Posts Tagged ‘Chrysler’
Monday, October 18th, 2010
In a well-known quote, Depression-era author Thurmond Arnold once described the inside of a corporate reorganization as:
a combination of a municipal election, a historical pageant, an antivice crusade, a graduate school seminar, a judicial proceeding, and a series of horse trades, all rolled into one — thoroughly buttered with learning and frosted with distinguished names. Here the union of law and economics is celebrated by one of the wildest ideological orgies in intellectual history. Men work all night preparing endless documents in answer to other endless documents . . . . At the same time practical politicians utilize every resource of patronage, demagoguery, and coercion beneath the solemn smoke screen.
Most litigators understand the compelling power of story as a means to rationalize and persuade. In bankruptcy, a debtor’s “first day motions” are the initial means by which counsel has to weave the “wild orgy” of corporate restructuring into a cohesive narrative that will serve the client’s interests.
Because business insolvency and its resolution typically follow a well-understood process with a predictable set of possible outcomes, the “first day” narratives describing a debtor’s demise – and setting forth its “exit strategy” – likewise often follow familiar patterns. These patterns have been adapted over the decades to suit the capital structure of distressed firms and the economic conditions they face. But in the end, they remain . . . familiar patterns.
Penn Law Professor David Skeel, Jr. has recently taken up an engaging, non-empirical analysis of these patterns as they have appeared in US bankruptcy law. In Competing Narratives in Corporate Bankruptcy: Debtor in Control vs. No Time To Spare (published most recently as Research Paper No. 10-20 under the auspices of Penn Law’s Institute for Law and Economics and previously in the Winter 2009 issue of Michigan State Law Review) Skeel argues that such narratives have been utilized historically to justify and obtain judicial sanction for what, at the time, may be innovative, even controversial, reorganization techniques attempted within the strictures of a fixed bankruptcy legal structure. In bankruptcy, he suggests, the power of narrative grows out of the innovation employed to restructure a firm, and is then used to strengthen and further extend the innovation.
Skeel – who earlier authored Debt’s Dominion: A History Of Bankruptcy Law In America – traces this narrative and its variations from the early “equity receiverships” utilized to reorganize railroads through the early cases filed in the wake of the 1978 Bankruptcy Code, and to the more recent 2008-09 “headline” cases of Lehman Brothers, Chrysler, and General Motors. Observing that reorganizations proposed over the last 30 years have been explained using one of two predominant narratives – “Debtor in Control” (used most commonly to justify the debtor’s further prosecution of an ongoing reorganization) or “No Time to Spare” (often used to justify the sale of the debtor’s business assets) – he then circles back to ask whether the “innovations” proposed are justifiable under either narrative.
Skeel’s treatment of narrative – particularly, in questioning whether there was truly “no time to spare” in the Lehman, Chrysler, and GM bankruptcies – is insightful. As he sees it:
Bankruptcy’s master narratives have always been closely intertwined with the underlying legal structures, which suggests that bankruptcy judges and bankruptcy law will determine the future of . . . current, competing narratives.
Though his work covers narrative in the domestic bankruptcy context, the same complexity and requests for emergency, interim relief that require narrative explanation also arise in cross-border insolvencies.
As these “master narratives” become intertwined with multiple (and potentially conflicting) “legal structures,” their continued evolution bears close watching.
Monday, April 5th, 2010
A great deal of scholarly ink has been spilled over last year’s well-publicized sales of Chrysler and GM, each authorized outside a Chapter 11 plan. Some of that ink is available for review . . . here.
It’s worth noting that both Chrysler and GM have enjoyed a considerable presence in Canada. Indeed, the Canadian government participated in the automakers’ Chapter 11 cases. Yet their bankruptcy sales were not recognized under Canadian cross-border insolvency law, nor were Canadian insolvency proceedings ever initiated.
Seton Hall’s Stephen Lubben and York University’s Stephanie Ben-Ishai collaborated last month to offer an answer to that question. The essence of their article, “SALES OR PLANS: A COMPARATIVE ACCOUNT OF THE ‘NEW’ CORPORATE REORGANIZATION” comes down to two points of difference between the Canadian reorganization process and US Chapter 11 – speed and certainty – and is captured in the following excerpt:
[B]oth the United States and Canada have well-established case law that supports the “pre-plan” sale of a debtor’s assets. The key difference between the jurisdictions thus turns not on the basic procedures, but rather the broader context of those procedures . . . . [I]n the United States it is generally possible to sell a debtor’s assets distinct from any obligations or liabilities associated with those assets. Indeed, the only obligations that survive such a sale are those that the buyer willing[ly] accepts and those that must survive to comport with the U.S. Constitution’s requirements of due process.
