I don't have to tell you things are bad. Everybody knows things are bad. It's a depression. Everybody's out of work or scared of losing their job. The dollar buys a nickel's worth; banks are going bust; shopkeepers keep a gun under the counter; punks are running wild in the street, and there's nobody anywhere who seems to know what to do, and there's no end to it.

We know the air is unfit to breathe and our food is unfit to eat. And we sit watching our TVs while some local newscaster tells us that today we had fifteen homicides and sixty-three violent crimes, as if that's the way it's supposed to be!

We all know things are bad -- worse than bad -- they're crazy.

It's like everything everywhere is going crazy, so we don't go out any more. We sit in the house, and slowly the world we're living in is getting smaller, and all we say is, "Please, at least leave us alone in our living rooms. Let me have my toaster and my TV and my steel-belted radials, and I won't say anything. Just leave us alone."

Well, I'm not going to leave you alone.

I want you to get mad!

I don't want you to protest. I don't want you to riot. I don't want you to write to your Congressman, because I wouldn't know what to tell you to write. I don't know what to do about the depression and the inflation and the Russians and the crime in the street.

All I know is that first, you've got to get mad.

You've gotta say,

"I'm a human being, goddammit! My life has value!"

So, I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window, open it, and stick your head out and yell,

"I'm as mad as hell, and I'm not going to take this anymore!!" 

Well, Howard's rant is what a lot of panicked plaintiffs' lawyers involved in cases against GM are screaming these days as they watch years of toil on behalf of people seriously injured by defective GM products (like crushed roofs, exploding "side saddle" gas tanks, and collapsing seat backs) potentially go for naught as GM makes its grandest attempt ever to crush an entire class of former customers (presumably including anybody who buys a GM car between now and the closing date of the sale) and existing and future products liability claimants (including those who haven't even been injured yet!) in a sale that many plaintiffs lawyers of record only received written notice of in the past couple of days. 

Those following this blog know my rising concern (even anger) over how products liability claimants were completely stiffed in Chrysler, so much so that Howard's famous rant came to mind!

So, I decided to do something about it, and officially stepped into the fray by filing this Objection to the GM Sale and this Memorandum in Support.  On the brief with me is Public Citizen's Adina Rosenbaum and Allison Zieve, counsel for the Center for Auto Safety, Consumer Action, Consumers for Auto Reliability and Safety, National Association of Consumer Advocates, and Public Citizen.

We should win; whether we do is a "horse of a different color."

***

Many thanks to the Center for Auto Safety's Executive Director, Clarence Ditlow, for his help in organizing the team, Public Citizen's Adina Rosenbaum and Allison Zieve for their tremendous assistance in framing the legal arguments and drafting the pleadings, and to Public Citizen's Director, Brian Wolfman, for his support.

And, of course, special thanks to The Coleman Law Firm's own Bob Coleman for his generosity in dedicating the firm's resources to this important pro bono effort.

The sad, and all too tragic, stories of my clients, taken from the filed objection, are set forth below.  The only thing my clients did wrong here was buy a GM car.  For this act of brand loyalty, they have paid dearly.   It's not enough that people lose their lives and get severely injured from design defects and product flaws, now they and their loved ones get thrown under the bus!

If their stories don't bring a tear to your eye, then you probably support the sale's treatment of product liability claimants too!

• Callan Campbell is a GM tort victim. On August 17, 2004—a week before she was to start college—18 year old Callan was a front-seat passenger in a 1996 GMC Jimmy when the driver of the vehicle lost control while attempting to make a left turn. The vehicle entered a driver-side leading roll and rolled 1.5 times before ending on its roof. The roof collapsed over Callan’s seat, partially paralyzing her. The strength to weight ratio of the GMC Jimmy roof is about 1.9, which is among the lowest of all GM vehicles. GM’s own tests revealed that roof strengths in rollovers should be 3W to 4W. Callan’s paralysis could have been avoided at a mere fifty dollar cost to GM. Callan’s medical bills total $200,000 for the life-saving treatment she received immediately after the crash. Additionally, Callan’s parents have spent $160,000 renovating their home to accommodate Callan’s physical and medical needs as a C6 incomplete quadriplegic. A life care planner has estimated Callan’s current and future needs for extra doctor visits, medicine, durable equipment and home modifications at $4,518,831.00. An economist has predicted her work loss based on total disability at $4,120,538. Callan is also entitled to significant compensation for pain and suffering including loss of life’s pleasures, loss of dignity and independence, loss of the use of her limbs, and disfigurement.

