Posted by Kenneth Anderson:
Chrysler Bankruptcy Case to Be Heard by Second Circuit Friday:
http://volokh.com/archives/archive_2009_05_31-2009_06_06.shtml#1244077649
Bankruptcy judge Arthur Gonzalez has permitted an appeal by Indiana
pension funds to the Second Circuit on his ruling allowing a sale of
the company to Fiat. [1]According to the NYT:
The judge, Arthur J. Gonzalez, said that an appeal that sought to
block the sale to Fiat could be heard directly by the United States
Court of Appeals for the Second Circuit, a move that the American
carmaker had wanted. Normally, appeals to bankruptcy court decisions
are heard in federal district court, which sits directly above
bankruptcy court in the judicial hierarchy. But cases may be moved
directly to the appeals court if a judge finds it necessary.
�This case involves a matter of public importance, and an immediate
appeal may materially advance the progress of this case,� Judge
Gonzalez wrote in his order.
The appeal was filed by lawyers for a group of Indiana pension
funds, which objected to the sale because they were seeking more
compensation for the Chrysler secured debt they hold.
The W[2]SJ reports today that the Second Circuit will apparently hear
the appeal on Friday:
Chrysler LLC's exit from bankruptcy could hit a speed bump Friday when
a federal appeals court is scheduled to hear from a group of Indiana
state pension and investment funds objecting to the auto maker's
reorganization.
The funds are trying to block the sales of most of Chrysler's assets
to Fiat SpA, contending the deal's terms regarding secured lenders are
unconstitutional.
The sale was approved on Sunday by the U.S. Bankruptcy Court in
Manhattan, but the funds filed an appeal. The U.S. Court of Appeals
for the Second Circuit will hear the case on Friday.
Perhaps Co-Blogger Zywicki can explain what all this means for
bankruptcy proceedings and likely outcomes. It seems to me unlikely,
but I defer to bankruptcy experts, that lenders will win the appeal.
The WSJ article talks with a bankruptcy expert:
A lot is riding on the outcome. The Obama administration is hoping
a speedy restructuring of Chrysler through bankruptcy will signal
the road ahead will be smooth for General Motors Corp., which the
Treasury ushered into bankruptcy protection on Monday. Moreover,
Fiat can back out of the deal if bankruptcy proceedings go beyond
June 15.
"You can't take away from the fact that this is a huge case.
There's a huge amount of public interest," said Earle Erman, a
bankruptcy attorney with Erman, Teicher, Miller, Zucker & Freedman,
a Southfield, MI based firm. "This is obviously an unusually large
case."
A ruling in the lenders favor appears unlikely given the bankruptcy
code primarily requires they get a fair repayment on their
investment, Mr. Erman said. He declined to speculate on a separate
argument they are making challenging the legality of providing a
manufacturer like Chrysler money from TARP, which was designed for
financial institutions.
People close to the case say that if the pension funds lose their
appeal, their chief lawyer, Thomas Lauria of White & Case, may try
to take the matter to the Supreme Court, a move that could impose a
significant delay on Chrysler's reorganization.
I wanted to note, further to an earlier post, that at issue are rights
of the secured/senior creditors. They argue that the effect of the
reorganization plan is to benefit the junior creditors, and the union
especially, at the expense of the seniors:
The Indiana pension funds -- the Indiana State Teachers Retirement
Fund, the Indiana State Pension Trust and the Indiana Major Moves
Construction Fund -- own just $42 million of Chrysler's $6.9
billion in secured debt, and the other secured lenders have already
agreed to accept a settlement paying them about 29 cents on the
dollar.
The Indiana funds bought Chrysler's debt a year ago for 43 cents on
the dollar, and are arguing the restructuring plan is unfair
because U.S. law normally puts secured lenders at the front of the
line for repayment. They say junior creditors are being put ahead
of senior secured lenders in the plan.
There are two questions here. One is whether it is in fact true that
the reorganization plan (the same basic issue arises for the GM
bankruptcy) benefits junior creditors, starting with the UAW, at the
expense of the senior creditors. The second is whether the senior
creditors have in fact been dealt with unfairly, given that they
could, in principle, go to court -- and as the Indiana pension funds
have done. Although I would welcome hearing anything that Todd might
want to say, the answers seems to me pretty clearly, yes and yes.
