Bankruptcy experts Mark Roe and David Skeel, law professors at Harvard and the University of Pennsylvania, have written a paper assessing the Chrysler bankruptcy—very negatively. It hasn’t been published yet, but it’s available here to Social Science Research Network subscribers; I’m working off an emailed copy. The paper tends to support my view that the government bludgeoned Chrysler’s secured creditors to give up property rights that they would normally have had in bankruptcy in favor of an unsecured creditor, the UAW’s retiree health plan funda—although they don’t go as far as I did in my May 6 Examiner column when I called this “Gangster Government.”
Roe and Skeel note that the bankruptcy judge didn’t use—or even mention—the ordinary requirements of creditor priority in § 1129 of the bankruptcy code. “The requirement in § 1129 (a)(8) tghat each class of creditors consent or receive full payment wasn’t used. A market test wasn’t used. There was no judicial valuation of the firm. Chrysler simply went through the motions of selling its principal assets to a newly formed entity controlled by its previous creditors.” The major creditors, as they point out, were banks that had taken TARP money and which therefore were in effect controlled—or bludgeoned—by the government. The result was that the unsecured retiree health plan fund got a promise of well over 50 cents on the dollar while secured creditors were getting 29 cents on the dollar. My additional gloss: property was transferred from those legally entitled to it to those who were political allies of the Obama administration.
This is out of line, Roe and Skeel argue, with what has been standard bankruptcy practice. “When a firm sells nearly all of its assets to a shell company that also assumes most but not all of its prior liabilities, we are not seeing a true sale solely to benefit creditors as a group. Instead, the sale is a de facto reorganization plan, which the courts had previously regularly rejected as requiring, at a minimum, a set of makeshift remedies in place of the § 1129 standards to confirmation.” There was no market test of alternatives: “The market test was one that could not have elicited suitable bids, because it was set to replicate the deal then at hand, when the very question was whether creditors could have obtained more money via a different deal.”
The implications of the Chrysler bankruptcy as precedent are worrying. As Roe and Skeel note, “credit markets reacted negatively to the Chrysler reorganization process and results.” They quote Warren Buffett saying, “If we want to encourage lending in this country, we don’t want to say to somebody who lends and gets a secured position that the secured position doesn’t mean anything.”
The case is not over; the Second Circuit Court of Appeals has not yet issued an opinion on its decision to affirm the ruling of the bankruptcy judge. Roe and Skeel’s advice to the judges: “The bankruptcy court opinion—one that neglected to even mention the Code section, § 1129, that enumerates the standards for plan confirmation, much less apply those standards—needs to be rejected as hastily done: bankruptcy practice would be improved by a sharp appellate rejection of the Chrysler bankruptcy’s structure. Some of that restoration of good bankruptcy practice could be obtained via the circuit court’s pending opinion, which could focus on the plausible elements of priority compliance in the record.”