• Kevin and Nikki Junso are the parents of Tyler, Matt, and Cole Junso. On April 25, 2006, Tyler and Cole Junso were involved a single car rollover accident while driving a 2003 GMC Envoy. During the rollover, the windshield and side windows were knocked out, reducing the strength of the roof structure. The Envoy sustained catastrophic damage to the roof structure, which buckled violently inwardly toward Tyler and Cole. Despite being belted, both occupants were partially ejected from the vehicle during the roll over. Seventeen year old Tyler, the driver, sustained massive skull and neck injuries and died at the scene of the accident. The evidence showed that Tyler’s head was partially outside the vehicle during the roll over sequence, due to the broken window and lateral displacement of the roof structure, and made contact with both the ground and the roof during the accident. The paramedics found Kevin, the passenger, with his left leg out the windshield and his right leg out the passenger side window. Kevin sustained serious injuries to his arms and legs, which eventually led to the amputation of his right leg below the knee.

• GM has been aware of the significant risks of “occupant excursion” if the safety mechanisms in its vehicles fail. Despite this knowledge, GM failed to introduce cost effective safety measures into its designs, which could have included side window plastics or laminates or seat belts resistant to excessive spool out. Not only has the Junso family lost a son as a result of GM’s failure to correct the strength instabilities in its SUVs, but Kevin has also lost his right leg. To date, Kevin has incurred medical bills totaling $555,204.19, and his future medical expenses are predicted to exceed $800,000.

• Edwin Agosto was driving his 2000 Chevrolet Blazer on September 22, 2008, when he lost control of his vehicle causing him to cross the center line and strike a tree. After striking the tree, the car once again crossed the center line and collided with a guardrail where it finally came to rest. Edwin’s airbags failed to deploy throughout the course of the entire accident. Because of that failure, Edwin suffered injuries including multiple spinous process fractures, a heavily comminuted fracture of the left scapula extending into his scapular spine and glenoid, multiple rib fractures, a humerus fracture, a subclavian vein injury, and a post traumatic subdural hygroma upon striking his head on the windshield. Due to these injuries, Edwin spent the next two and a half months of his life in a coma.

• Joseph Berlingieri was parked in a driveway on September 21, 2006 when the driver side impact airbag in his 1998 Cadillac DeVille malfunctioned and deployed. The air bag struck Joseph in his left ear, arm, and shoulder causing trauma injuries including hearing loss, tinnitus, and other serious injuries. The vehicle had previously been recalled for faulty side airbags, and after its repair was warranted to Joseph as being free from defect and suitable for purchase. However, the vehicle was not suitable for use, and was sold to Joseph despite the defective airbag mechanism.

Here's the "Reader's Digest" version of the holding, written by Justice Souter for a 7-2 majority:

The Second Circuit erred in holding the 1986 Orders unenforceable according to their terms on the ground that the Bankruptcy Court had exceeded its jurisdiction in 1986.  On direct appeal of the 1986 Orders, any objector was free to argue that the Bankruptcy Court had exceeded its jurisdiction, and the District Court or Court of Appeals could have raised such concerns sua sponte.  But once those orders became final on direct review, they became res judicata to the parties and those in privity with them.

As I learned early on in law school from one of the smartest guys around, if you really want to find out what the case is about, read the dissent.  And if you want to know "what's bothering Ruthie?", you'll find it in dissent of Justice Stevens, in which she joined.  Justice Stevens dissented, he wrote, because:

In my view, the injunction bars only those claims against Manville’s insurers seeking to recover from the bankruptcy estate for Manville’s misconduct, not those claims seeking to recover against the insurers for their own misconduct.  This interpretation respects the limits of the Bankruptcy Court’s power....

