General Motors Should Pursue Prepackaged Bankruptcy, Says Lawyer

Brian Baxter

The American Lawyer

With General Motors reportedly having reviewed -- and subsequently ruled out the option of a traditional Chapter 11 filing -- some observers believe there is another option to consider: a prepackaged bankruptcy.

In a "prepack," as it's known colloquially among bankruptcy and restructuring lawyers, debtor's counsel negotiate agreements with creditors prior to an actual filing for Chapter 11 protection.

The head of President-elect Barack Obama's auto industry transition team, Georgetown University law professor Daniel Tarullo, has been reported to be examining the merits of a prepack. However, an Obama transition team spokesman later denied the report. (On Tuesday The Am Law Daily handicapped who might handle a Big Three bankruptcy while Wachtell, Lipton, Rosen & Katz weighed in with its own memo on what's ailing the auto industry.)

The Am Law Daily caught up with Ropes & Gray bankruptcy and restructuring co-head Mark Bane to hear about the possible alternative method of going bust.

Hello, Mark. So what does GM have to do here?

I think [a prepackaged filing] is the only viable alternative that the company should be pursuing. When a company goes into an unstructured bankruptcy case, retail customers that are relying on the longevity of the seller are going to start questioning whether they should buy the product.

How does that differentiate an automaker from other companies that file for bankruptcy?

An automobile is very distinct from other types of consumer items, because when you buy an automobile you're relying on a long-term warranty and you're relying on the availability of future parts. And if a company like GM or Chrysler or Ford would go into a regular Chapter 11 with no certainty of emerging, I think they really risk a defection of customer loyalty.

Which wouldn't necessarily be the case with salt and pepper shakers or stereo equipment.

Right. Compare it to a shoe manufacturer or restaurant chain. If I go into a restaurant and buy a meal, I don't really care if they're in bankruptcy or not. If I buy an automobile, I'm very concerned that the manufacturer is available to satisfy its ongoing role in my using [the car I bought].

And so if GM pursued a prepack, that would help offset customer concerns?

Correct. By contrast, if GM would go into a structured or negotiated prepackaged bankruptcy, then it really would not affect consumer confidence. In fact, it might enhance consumer confidence if someone hears that [GM] is going into bankruptcy for 30 or 90 days and then it's going to emerge a much healthier company. As a buyer, then I'm satisfied that I can have faith in the future of the company.

If GM was going to pursue such an option, would its lawyers have to be currently conducting negotiations with creditors?

That is the big question. I think what the Big Three are doing now is they are compromising the potential of a restructuring outside of bankruptcy by not engaging their constituencies immediately. What they're doing to some degree or another is playing "chicken" with the government and saying, "You better bail me out, because if you don't I'm going to die otherwise." Well you didn't have to die if you explored a prenegotiated, restructured bankruptcy. Why aren't you doing that?

Is it your understanding that they're not doing so?

None of the banks that I've spoken to that are involved and own positions [in GM] have heard anything about it. That's who they'd be negotiating with. Now, unless they're negotiating with some representatives of the banks that the [debt] holders don't know about -- which is always a possibility, although it's dangerous -- no one has heard of any discussions. And frankly if they were engaged in negotiations, there's such a broad-based holding that everyone would know about it. They probably don't want to start down that road until they feel they [have] to. It's going to be hard to keep it under wraps.

[Interviews are condensed and edited for grammar and style.]

This article first appeared on The Am Law Daily blog on AmericanLawyer.com.