Troubling Legacy Created by GM and Chrysler Bankruptcies

Troubling Legacy Created by GM and Chrysler Bankruptcies

11/28/2010

According to an article that was published by two University of Illinois experts in bankruptcy law, the bankruptcy reorganizations of General Motors and Chrysler embodied a sea change in corporate restructuring. It was an event that could herald that end of the current system of bankruptcy reorganization.

Ralph Brubaker and Charles Tabb, two law professors from the University of Illinois, argue that the legal principles that were applied in the Chrysler and GM bankruptcies, were ill-advised and eventually undermined the distributional models of bankruptcy reorganizations. Chrysler and GM bankruptcies are two of the biggest in U.S. history at $83.5 and 39.9 billion, respectively.

Charles Tabb mentioned that, “It would be slightly less troubling if GM and Chrysler were just political aberrations, and could be viewed by courts as byproducts of the extraordinary economic and political pressure of preventing two-thirds of the American automotive industry from disappearing. But that’s not the case. These types of bankruptcies have been happening for some time; Chrysler and GM just brought it to the forefront.”

Traditionally, bankruptcy reorganizations have been effectuated by a Chapter 11 plan of reorganization, with complex prerequisites for disclosure, creditor voting and allotment of stakes among owners and creditors. In the case of Chrysler and GM, however, it was done by sale and not by plan.

Brubaker said, “The acute danger this presents is that a nominal sale structure could be used to effectuate a purely internal boot-strap reorganization.” He also added, “That would distribute the value of the reorganized debtor entity among creditors in a manner that contravenes their relative priority rights in the debtor’s assets.”

WRITTEN BY:

blakeh@wellsdrew.com