Chrysler: A Sub Rosa by Any Other Name

The latest news in the Chrysler drama was Justice Ruth Bader Ginsburg saying the bankruptcy judge's orders allowing the sale "are stayed pending further order" by her or by the Supreme Court. This is the event that most said would not happen. Likely it is an administrative extension so the court can determine whether Indiana's request has merits. Hopefully it will lead to the restoration of creditors rights.

Many, including myself, have opined that the 363b sale is a sub rosa bankruptcy plan. For informational purposes, a "sub rosa plan" is a term that recognizes the effect that a Section 363 sale of assets can have on the DIP's reorganization efforts. In Chapter 11, creditors get certain protections as part of the Chapter 11 Plan confirmation process, including a formal disclosure statement, the right to vote on the Plan, and make legal objections to the proposed manner of distribution under the "absolute priority rule", etc. The sale of assets under Section 363 has rules and is done under bankruptcy court supervision, but it does not include all of the creditor protections that are part of the Plan confirmation process.

The court disagreed, stating (as paraphrased and used as support by the Solicitor General):

The bankruptcy court acknowledged that a bankruptcy estate’s sale of assets cannot be approved if the sale “would amount to a sub rosa plan of reorganization.” App., infra, 16. The court found no such subversion of the requirements of Chapter 11 here, however, because the significant and ongoing depreciation of Chrysler’s assets made it crucial to conduct the sale in time to preserve the going-concern value of many of those assets.

The old melting ice cube. But wait: Chrysler LLC was selling cars at a higher rate than the U.S. industry last month, buoyed by incentives of as much as $6,000 and President Barack Obama’s assurances on the automaker’s survival. Chrysler's sales fell about 30 percent through May 18, less than the U.S. market’s drop of as much as 33 percent, said Gary Dilts, senior vice president of consumer-research firm J.D. Power & Associates, which collects data from 6,000 dealers.

So, we have a "plan" that is premised on the quick "surgical" sale of assets to a new company (controlled by an unsecured class of creditors) in order to retain the value of Chrysler's assets. Yet, the assets had a better month than the industry. The other reason is that if the sale is not consummated by June 15, Fiat (FIATY.PK) could walk.

Given FIAT's recent Opel defeat and their aspirations to become a global automotive company, will they walk? They are getting a better deal than the UAW, with no cash in and all upside and the administration thinks they will just walk away. Yeah, right.

So, what is the hurdle?

“Denial of [an] in-chambers stay application[] is the norm; relief is granted only in ‘extraordinary cases.’” To justify such relief, applicants must show, at a minimum, “(1) ‘a “reasonable probability” that four Justices will consider the issue sufficiently meritorious to grant certiorari * * * ; (2) ‘a fair prospect that a majority of the Court will conclude that the decision below was erroneous’; and (3) a likelihood that ‘irreparable harm [will] result from the denial of a stay.’”

Pretty high hurdle, it seems. Hopefully, the court will take the case and at least restore the appearance of rule of law. That said, I do not believe that the court will take the case due to the implications for both Chrysler and, more importantly, GM (GMGMQ.PK).

Disclosure: No position in Chrysler, long GM bonds.

Comments

[Dave Wrixon:]

Frankly, there at stake for the US if this is pushed through illegally than if GM were allowed to simply fail. If this sale goes through without due process than all US Corporate Bonds are effectively junk. How do you raise the finance to make the investment necessary to turn the economy around on that basis, unless Obama intends to nationalize everything and finance it all through the issue of Treasury Bonds?

At some point, somebody is going to have to bite the bullet, rather than just proceeding to the next expedient thing. Perhaps somebody will consider that the rule of law is just to big a sacrifice to make to save a couple of lame duck car assemblers.

Jun 09 07:45 AM

[MinAkkar20:]

The issue with the 363 sale was they valued the assets at fire-sale value, which was less than the total value of the $$ owed to bond-holders. The court then said that since the assets are worth less than what they are owed anyways, there is no damage being suffered by the sale. The point made by the Indiana Pensions was that this business is being sold with the intent of operating in the future. When valued in that manner their collateral more than covers the amounts owed to them.

At least when municipilaties take land under eminent domain there is some semblance of fair compensation. This is outright thievery by a government agency.

Jun 09 08:46 AM

[Michael Terry:]

I completely agree. It is better to get hurt on one investment to preserve all the rest. We are a creditor nation, and without creditor rights and the rule of law we become Argentina (or Venezuela). Who lends to them? With US government debt needs and corporate debt needs, we must establish that we are a safe place to invest. China gave us a shot across the bow, the next one is through it.


On Jun 09 07:45 AM Dave Wrixon wrote:

> Frankly, there at stake for the US if this is pushed through illegally
> than if GM were allowed to simply fail. If this sale goes through
> without due process than all US Corporate Bonds are effectively junk.
> How do you raise the finance to make the investment necessary to
> turn the economy around on that basis, unless Obama intends to nationalize
> everything and finance it all through the issue of Treasury Bonds?
>
>
> At some point, somebody is going to have to bite the bullet, rather
> than just proceeding to the next expedient thing. Perhaps somebody
> will consider that the rule of law is just to big a sacrifice to
> make to save a couple of lame duck car assemblers.

Jun 09 09:45 AM

[casey00001:]

Somebody can correct me if I am wrong, but once Ginsburg issued her ruling in effect allowing the case to move forward (by taking any action on the matter ie. granting stay) it is now under the control/influence of Chief Justice John Roberts. He can over rule any of the other justices and indicate that the case can be heard by the court. This moves it from the liberal bent of Ginsburg, tossing it aside to prevent Obama embarasement, to the much more conservative thinker Roberts.

Jun 09 11:30 AM

[Big Bubbette:]

There is more at stake here than the Chrysler bankruptcy. Look at Youngstown Sheet and Tube where the Supreme Court spanked Truman for trying to take over the steel mills during the Korean war. The Supreme Court needs to spank Obama and restore the Constitutional rights of citizens and States.

It will be interesting to see if Ginsberg punts or refers it to the Supreme Court where five out of the nine justices will have to agree whether to hear the case. I hope the Court takes up this very important case for the same reasons stated in Youngstown.

Jun 09 12:05 PM

[zagrebzagreb:]

'We are a creditor nation, and without creditor rights and the rule of law we become Argentina (or Venezuela).'

Not to be snarky, but actually the US is the world's biggest debtor nation...

Jun 09 01:47 PM

[ejhickey:]

Some info about Fiat from Autoguide.com

"A new survey out of the U.K. by J.D. Power & Associated might be great new for Lexus… but it’s quite the opposite for both Chrysler and its new bosses at Fiat.

The Vehicle Ownership Satisfaction Study (VOSS) lets owners of three year old cars rate those vehicles and Chrysler did not do well. In fact, it finished dismally, ranking in the second last place.

You might think Chrysler’s new bosses at Fiat wouldn’t be too pleased about the results, but Fiat has its own problems, with a ranking of dead last.

The survey includes info on vehicle quality and reliability, appeal, ownerships costs and overall satisfaction. In total 15,700 online interviews were conducted for 29 brands on 101 models.

Jun 09 08:55 PM