We should not lightly assume that the Bankruptcy Court entered an order that exceeded its authority.  When a bankruptcy proceeding is commenced, the bankruptcy court acquires control of the debtor’s assets and the power to discharge its debts.  A bankruptcy court has no authority, however, to adjudicate, settle, or enjoin claims against nondebtors that do not affect the debtor’s estate.  Because Travelers’ insurance policies were a significant asset of the Manville bankruptcy estate, the Bankruptcy Court had the power to channel claims to the insurance proceeds to the Manville Trust.  But this by no means gave it the power to enjoin claims against nondebtors like Travelers that had no impact on the bankruptcy estate.  Thus, even accepting the Bankruptcy Court’s representation in 2004 that it had “meant to provide the broadest protection possible” to the settling insurers, such relief could not include protection from independent actions. (Emphasis added.)

The limits of the Bankruptcy Court's power will be on display in the GM case as Judge Gerber is asked to do what Judge Gonzalez was unwilling to do in the Chrysler case; that is, respect the jurisdictional boundaries of the Court and the statutory directives of Congress and refuse GM's request to bar present and future claims of product liability claimants from being asserted against the purchaser post-closing under applicable state law theories of successor liability. 

Much more on that to follow.

Happy hunting!

[See Part I of my analysis of Judge Gonzalez's sale opinion here.]

The brilliant lawyer, author, and ex-blogger, Bill Patry (now senior copyright counsel at Google), wrote on his Patry Copyright Blog back in 2005 about the greatest Biblical scholar of all time, Rabbi Shlomo Yitzhak (whom everyone affectionately calls "Rashi").  Bill wrote:

Rashi is used as a learning device for children not because he is simple (he isn't) but because of the unusual nature of his commentary.  His commentary consists of very terse conclusions, but without the questions that prompted the conclusions.  Children are left with the task of asking "What's Bothering Rashi?"  ...  The "What's Bothering Rashi?" approach to learning text is useful in analyzing statutes because it teaches one to ask the why of things, rather than as we almost always do, just read the literal words divorced from what the law would be like in their absence.

Bill's post came to mind in thinking about "What's Bothering Ruthie?" that would prompt her to write a one-liner calling a halt to a sale that remarkably worked its way from bankruptcy filing to cert. review in less time than it takes the average person to buy a used Town & Country.  Here are a few ideas:

• Maybe she doesn't like the lawyers down the street telling her (as reported here by SCOTUS Blog) that "no court, including the Supreme Court, has the authority to hear a challenge by Indiana benefit plans to the role the U.S. Treasury played in the Chrysler rescue."  Tell that to Justice Marshall!

• Or maybe, like her predecessors during the Depression in the Schechter Poultry Corp. v. US case, she's wondering whether (as argued here by Ralph Nader) Congress abdicated the essential legislative functions with which it is vested by letting the Executive Branch alone structure and implement the deal.

• As noted in my Part I analysis, however, I doubt she's losing sleep over whether the sale is a sub rosa plan or whether the absolute priority rule was violated. 

I'm guessing, though, that what bothers her most -- and frankly what's really been bothering me most (hence Part II) -- is the sale's treatment of tort claimants, both present and future, and Judge Gonzalez's cursory justification for such treatment.  He wrote:

Various objections were raised related to property damage claims and personal injury and wrongful death claims, including those which have not yet occurred.  Some of these objectors argue that their claims are not "interests in property" such that the purchased assets can be sold free and clear of them.  However, the leading case on this issue, In re Trans World Airlines, Inc., 322 F.3d 283 (3d Cir.2003) ("TWA"), makes clear that such tort claims are interests in property such that they are extinguished by a free and clear sale under section 363(f)(5) and are therefore extinguished by the Sale Transaction.  The Court follows TWA and overrules the objections premised on this argument.  Even so, in personam claims, including any potential state successor or transferee liability claims against New Chrysler, as well as in rem interests, are encompassed by section 363(f) and are therefore extinguished by the Sale Transaction.  See, e.g., In re White Motor Credit Corp., 75 B.R. 944, 949 (Bankr. N.D. Ohio 1987); In re All Am. Of Ashburn, Inc., 56 B.R. 186, 190 (Bankr. N.D. Ga. 1986). The Court also overrules the objections premised on this argument.

