Last Thursday the President announced a deal among Chrysler, Fiat, the UAW, the U.S. government, and several of Chrysler’s largest creditors. Some creditors oppose the deal, and Chrysler entered a bankruptcy process that will attempt to resolve this dispute.
The creditors left out of the deal are arguing that the Administration offered better deals to more junior creditors (such as UAW retirees) than to them. These objecting creditors think they can get a better deal from a bankruptcy judge than they were offered by the Administration.
This is not a traditional bankruptcy filing under Chapter 11. Instead, Chrysler, supported by the Administration, is using a section of the bankruptcy code (section 363) to try to sell portions of Chrysler to a new company (called “NewCo”) and dump some of the liabilities. If approved by the bankruptcy court, this would appear to give Chrysler the ability to “roll” the recalcitrant creditors and implement the deal negotiated with the other parties. The Administration appears to think this section 363 process gives them more leverage over the objecting creditors. The President has some smart and experienced people working on this, so I have no reason to doubt their judgment on this point.
A former colleague referred me to these two excellent posts on the section 363 process at the Bankruptcy Litigation Blog, and the New York Times DealBook blog has a good follow-up post this morning. It appears that the key hearing will be Tuesday afternoon.
Here is the key argument framed by the Bankruptcy Litigation Blog (emphasis is mine):
Chrysler and all its major constituents will argue that the house is on fire and absent a quick sale on the agreed-upon terms, asset values (whatever’s left of them) will be irrevocably destroyed. The dissident lenders will argue that the fire is an ingenious illusion meant to force them to accept a deal that denies them their first priority rights to Chrysler’s assets and is merely a disguised plan of reorganization that a Court has no authority to approve in the section 363 sale context.
The President is supporting Chrysler and aggressively opposing the objecting creditors, so I am confused as to why he said this last Thursday:
And that’s why I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success.
The President’s language sounds like it is “a disguised plan of reorganization.”
The President emphasized that this process would be quick:
Because of the fact that the UAW and many of the banks, the biggest stakeholders in this whole process have already aligned, have already agreed, this process will be quick. It will be efficient. It’s designed to deal with those last few holdouts, and it will be controlled.
Last Thursday, every bankruptcy expert on CNBC disagreed that this could be completed within 60 days, as suggested by the Administration, but I think those experts had not yet focused on this section 363 process. The DealBook blog points out that the negotiated agreement creates a June 15 deadline:
The key to this deal is that the parties have put it on a short leash. The agreement states that if the Chrysler sale is not completed by June 15, 2009 … extendable by 30 days if antitrust clearance is still needed … then Fiat can terminate the agreement at any time.
I am not a bankruptcy law expert, but the Administration’s negotiated agreement, bankruptcy strategy, time prediction, and TARP financing predictions all appear to be predicated on the court approving use of a section 363 sale process. In particular, I am concerned about three effects if the court rejects the sale and tells Chrysler its only option is a traditional Chapter 11 restructuring process:
- Will this take so long that Chrysler’s sales will decline to the point where it has no chance of viability?
- Will this take so long that Treasury will have to put up tremendous amounts of constrained TARP cash as debtor-in-possession financing?
- Will the parties to the negotiated agreement, and especially UAW, try to walk away if the court rejects the section 363 sale process?
I hope their plan still works, or they have a fallback plan, if the court instead sides with the objecting creditors and forces a traditional Chapter 11 restructuring.