Posts Tagged ‘General Motors’
Monday, March 7th, 2011
Asset sales through bankruptcy are all the rage – they’re presumably [relatively] quick. And just as importantly, they’re perceived as clean – that is, they permit assets to be sold “free and clear” of an “interest” in the property.
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The term “interest” has been construed broadly, and has been interpreted to extend to successor liability claims – including often prohibitively expensive environmental liabilities. Indeed, one recent post on this blog (here) notes the potentially broad reach of bankruptcy court orders authorizing asset sales – and suggests the relief available in some circumstances may even be broader than the Chapter 11 discharge.
But not all courts agree with this conclusion . . . at least not entirely.
Late last month, the Southern District of New York (the same jurisdiction which authorized the “Section 363″ sale of General Motors free and clear of environmental liabilities) reached a different result in the case of In re Grumman Olson Industries, Inc.
Grumman Olson, an auto-body manufacturer whose primary customers were Ford and General Motors, commenced Chapter 11 proceedings nearly nine years ago and completed a “363 sale” of its assets to Morgan Olson, LLC about 6 months after filing. The sale order contained provisions which purported to release both Morgan Olson and the sold assets themselves from any successor liability claims which might arise.
Ms. Frederico, a FedEx employee, sustained serious injuries on October 15, 2008 when the FedEx truck she was driving hit a telephone pole. In a New Jersey lawsuit filed after the accident, the Fredericos claimed that the FedEx truck involved in the accident was manufactured, designed and/or sold by Grumman in 1994, and was defective for several reasons. The Fredericos claimed that Morgan Olson continued Grumman‘s product line, and was, therefore, liable to the Fredericos as a successor to Grumman under New Jersey law. In response, Morgan Olson requested that Bankruptcy Judge Stuart Bernstein re-open the [now closed] Grumman Olson case, then filed an adversary proceeding to determine that the Federico’s claim was barred by the prior sale order.
Both sides sought Judge Bernstein’s summary judgment regarding the Morgan Olson suit. In a 21-page decision, Judge Bernstein ruled (following a brief discussion addressing his continuing jurisdiction to interpret the prior sale order) that Morgan Olson was, indeed, a successor for purposes of the Fredericos’ suit. This was because the Fredericos’ claimed injuries arose not from the assets sold through bankruptcy, or from personal claims against Grumman Olson that arose prior to Grumman’s Chapter 11, but from Morgan Olson’s post-confirmation conduct:
the Fredericos are basing their claims on what Morgan [Olson] did after the sale. According to their state court Amended Complaint, Morgan [Olson] is liable as a successor under New Jersey law because it “continued the product line since the purchase,” “traded upon and benefited from the goodwill of the product line,” “held itself out to potential customers as continuing to manufacture the same product line of Grumman trucks” and “has continued to market the instant product line of trucks to Federal Express.” The Sale Order did not give Morgan [Olson] a free pass on future conduct, and the suggestion that it could is doubtful.
A good portion of Judge Bernstein’s decision is devoted to a discussion of what constitutes a “claim” for bankruptcy purposes – and the circumstances under which an anticipated “future tort claim” (i.e., claim based on a defective product manufactured by the debtor which hasn’t yet caused an injury, but which will at some point in the future) may be addressed through a “Section 363″ sale.
In permitting the Fredericos to proceed with their New Jersey law suit against Morgan Olson, Judge Bernstein’s analysis focused on three areas:
- the Fredericos’ lack of any meaningful “contact” with Grumman prior to the commencement of Grumman’s case or confirmation of Grumman’s Chapter 11 plan;
- the absence of any notice by the Fredericos of the Grumman/Morgan sale; and (though less important than the lack of contact and lack of notice)
- the absence of any provision for such anticipated “future claims” in Grumman’s Chapter 11 plan.
In the end, he observed that “every case. . . addressing this issue has concluded for reasons of practicality or due process, or both, that a person injured after the sale (or confirmation) by a defective product manufactured and sold prior to the bankruptcy does not hold a ‘claim’ in the bankruptcy case and is not affected by either the § 363(f) sale order or the discharge under 11 U.S.C. § 1141(d).”
Judge Bernstein’s Grumman Olson decision serves as an important reminder that “section 363 sales” – though undoubtedly a very powerful tool for disposing of distressed assets quickly and cleanly – do not provide “bullet-proof” protection for any type of liability which might be associated with the debtor’s assets, or with its general product line.
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.
Monday, August 31st, 2009
Chrysler’s and GM’s recent sales through the Bankruptcy Courts of New York’s Southern District have raised the question of whether some jurisdictions provide more receptive forums than others for getting a “distressed M&A” transaction accomplished. This sort of “forum shopping” is both a well-established concept in commercial insolvency practice and an integral part of reorganization planning.