[I]n Canada the debtor has less ability to “cleanse” assets through the sale process. Particularly with regard to employee claims, a pre-plan sale under the CCAA is not apt to be quite as “free and clear” as its American counterpart.
The jurisdictions also differ on the point at which the reorganization procedures – and the sale process – can be invoked. Canada, like most other jurisdictions, has an insolvency prerequisite for commencing [a reorganization] proceeding, whereas Chapter 11 does not. And the Canadian sale process is tied to the oversight of cases by the [court-appointed] monitor: without the monitor’s consent, it is unlikely that a Canadian court would approve a pre-plan asset sale. In the United States, on the other hand, there is no such position. Accordingly, a [US] debtor can seek almost immediate approval of a sale upon filing. Finally, there remains some doubt and conflicting case law in Canada about the use of the CCAA in circumstances that amount to liquidation, particularly following an asset sale. In the US, it is quite clear that Chapter 11 can be used for liquidation.
[T]hese latter factors are the more likely explanations for the failure to use the CCAA in [GM's and Chrysler's] cases . . . . [I]t is the questions of speed and certainty that mark the biggest difference between the two jurisdictions . . . . In the case of GM and Chrysler, where the governments valued speed above all else, these issues came to the fore.
The article offers a very interesting perspective on the strategic use of specific insolvency features of different jurisdictions to effect cross-border bankruptcy sales, and is well worth the read.
Monday, September 28th, 2009
The bankruptcy blogosphere is replete with commentary on Chrysler LLC’s sale, through Section 363 of the Bankruptcy Code, to a newly-formed entity. The sale, of substantially all of Chrysler’s assets for $2 billion, gave secured creditors an estimated $0.29 on the dollar. Other, unsecured creditors received more. Though challenged, the sale ultimately received the 2d Circuit’s approval in a decision issued August 5.
Was the Chrysler sale proper? Or did it constitute an inappropriate “end run” around the reorganization provisions that ordinarily apply in a confirmed Chapter 11 plan?
Harvard Law’s Mark Roe and Penn Law’s David Skeel tackle this question in a paper released earlier this month entitled “Assessing the Chrysler Bankruptcy.” Roe and Skeel argue, in essence, that there was no way to tell whether or not the sale was proper because the sale lacked valuation, an arm’s length settlement, or a genuine market test (i.e., an auction) – all traditional measures of whether or not secured creditors received appropriate value for their collateral. They then suggest that the Chrysler transaction may portend a return of sorts to the equitable receiverships used to reorganize the nation’s railroads at the end of the ninenteenth century.
Roe and Skeel follow two fundamental strands of thought.
First, they review the basic facts of the Chrysler sale against the context of other so-called “363 sales” and ask where Chrysler fits within this context.
Their answer is that it really doesn’t fit.
Most complex bankruptcy sales (i.e., sales that effectively determine priorities and terms that the Code is structured to determine under Section 1129) are insulated from running afoul of the Code’s reorganization provisions through judicial innovations such as expert valuations or priority determinations, creditor consents, or competitive auctions. According to Roe and Skeel, the Chrysler sale had none of these. Instead,
“[Chrysler's] sale determined the core of the reorganization, but without adequately valuing the firm via [Section] 1129(b), without adequately structuring a . . . bargain [with creditors or classes of creditors], and without adequately market testing the sale itself. Although the bankruptcy court emphasized an emergency quality to the need to act quickly . . . there was no immediate emergency. Chrysler’s business posture in early June did not give the court an unlimited amount of time to reorganize, but it gave the court weeks to sort out priorities, even if in a makeshift way.”
How was the Chrysler sale deficient in these respects?
Though it involved a valuation presented by Chrysler, “the court did not give the objecting creditors time to present an alternative valuation from their experts . . . . Here, the judge saw evidence from only one side’s experts.”
