A House Subcommittee on Commercial and Administrative Law held a third hearing on ramifications of the auto industry bankruptcies July 22. The hearing featured testimony from inside and outside counsel at GM and Chrysler as well as Douglas Baird, a University of Chicago law professor quoted in InsideCounsel‘s September story, “Fire Sale.” Rep. Jon Conyers, D-Mich., chairman of the House Judiciary Committee, introduced the hearing with a statement noting that “many important questions remain about the companies’ use of certain Bankruptcy Code provisions in their cases, the future of the auto industry, and the many millions of Americans affected by these bankruptcy cases.”
Some of the testifying witnesses’ statements shed light on the usefulness of 363 sales–sales provided for in Section 363 of the Bankruptcy Code–in the Chrysler and GM bankruptcy proceedings. Lawyers for both companies made clear at the hearing their belief that the sales combined with the government aid made their enterprises’ survival possible. They also touched on the prospect of legislation that would address some of the more questionable aspects of the sales.
Michael Robinson, vice president and general counsel of North America for General Motors Co.:
Fundamentally, the purpose of Chapter 11 of the Bankruptcy Code is to preserve and protect, to the extent possible consistent with applicable legal provisions, the value of an enterprise as a going concern. There is no doubt the bankruptcy of a major corporation almost inevitably imposes severe hardship on employees, creditors, suppliers, customers and other interested stakeholders. However, by preserving the value of the enterprise, Chapter 11 maximizes the value for each constituency.
The bankruptcy of General Motors Corporation amply illustrates these principles. [In] the event of liquidation unsecured creditors, including dealers, suppliers, employees and customers would have received no recovery.
The Section 363 sales transaction negotiated with the United States Treasury was the only viable alternative available to General Motors Corp. to avoid the liquidation scenario. The terms of its approval by the Bankruptcy Court were the subject of extensive negotiations with numerous parties, including the National Association of Attorneys General. As confirmed by Judge Gerber’s finding in his written decision, the government was the only source of financing for any alternative as well as the only party that expressed any interest in any acquisition. The basic decision to pursue a sale transaction reflected a determination by the Automotive Task Force that alternative approaches, including in particular a traditional Chapter 11 Reorganization Process, would be unduly risky and expensive for taxpayers.
Louann Van Der Wiele, Chrysler Group LLC vice president and associate general counsel:
We have previously stated that the goal of the sale of Old Carco (the pre-reorganization Chrysler)’s assets to the new company was to create a strong, financially sound automotive company serving customers with a broader and more competitive lineup of environmentally friendly, fuel-efficient, high-quality vehicles and an equally high level of customer service through an efficient dealer network. Through the steps already taken, Chrysler Group is in a position to achieve that goal.
The future of Chrysler Group is undoubtedly challenging, but the company has a real chance not just to survive, but to thrive. … Nonetheless, Chrysler Group faces a tough road ahead. Our economy continues to suffer and unemployment remains high. Many observers note that we face a few more quarters of slow economic growth before we will see auto sales improve. In this difficult environment, it is very important to recognize that legislation aimed at reversing some of the painful but necessary actions taken during Old Carco’s bankruptcy will simply take Chrysler back to the future that Old Carco faced not long ago–and this time, without the option of a purchaser for substantially all of its assets. Complete liquidation, with all of its dire consequences, could follow.
Douglas Baird, University of Chicago law professor:
Going-concern sales are common in large Chapter 11 cases. Over half of all large Chapter 11 cases now involve sales of one kind or another. In principle, this is a salutary development. A sale often converts an unwieldy and illiquid asset into cash that can be readily divided among the various stakeholders according to their legal entitlements. A sale can provide the best way to maximize the value of the assets. Even when a reorganization provides a better alternative, the possibility of a sale improves the process as it tends to keep everyone honest. A cash bid of a company for $100 makes it impossible for one of the competing claimants to argue that it is worth less.
But we need to ensure that the sale process is conducted in such a way that ensures that the firm is sold for top dollar. Companies that are put up for sale are often in severe financial distress. They are melting ice cubes, and those in control of the process assert that they are willing to pump new money into the company to keep it alive only if the sale is done quickly to a buyer they have already identified. The danger that the business will not have enough cash to stay open puts enormous pressure on the judge to move the case quickly.
Without appropriate procedures, there is a risk that too many ?363 sales are fire sales that work to the advantage of those in control, not to the stakeholders as a group. The Bankruptcy Code itself offers no guidelines beyond a general requirement of notice and a hearing. Courts have begun to develop procedures. These, in conjunction with the rule-making process, might be sufficient to create procedures that ensure that these sales do in fact yield top dollar. If they do not, it may make sense for Congress to revisit this issue and ask whether procedures and protections for going concern sales should be explicitly addressed in the Bankruptcy Code.