Automakers’ Swift Cases in Bankruptcy Shock Experts
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By MICHELINE MAYNARD
THE NEW YORK TIMES
July 7, 2009
DETROIT — That didn’t take long.
In fewer than 45 days each, General Motors and Chrysler swept through government-sponsored sales in bankruptcy court — quick tours that most people in the legal community thought impossible not long ago.
The swift action has riveted bankruptcy lawyers and law professors, who say the cases will be widely studied this fall when law students return.
“It is remarkable,” said James J. White, a professor at the University of Michigan Law School in Ann Arbor, who is planning a three-day seminar on the cases in his bankruptcy class.
Judge Robert E. Gerber of United States Bankruptcy Court in New York approved the G.M. sale late Sunday, although he issued a four-day stay that blocks final action until Thursday.
The sales, handled under Section 363 of the federal bankruptcy code, raised the profile of a tactic once used primarily to shed failing plants or unneeded equipment, and was not considered until a few years ago as a substitute for a complete restructuring.
“Twenty years ago, you would not have been able to do a 363 sale of an entire company,” said Mary Joanne Dowd, a partner in the financial and bankruptcy restructuring practice at Arent Fox in Washington.
While the cases are not likely to bring about the end of old-style restructurings, the sheer scope of G.M. and Chrysler show a Section 363 sale can apply to companies of any size, lawyers say.
For businesses that follow similar legal strategies, the G.M. and Chrysler cases could pave the way for a faster trip through court. For creditors, it could mean less time to reach a deal, especially in situations where companies face strict deadlines from lenders, as the two carmakers did with the government.
In such cases where the government plays a major role, lawyers are likely to feel they have less control than in traditional bankruptcies.
“I don’t think the government pressures judges as much as it pressures everybody,” said Professor White.
In fact, a government-imposed deadline for concluding the G.M. case by the end of this week helped the court work through 850 objections in three days of hearings last week. Normally, such issues could take weeks.
The haste drew skepticism from Michael P. Richman, a lawyer who represents three dissident G.M. bondholders.
At last week’s hearings, he urged Judge Gerber to “call the bluff” of the government deadline and take a more deliberate pace. (On Monday, Mr. Richman said his clients would likely not challenge the sale approval, citing the “enormous costs” that an appeal would incur.)
Obama administration officials say the legal community need not expect a wholesale shift in bankruptcy law. The G.M. and Chrysler cases were unique situations, they note, in which the president wanted to make sure that a crucial American industry survived.
Under the terms of the deal, G.M. would sell its most desirable assets, including the Chevrolet and Cadillac brands, to a new company owned largely by the American and Canadian governments and a health care trust for the United Automobile Workers union.
Over the last decade, Professor White said, companies already have been shifting toward a broader use of Section 363 sales as a quicker approach for restructuring than the usual Chapter 11 process.
In his order approving the G.M. sale late Sunday night, Judge Gerber cited instances involving Lionel, the maker of toy trains, which emerged from bankruptcy last year; Trans World Airlines, which was absorbed by American Airlines in 2001, and other similar cases as justification for his decision.
But none involved government financing, and thus moved far less quickly. The most recent Lionel case took three and half years; a case involving United Airlines took just over three years, and the case of the Delphi Corporation, G.M.’s former parts supplier, has been in court since 2005.
By contrast, G.M. and Chrysler sales beat even the government’s aggressive timetable.
The Treasury Department initially said it expected the Chrysler sale, which required 42 days, including an appeal to the Supreme Court, to be approved in 60 days. It said the G.M. sale would require 60 to 90 days of deliberations; as of Monday, the case has been in court for 36 days.
The speed is even more remarkable given that as recently as mid-March, when the Treasury’s auto task force retained bankruptcy counsel, it was not clear the cases would wind up in bankruptcy court, a senior administration official said Monday.
At that time, G.M. was still resisting a bankruptcy filing and a case did not seem likely at Chrysler, which had Fiat standing by, prepared to assume management control. Fiat officials eventually signed on to the need for a quick bankruptcy filing, which helped Chrysler shed plants, dealers and suppliers.
By mid-April, G.M. came around to the idea of a conventional prepackaged bankruptcy case, which still could have taken months, the official said.
Treasury officials pointedly told G.M. executives that the government, which was financing the company’s stay in bankruptcy, did not have the patience or resources for a long case, and would only provide financing under a Section 363 sale.
The administration official also said that G.M.’s case moved so quickly in part because it had the benefit of an “icebreaker” from Chrysler’s quick tour through bankruptcy.
In his 95-page opinion Sunday, for example, Judge Gerber repeatedly cited the discussion of issues from the opinion by Judge Arthur J. Gonzalez, who approved the Chrysler sale last month.
Professor White said the Supreme Court’s ruling against pensioners from Indiana, who sought to block the Chrysler sale, also was likely to deter similar actions in the G.M. case.
In fact, so far only one lawyer has challenged Judge Gerber’s approval of the sale: Steve Jakubowski, who represents five accident victims. And even he will not ask to delay the closing of the G.M. sale, unlike the Indiana state funds that objected to Chrysler’s turnaround plan.
“I personally didn’t have any problem with the speed of it,” he said of the two cases. “The fact is, the companies were dead.”
-Michael J. de la Merced contributed reporting from New York.
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