For those who may protest that the Chrysler sale did, indeed, enjoy the consent of Chrysler’s secured lenders, Roe and Skeel argue that the largest of these lenders were beholden to the U.S. Treasury and to the Federal Reserve – not only as regulators, but as key patrons via the federal government’s rescue program. They were, therefore, willing to “go along with the program” – and the Bankruptcy Court was inclined to use their consent to overrule other objections from lenders not so well situtated. On this basis, Roe and Skeel contend that the secured lenders’ “consent” – such as it may have been – wasn’t independent “consent” at all.
Roe and Skeel also point out that the “market test” proposed as a means of validating the sale was, in fact, not a test of Chrysler’s assets, but of the proposed sale: “There was a market test of the Chrysler [sale], but unfortunately, it was a test that no one could believe adequately revealed Chrysler’s underlying value, as what was put to market was the . . . [sale] itself.”
The authors then go on to argue that the sale was mere pretense – and that, in fact, “there was no real sale [of Chrysler], . . . at its core Chrysler was a reorganization”:
“Consider a spectrum. At one end, the old firm is sold for cash through a straight-forward, arms-length sale to an unaffiliated buyer. It’s a prime candidate to be a legitimate [Section] 363 sale. At the other end, the firm is transferred to insider creditors who obtain control; no substantial third-party comes in; and the new owners are drawn from the old creditors. That’s not a [Section] 363 sale; it’s a reorganization that needs to comply with [Section] 1129.
. . . .
[To determine where a proposed sale falls along this spectrum,] [a] rough rule of thumb for the court to start with is this stark, two-prong test: If the post-transaction capital structure contains a majority of creditors and owners who had constituted more than half of the old company’s balance sheet, while the transfer leaves significant creditor layers behind, and if a majority of the equity in the purportedly acquiring firm was in the old capital structure, then the transaction must be presumed to be a reorganization, not a bona fide sale. In Chrysler, nearly 80% of the creditors in the new capital structure were from the old one and more than half of the new equity was not held by an arms-length purchaser, but by the old creditors. Chrysler was reorganized, not sold.”
Was the Chrysler transaction – however it may be called – simply a necessary expedient, borne of the unique economic circumtsances and policy concerns confronting the federal government during the summer of 2009?
Roe and Skeel argue that, in fact, the government could have acted differently: It could have picked up some of Chrysler’s unsecured obligations (i.e., its retiree obligations) separately. It could have offered the significant subsidies contemplated by the deal to qualified bidders rather than to Chrysler. It could even have paid off all of Chrysler’s creditors in full. But it did none of this.
Second, Roe and Skeel consider that “[t]he deal structure Chrysler used does not need the government’s involvement or a national industry in economic crisis.” Indeed, it has already been offered as precedent for proposed sales in the Delphi and Phoenix Coyotes NHL team bankruptcies – and, of course, in the subsequent GM case.
One very recent case in which South Bay Law Firm represented a significant trade creditor involved a similar acquisition structure, with an insider- and management-affiliated acquirer purchasing secured debt at a significant discount, advancing modest cash through a DIP facility to a struggling retailer, and proposing to transition significant trade debt to the purchasing entity as partial consideration for the purchase.
The deal got done.
What’s to become of this new acquisition dynamic? Employing a uniquely historical perspective, Roe and Skeel travel back in time to observe:
“The Chrysler deal was structured as a pseudo sale, mostly to insiders . . . in a way eerily resembling the ugliest equity receiverships at the end of the 19th century. The 19th century receivership process was a creature of necessity, and it facilitated reorganization of the nation’s railroads and other large corporations at a time when the nation lacked a statutory framework to do so. But early equity receiverships created opportunities for abuse. In the receiverships of the late 19th and early 20th century, insiders would set up a dummy corporation to buy the failed company’s assets. Some old creditors – the insiders – would come over to the new entity. Other, outsider creditors would be left behind, to claim against something less valuable, often an empty shell. Often those frozen-out creditors were the company’s trade creditors.”
They trace the treatment of equity receiverships, noting their curtailment in the US Supreme Court’s Boyd decision, the legislative reforms embodied in the Chandler Act of 1938, and the 1939 Case v. Los Angeles Lumber Products decision which articulated the subsequently-enacted “absolute priority rule” (but preserved the “new value exception”). Against this historical background, “Chrysler, in effect, overturned Boyd.”
But with a twist.