Last week, a 7th Circuit decision highlighted another area where geography – at least as it concerns the choice of a Bankruptcy Court – can have an important effect on the outcome of a Chapter 11 case, as well as on a reorganized debtor’s post-confirmation operations: The resolution of environmental liabilities.
U.S. v. Apex Oil Company involved an environmental injunction obtained against Apex Oil, successor-by-merger to Clark Oil and Refining Corporation.
Clark Oil, its corporate parent, and a number of affiliates filed related Chapter 11 cases 12 years ago, in 1987. Clark was subsequently merged into Apex, and a Chapter 11 Plan confirmed in the debtors’ related Chapter 11 cases. Nearly two decades later, in 2005, the Environmental Protection Agency sought an injunction requiring Apex to clean up a contaminated site in Hartford, Illinois, which housed an oil refinery once owned by Clark.
Chief US District Court Judge David Herndon of Illinois’ Southern District conducted a 17-day bench trial in early 2008 and, in July 2008, issued a 178-page decision finding that, in fact, contamination was present at the site and that it was Apex’s responsibility to clean it up.
Apex appealed, arguing that confirmation of the Chapter 11 Plan and discharge obtained in Clark Oil’s Chapter 11 case 2 decades earlier precluded enforcement of the more recent federal injunction. In essence, Apex argued that Section 101 of the Bankruptcy Code defines a “claim” as a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.” Since cleaning up the contaminated Hartford, Ill. refinery site in response to the federal injunction would obviously require the significant expenditure of money, Apex reasoned that this obligation was effectively a “claim” subject to the earlier Chapter 11 discharge, and could not be enforced.
Judges Posner, Cudahy, and Kanne of the 7th Circuit were not persuaded. Judge Posner’s comparatively brief, 12-page decision issued last week held that the EPA’s federal injunction at issue did not give rise to a “claim” as that term is defined by the Bankruptcy Code . . . and, therefore, could not be discharged by means of Clark Oil’s Chapter 11 Plan.
Consequently, Apex now holds the clean-up tab for the old Clark refinery.
In order to hand Apex that tab, Judge Posner and his colleagues distinguished Apex’s case from a 1985 Supreme Court decision – Ohio v. Kovacs, 469 U.S. 274 - which involved Ohio’s appointment of a receiver to remediate environmental claims after the debtor failed to abide by a state court consent decree requiring him to do so. The Supreme Court found that these enforcement efforts constituted a dischargeable “claim” in Kovacs’ bankruptcy.
The result in Apex was different because, in Judge Posner’s view, the receiver in Kovacs sought money for clean-up, whereas the EPA in Apex merely sought clean-up . . . from Apex. And, in fact, the federal statute under which the EPA sought remediation (the federal Resource Conservation and Recovery Act – “RCRA”) affords only this relief – and nothing more.
Juge Posner’s analysis of RCRA relies in part on earlier 7th Circuit precedent (AM Int’l. v. Datacard Corp., 106 F.3d 1342) - which itself relies on other Supreme Court precedent (Meghrig v. KFC W., Inc., 516 U.S. 479) – to hold that RCRA doesn’t allow a party obtaining a “clean-up” order to clean up a contaminated site itself, then sue for response costs in lieu of seeking an injunction. For this reason, he held, RCRA cannot “give rise to a right to payment” for purposes of a bankruptcy discharge.
The 7th Circuit panel acknowledged that Apex’s case is similar to U.S. v. Whizco, 841 F.2d 147 - in which the 6th Circuit reached a conclusion opposite from Judge Posner and his 7th Circuit colleagues. But where Apex is concerned, that is no matter. As Judge Posner sees it, the 6th Circuit’s rationale “cannot be squared with . . . [7th Circuit] decisions [such as Datacard] which hold that cost incurred [to comply with an equitable order] is not equivalent to the ‘right to payment’ . . . .”
Though the 7th Circuit’s understanding of RCRA is based in part on Supreme Court precedent, few decisions outside either the 6th or 7th Circuit appear to discuss its application in the bankruptcy context. Moreover, other Supreme Court precedent (such as Kovacs) holds that, at least in certain circumstances, equitable remedies (such as appointment of a receiver) are, in reality, “claims” within the meaning of the Bankruptcy Code – and, therefore, can be discharged.
As a result, the resolution of environmental claims in bankruptcy appears to turn not only on the “clean-up” statute at issue – or, more specifically, its remedies – but also on the jurisdiciton where the debtor’s bankruptcy case is filed.
So who’s gonna clean up this environmental mess?
That depends, at least in part, on which court first decides the claims resolution mess.
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?