In both Chrysler and GM, the junior creditor UAW wound up with far
more equity -- that is, whatever it is, however, speculative, that the
parties thought might be of value in the future -- than the senior
creditors did. It doesn't really help to say that absent the
government bailout, they would have done even worse. Bankruptcy, as I
understand it on this matter, is about the relative claims of the
parties, relative to each other, seniors and juniors. In fact,
although a number of commenters raised it in a post of mine yesterday,
I don't see many financial commentators disputing that at all
(although, to be sure, I won't rule out confirmation bias!).
This leads directly to the second question -- why, consistent among
other things with fiduciary duty, didn't the senior creditors, or more
of them, contest this reorganization and assert their rights? I said
yesterday that they were "strong-armed" by the administration which,
after all, has extended financing to many of them and so altered their
incentives with regards to asserting legal rights. Mirabile dictu,
today's [3]Washington Post editorial on the GM bankruptcy says
(emphasis added):
Also worrisome was the strong-arming of the company's bondholders,
who got far less equity in return for their money than the UAW, the
president's political ally. The administration wants to spin GM
back to the private sector as soon as possible. But private
investors may have been durably scared by the union's display of
clout. Indeed, the UAW boasted to its members that it blocked a
plan to build GM cars in China and "negotiated new opportunities
for UAW involvement in future business decisions."
The retort says, look, the seniors could have exercised their rights
and gone to court, but they didn't. If it's because they received
government money and so have to dance to the government's tune, that
is in the interests of the taxpayers, who are otherwise going to lose
as value is transferred first to the creditors in bailing them out,
and then to creditors when they take money that would otherwise go to
fixing Detroit.
The counter-response is that the problem is not so much one of junior
and senior creditors, it is, [4]as David Skeel has noted, a problem of
politically favored insiders and politically disfavored outsiders. It
is highly unlikely to be efficient, either in the allocation of credit
in the economy or in the making of cars, for the government to be
naming winners and losers not even on the basis of its (likely
dubious) estimations of efficiency, but instead on the basis of the
UAW insiders and creditor-fiduciary outsiders.
My experience negotiating lending deals in the developing world
suggests that the most important characteristic is not
creditor-debtor, but insider-outsider when it comes to efficiency when
a government is somehow involved. In the areas I am familiar with,
independent media, government involvement comes in the form of
broadcast licenses, newsprint monopolies, government agency
advertising, all sorts of ways. Crony capitalism in one way or
another, rent-seeking, as [5]Megan McArdle explains:
Bankruptcy is often portrayed as a question of creditors v.
debtors, and of course that's not a ridiculous frame. But just as
important is the tension between insiders and outsiders. This
conflict has existed for as long as we've had insolvency, and it
doesn't match up to the creditor/debtor divide .... I suspect Obama
views his administration's actions as moving along the X axis
towards a more debtor-friendly system. But in fact, Chrysler, not
the UAW, is the debtor, and it's not likely the company would have
ended up in liquidation. The administration's actions weren't
debtor-friendly, they were insider friendly. This was classic
collusion among creditors, and it's why the parts of the bankruptcy
law that deal with Section 363 sales spend so much time talking
about the importance of avoiding sham transactions. Cutting back on
that sort of abuse was at least as important an achievement as
giving debtors a fresh start.
It is far from mad to point out, as McArdle does, that the current
Detroit policies are far less about the rights of creditors than they
are about the privileges of political insiders. Yet the frame against
which the Second Circuit will consider this will be one of creditors
versus creditors versus debtors, in the context of something approved
by a bankruptcy judge who notes that 90% plus of the senior/secured
creditors have approved. The "strong-arming" that caused them not to
enforce their legal rights -- the frame of favored insiders and
disfavored outsiders -- will not be on the table. In my estimation,
that's to be regretted because, yes and with all due respect to
everyone, it does remind me slightly too much of deals in Skopje and
Belgrade.
References
1. http://www.nytimes.com/2009/06/03/business/03chrysler.html?ref=business
2. http://online.wsj.com/article/SB124406211872582465.html
3.
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/02/AR2009060203217.html
4.
http://www.american.com/archive/2009/may-2009/why-the-chrysler-deal-would-horrify-a-new-dealer/article_print
5.
http://meganmcardle.theatlantic.com/archives/2009/05/if_youre_interested_in_bankrup.php
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