Additionally, objections in this category touching upon notice and due process issues, particularly with respect to potential future tort claimants, are overruled as to those issues because, as discussed elsewhere in this Opinion, notice of the proposed sale was published in newspapers with very wide circulation.  The Supreme Court has held that publication of notice in such newspapers provides sufficient notice to claimants "whose interests or whereabouts could not with due diligence be ascertained."  Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 317 (1950).  Accordingly, as demonstrated by the objections themselves, the interests of tort claimants, including potential future tort claimants, have been presented to the Court, and the objections raised by or on behalf of such claimants are overruled....

Another objection related to an asbestos claim raised both the failure to comply with section 524(g) and that the Sale Transaction improperly provides for the release of third parties, but this objection is overruled as to both issues because section 524(g) is inapplicable to a free and clear sale under section 363 and the Sale Transaction does not contain releases of third parties.  Such claims can still be asserted against the Debtors' estate.

There's far more to say about this issue than can be summarized in a blog post that only an insomniac at Zero Hedge can appreciate (as attested by the two redwells on my desk relevant to successor liability issues in bankruptcy, one stuffed with about 25 articles and the other with about 110 cases ).  Here, for example, is an overview of the successor liability issues, written last September after reading about an asset purchaser's claim that it had no responsibility to comply with the Simplicity crib recall. 

Suffice it to say, however, as touched upon in part in these two briefs filed with the Supreme Court by attorneys for some tort claimants, there are a number of decisions out there -- both state and federal -- holding that Section 363(f)'s reference to a sale "free and clear of interests" doesn't permit a court to enter an sale order "free and clear of claims."  As such, the argument goes, Section 363(f) can't be the basis for enjoining a tort claimant's well-established state law rights to assert successor liability claims under the "product line" and "business continuity" exceptions (and all the more so, even Professor Lubben would agree, for future claimants whose injuries arise or become manifest only after the sale).

And why should all this bother Justice Ruthie so much?  Well, maybe because an opinion deciding the seminal case that opened the door to this variation of the so-called "channeling injunction" against non-consenting tort claimants is in its final draft on one or more of the Justices' desks (maybe even hers given the way she pounced from the gate at oral argument before petitioner's counsel had gotten halfway through the second sentence of his opening remarks).  As explained in this neat little summary, the Court is on the verge of deciding Travelers Indemnity Co. v. Bailey, an appeal from the Second Circuit's decision in modern bankruptcy's first mega-case, In re Johns-Manville, in which the Second Circuit held that "while there is no doubt that the bankruptcy court had jurisdiction to clarify its prior [1986] orders [enjoining all third-party derivative claims against Travelers], that clarification cannot be used as a predicate to enjoin claims over which it had no jurisdiction [i.e., direct claims against Travelers by the asbestos plaintiffs that Travelers, as Manville's primary insurer, conspired with Manville to withhold knowledge of the ill effects of asbestos]."  Travelers Cas. and Surety Co. v. Chubb Indem. Ins. Co., 517 F.3d 52, 60-61 (2d Cir. 2008).

The implications of this decision are ginormous (an official word), to say the least, and in many ways the arguments in that case echo those made by the tort claimants in their objections to the Chrysler sale.  I think that's "what's bothering Justice Ruthie" and I think that's what prompted her to stay the sale above all else.

***

Thanks for reading, and please excuse the late night errors (though I don't think anyone on the sale side will be excusing this particular one)!  And a special shout-out to my favorite Judge Ruthie, the first to read my blog, who once met Justice Ginsburg at the National Women's Judges Conference and introduced herself as the "other Judge Ruth" and who I know joins me in hoping that Mom and Dad, of blessed memory, are enjoying this all from their perch!

Well it's official, and really no surprise:  Judge Gonzalez in this opinion (WL) approved the sale of Chrysler's assets in the Fiat Transaction "free and clear of liens, claims, interests and encumbrances."