“One feature of Chrysler that differed from Boyd may portend future problems. Major creditors in Chrysler were were not pure financiers, but were deeply involved in the automaker’s production.” In cases where the value of the assets is enhanced by the continued involvement of key non-financial creditors, “players with similar [legal] priorities will not . . . be treated similarly.”
Translation: When non-financial creditors are driving enterprise value, a Chrysler-style sale suggests that some will make out, and some creditors – even, on occasion, some secured lenders – will get the shaft.
If accurate, Roe’s and Skeel’s Chrysler analysis raises some significant considerations about access to and pricing of business credit. It raises new concerns for trade creditors. It likewise presents the possibility that the Chapter 11 process – which has, in recent years, tilted heavily in favor of secured lenders – may not be quite as predictable or uniformly favorable as in the past.
Meanwhile . . . it’s back to the future.
Saturday, July 18th, 2009
A couple of earlier posts on this blog (here and here) have periodically discussed the state of bankruptcy-related mergers and acquisitions during this Chapter 11 cycle. A post dated July 10 by Reuters’ Alexander Smith suggests that M&A activity – which has been brisk – continues unabated. Smith notes:
There were five bankruptcy-related M&A deals announced during the week [of July 6], including the acquisition of venture-backed public company Nanogen by French investment holding company Financiere Elitech for $25.7 million. So far this year there have been 173 bankruptcy-related deals, the highest level since the same period of 2004 when there were 202. During 2009 the most bankruptcy-related M&A deals have occurred in the industrials sector with 23 percent, followed by the media and entertainment sector with 16 percent. In terms of geography, U.S. targets represent 83 deals or 48 percent of the total of bankruptcy M&A. This is hardly surprising given the speed with which some of the biggest bankruptcies have happened in the U.S. – with a little help from section 363 easing rapid asset sales at GM and Chrysler.
As noted in prior posts, this remains an excellent environment for purchasers with the cash, business vision, and/or creativity to make strategic acquisitions.
Monday, June 1st, 2009
Readers of this blog will be familiar with Seton Hall Professor Stephen Lubben’s prior work on credit default swaps and their impact on business bankruptcies. In a post on last week’s Credit Slips, Professor Lubben weighed in on another timely topic: Chrysler’s proposed asset sale to Fiat.
Of interest is a recent objection to the pending sale order filed by the State of Connecticut – the relevant portions of which are quoted in Lubben’s post – where the State argues:
Neither the Supremacy Clause of the United States Constitution nor the doctrine of preemption obligate state courts to enforce an otherwise valid order of any United States Bankruptcy Court where such order is challenged under the successor liability law of the states. See e.g. MPI Acquisition, LLC v. Northcutt, 2009 Ala. LEXIS 14 at * 10 (Ala. 2009); Lefever v. K.P. Hovnanian Enterprises, Inc., 160 N.J. 307 (1999) (bankruptcy sale order did not preclude application of product-line successor liability); Gross v. Trustees of Columbia Univ., 816 N.Y.S. 2d 695 (2006) (successor liability imposed against purchaser of assets free and clear of claims in bankruptcy proceeding); Simmons v. Mark Lift Industries, Inc., 366 S.C. 308, 313 (2005) (“a plaintiff may maintain a state-based product liability claim under a successor liability theory against a successor corporation which purchased the predecessor’s assets in a voluntary sale approved by the federal bankruptcy court”).
According to Lubben:
the State agues that the [Chrysler] sale order can’t release Chrysler from successor liability. This is a key issue, especially since the sale order in Lehman Brothers[' bankruptcy case] expressly included just such a release. Obviously the market for distressed assets would become even more illiquid if bankruptcy courts were unable to “cleanse” the assets as part of the sale process.
The professor points out a number of problems with Connecticut’s argument and the authorities supporting it, including (i) the State’s misstatement of the Alabama court’s holding; (ii) the absence of any mention by the South Carolina court of section 363; and (iii) the New Jersey court’s own misstatement of federal bankruptcy law. Of greater interest, however, is the New York decision cited by the State of Connecticut, which – according to the analysis offered on Credit Slips – relies on the Piper Aircraft decisions to find that successor liability under state law cannot be entirely eliminated by a federal bankruptcy sale order.
