Almost every bankruptcy expert The Am Law Daily talks to agrees that the super-fast General Motors and Chrysler bankruptcies diverted from traditional bankruptcy law because of the government's huge role in each case and the danger that liquidation might have posed to the broader economy.
What they don't agree on is whether the cases set a meaningful precedent for future judges. "What happened in GM and Chrysler is so outrageous and so illegal that until March of this year, nobody even conceptualized it," says Lynn LoPucki, a bankruptcy expert at UCLA Law School. "Wouldn't almost every company like to get out [of bankruptcy] in 30 or 60 days? Is there any reason they cannot all propose to do what GM and Chrysler have now done?"
Others are less worried: "These cases are huge outliers," says Kenneth Klee, name partner at the bankruptcy boutique and LoPucki's colleague at UCLA. "They involve such major political elements and companies of such importance to the economy that the legal principles involved will not carry over to other cases."
Several other experts and Am Law 100 partners echoed LoPucki's concerns, though no one else directly labeled the sale illegal. But their basic views are the same: The courts stretched §363 of the Bankruptcy Code -- which allows a company to sell its best assets to a new buyer rather than go through a complete reorganization -- beyond the code's intentions. The section, they say, was not originally intended for companies to sell essentially their entire business to a new buyer, though the 2nd U.S. Circuit Court of Appeals has upheld such a sale in a handful of cases, says Howard Seife, head of the bankruptcy and restructuring practice at Chadbourne & Parke.
What General Motors and Chrysler did, experts tell us, is more akin to a restructuring of the business, a process that normally unfolds in a longer Chapter 11 case and not a §363 sale. In the former, creditors have more powerful rights, including the right to vote on the reorganization plan. They can object to a §363 sale -- and hundreds did in both Chrysler and GM -- but those objections are not enough to hold up the sale.
Bondholders in both cases claimed that the sales gave some unsecured creditors better return for their bonds than others. A §363 sale normally nets a pile of cash for the bankrupt estate, which then distributes the cash to creditors according to the order of their claims, says Klee. That's not exactly happening in these cases, court records show.
In the GM case, for instance, the U.S. Treasury Department, which will own a 60 percent stake in "new GM," is leaving about $1.125 billion behind in the bankrupt GM estate. That money is intended to pay administrative claims and wind down the GM estate, says Michael Richman, a Patton Boggs partner who represented small bondholders opposed to the GM sale. Bondholders will get a 10 percent equity stake in the new GM in lieu of cash, Richman says. That might amount to pennies on the dollar, while another unsecured creditor, the United Auto Workers union, is getting a larger equity stake in the new company plus ownership of other debt.
"What I find troubling is the distribution to creditors that isn't consistent with priorities established under bankruptcy laws," Seife says. "Clearly, shortcuts are being taken here. The argument is that these are special cases."