Part I of my quick take on the opinion focuses on the most discussed elements of the case that have caused so much unnecessary heartburn (some caused, I admit, by my own three previous posts).  Here's my thoughts on a few of the key issues in the opinion that I touched upon in prior posts:

• Was it a sub rosa plan (as questioned here)?  The Court said no.  And I actually agree.  It's hard to argue something circumvents the chapter 11 plan process when the debtor wouldn't have survived long enough to be able to propose a plan in the first place.  Arguments that a sale is a sub rosa plan make sense when the debtor can survive to confirmation; they are irrelevant where the debtor can't.

• Was the absolute priority rule violated (as questioned here)?  The Court danced around this issue pretty well, taking the position, well stated in this Credit Slips blog post, that "the allocation of ownership interests in the new enterprise is irrelevant to the estates' economic interests" and that "in addition, the UAW, VEBA, and the Treasury are not receiving distributions on account of their prepetition claims ... [but] under separately-negotiated agreements with New Chrysler ... [that are] not value which would otherwise inure to the benefit of the Debtors' estates." 

Everyone cares about the retirees' medical claims under VEBA, but it's hard to see why this group should get any consideration from the New Chrysler since they will provide no value to the new enterprise.  Moreover, it's quite common in bankruptcy cases (see In re UAL, discussed here) for the current employees to leave the retirees hanging out to dry precisely because they'll provide no value to the new enterprise and the existing employees want to retain whatever benefits they can eke out for themselves.  To this limited extent, therefore, perhaps the flow of consideration does violate the absolute priority rule.  The auto workers union is obviously a tighter and more cohesive group, however, and they refused to do what their comrades in the pilots union did to the retiree pilots, thus enabling the Court here to find that the "unprecedented modifications to the collective bargaining agreement, including a six-year no-strike clause" were sufficient to justify New Chrysler's assumption of obligations to all VEBA claimants, as demanded by the union.

• What are the rules of the game for "last-resort" lenders?  One thing I said in my 10 minute interview with Anthony Mason that didn't make it on TV was that "what goes around, comes around" (as the apparently not so old saying goes) and that here, the secured lenders were getting a taste of their own medicine, so it was hard to feel too sorry for them.  After all, in most bankruptcy cases, the existing secured lender is the lender of last resort, and it is the existing secured lender that takes the hard-line, "take it or leave it" position described by Judge Gonzalez that leaves everyone else gasping for air as it stuffs its demands down everyone's throat, including the court's.  Such practices, Judge Gonzalez tells us, are "troubling to some, but such is the harsh reality of the marketplace."  Further, as I was quoted in my 7 seconds of  fame, "the [governments'] providing the money, and they're the ones who are ultimately going to decide how that money's going to be spent."  And that's pretty much what Judge Gonzalez said, though far more articulately:

The absence of other entities coming forward to fund any transaction highlights the risk presented to distressed companies that are situated similarly to Chrysler.  Accompanying that risk is the lender's ability to dictate many of the key terms upon which any funding will occur.  The hard-fought "take it or leave it" approach that often drives the outcome of this type of negotiation is troubling to some, but such is the harsh reality of the marketplace.  Here, the Governmental Entities, as lenders of last resort, are dictating the terms upon which they will fund the transaction, thereby leaving the Debtors with few options.  Nevertheless, the usual marketplace dynamics play out and the Court applies the same bankruptcy law analysis.  Moreover, the Debtors' CEO testified that the demands from the Governmental Entities were not greater than that presented by other lenders, and in some aspects were not as onerous.... 

[T]he ordinary marketplace dynamic played out with respect to the lenders and whatever ability they had to dictate terms.   The fact that the lenders of last resort happened to be Governmental Entities did not alter that dynamic.  The Governmental Entities did not preclude other entities from participating or negotiating, they merely set forth the terms that they required to provide financing and the parties were either amenable to them or not.  Finally, as noted, the Governmental Entities had no obligation to fund the transaction and Chrysler and Fiat were free to walk away from the negotiations.

• Has the "Rule of Law" Been Withered (as questioned here)?  Maybe, as I'll discuss later in Part II, but not for the reasons the Indiana Pension Funds are arguing on appeal.  In fact, if anything, the following well-worn rules have been affirmed in this case:

  1.  You can't circumvent chapter 11's plan process when you can't even fund next week's payroll.

  2.  You can't violate the absolute priority rule if junior creditors necessary to the new enterprise get something out of the deal.