For Lubben, the New York trial court has a point about successor liability, though not for the reasons given by State of Connecticut. Instead, the bankruptcy court’s inability to “cleanse” the sale of distressed assets through a “Section 363 sale” has more to do with due process: In essence, those future claimants who may hereafter be injured by defective Chrysler vehicles should not be bound by a present bankruptcy order of which they had no notice. Lubben asks for comments on whether “[a] limited group of claimants might nonetheless be able to bring such [successor liability] claims, if they have good arguments that due process so requires.”
Great question, Professor Lubben. I have only one observation.
Successor liability to future claimants has long been a thorny issue where bankruptcy sales are concerned. It has received serious academic attention for well over a decade. However, such sales are not the only context in which bankruptcy courts have had to wrestle with successor liability. The Owens-Corning cases, which concerned the ability of an operating company to address future claims arising from asbestos-related product liability, resolved this problem and effectuated a successful reorganization through the appointment of a “future claims representative” – i.e., a representative appointed by the court and charged specifically with representing the interests of future claimants whose asbestos-related injuries had not yet manifested themselves in the company’s present reorganization. The Owens-Corning decision was of such creativity that its approach was implemented by Congress for all asbestos-related reorganizations in subsequent amendments to the Bankruptcy Code. See 11 U.S.C. 524(g) and its legislative history, which – incredibly – actually make for some interesting reading.
Where Chrysler’s asset sale will likely result in a liquidating plan, could the bankruptcy court follow a similar approach – i.e., appoint a claims representative to bargain with existing creditors on behalf of those future plaintiffs not yet injured by already-manufactured Chrysler vehicles for an appropriate share of the Chrysler sale proceeds, to be distributed through a claims trust and enforced by a channeling injunction similar to that prescribed for asbestos-related liabilities under Section 524(g)?
Comments, Professor Lubben? Anyone else? I’d love to hear from you at email@example.com.
Monday, May 4th, 2009
An earlier post on this blog covered the potential impact of credit default swaps (CDS’s) on distressed debt and suggested that
CDS’s could impede the negotiation of workouts, pre-arranged or pre-negotiated Chapter 11 plans, as creditors with a vested interest in the debtor’s failure either refuse to negotiate or – worse yet – actively seek the company’s demise.
A spate of recent articles in April indicates this is exactly what appears to be happening in the troubled auto industry – and elsewhere.
In a short April 17 piece, The Atlantic’s Megan McArdle cites to mall operator General Growth Partners (GGP) and newsprint maker AbitibiBowater as examples of recent Chapter 11 filers who – but for the credit protection provided lenders and bondholders by CDS’s – might have been able to negotiate consensual restructurings without the need for a court proceeding. Two other, more recent articles – one from the Detroit Free Press and another from The Deal – reference the same negotiation dynamic in talks surrounding proposed workouts for automakers General Motors and Chrysler. Readers will undoubtedly be aware that Chrysler commenced Chapter 11 proceedings last Thursday in New York. GM’s impending bankruptcy has been the subject of speculation for some time.
When a troubled business attempts to restructure its debt, how should its management address the “CDS effect?” Should CDS issuers be incorporated into the work-out discussion? Where the issuer is a counter-party on a number of “at-risk” CDS’s involving multiple troubled companies, should the issuer be allowed to fail so that lenders are instead required to deal directly with their debtors?
Ms. McArdle cites to earlier work – including a Financial Times article, and a Business Insider article tying the continued viability of some CDS protection to the AIG bailout (an earlier Business Insider piece went further, directly linking AIG-issued CDS’s to GM’s inability to reach terms with its lenders). She then goes on to argue that a bankruptcy system too creditor-friendly (i.e., one that permits lenders to rely upon third-party protection, rather than forcing them to the table with their debtors) discourages entrepreneurship, makes reorganization more difficult, and in the end, proves a societal disadvantage.
Now, wait a minute.
Wasn’t the AIG bail-out (which, in turn, “propped up” the viability of the CDS’s on which many lenders rely) itself really an attempted government-sponsored reorganization of sorts? If so, McArdle’s argument (and the articles she cites) leads to the conclusion that government intervention for the purpose of propping up the issuers of CDS’s ultimately leads to more corporate failure.
Can it be that government efforts to shore up the economy (or at least, to shore up the issuers of CDS’s) are, in fact, making it harder for businesses across a broad range of industries to negotiate their own restructuring?