrysler can emerge from bankruptcy in the "required" 30 to 60 days is not a certainty.
Bernstein says a bankruptcy case with the president of the United States hovering about is likely to be expedited, but he sees troubling signals, such as much of the action proceeding before an unsecured creditors committee even was formed (unsecured creditors did create a committee on May 5, several days after the bankruptcy announcement).
He said if U.S. Bankruptcy Judge Arthur Gonzalez allows the section 363 sale of Chrysler's assets to advance -- this assumes the judge overrules any substantive objections like those of the dissident investors -- then it's possible to conclude the bankruptcy quickly. He said bankruptcy courts "are typically pretty accommodating."
But, "the loose ends will go on for years," Bernstein concluded.
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