  3.  Lenders of last resort owe no duty to anyone but themselves and can dictate the terms of a plan or sale so long as the terms aren't unconscionable, which they aren't here.

More to follow, and thanks as always for reading!

Many thanks to the CBS Evening News production team for the call and the opportunity, and to the TV House in Chicago for a cool, comfortable setting in which to give the interview.

5/28/09 Update:  Make that about 7 seconds.  Eight more to go.

***

And special thanks to Charles Osgood for including me in his 5/29/09 broadcast.  I well remember the one time I met him when I was fresh out of college and working part-time for the CBS News / NYT Poll during the 1980 presidential election, and he was, as he always has been, the consummate gentleman.

Todd Zywicki, the University Foundation Professor of Law at George Mason University's School of Law, has been a friend to me and this blog since very early in my blogging career back in 2005 when his first of many links to one of my posts on the Volokh Conspiracy blog multiplied my puny site visits by ten-fold.  His justification?  Polish bankruptcy lawyers always stand together!

Todd takes some pretty unorthodox views now and then, exhibiting what Professor Lawless called "cognitive dissonance" in testimony before Congress when he extolled the newly-enacted BAPCPA bill as "perfect" and "well-calibrated."  You did have to wonder though whether Todd was arguing simply because he really likes to argue!

While his backing of BAPCPA may not have been one of his shining moments, his passionate op-ed piece in yesterday's Wall Street Journal entitled Chrysler and the Rule of Law is.  In it, he articulates what has disturbed a lot of people in the business and financial community about the heavy-handed manner in which the Chrysler sale was jammed down the senior lenders by the Obama administration (as this phenomenal piece of journalism by the WSJ's Jeff McCracken and Neil King proves).  Todd wrote:

The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors -- entitled to first priority payment under the "absolute priority rule" -- have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

The absolute priority rule is a linchpin of bankruptcy law.  By preserving the substantive property and contract rights of creditors, it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress.  Chapter 11 promotes economic efficiency by reorganizing viable but financially distressed firms, i.e., firms that are worth more alive than dead.  Violating absolute priority undermines this commitment by introducing questions of redistribution into the process.  It enables the rights of senior creditors to be plundered in order to benefit the rights of junior creditors.

The U.S. government also wants to rush through what amounts to a sham sale of all of Chrysler's assets to Fiat.  While speedy bankruptcy sales are not unheard of, they are usually reserved for situations involving a wasting or perishable asset (think of a truck of oranges) where delay might be fatal to the asset's, or in this case the company's, value.  That's hardly the case with Chrysler. But in a Chapter 11 reorganization, creditors have the right to vote to approve or reject the plan.  The Obama administration's asset-sale plan implements a de facto reorganization but denies to creditors the opportunity to vote on it.

By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses.  That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation.  In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election.  But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today? 

My earlier posts on Chrysler examined whether the Chrysler sale is tantamount to an illegal "sub rosa" plan or whether the "absolute priority rule" will kill the Chrysler sale, but with nowhere near  Todd's passion.  His views are resonating with many, including Jack and Suzy Welch, who are far from "speculators" or "Obama-bashers."  In their column last week in Business Week entited, A Bad Week for Business, they wrote:

Look, we don't know how the Washington-Detroit negotiations played out.  But the ease with which the large bank lenders appeared to cave to a pennies-on-the-dollar deal might suggest that TARP was involved; the government was wielding a big stick, and it wielded it in favor of the unions over the conventions of bankruptcy law.  Is such a radical upending of the economic system good for business confidence and capital formation?  It's hard to imagine how.

And so, we are beginning to feel afraid—very afraid.  We believe America needs to be more competitive than ever to get out of this recession.

It looks like not everyone agrees.

And so, with GM moving inexorably towards the Chrysler model of bankruptcy justice, as reported here, we bankruptcy professionals--lawyers, judges, and consultants alike--have to wonder, "whither the rule of law?"  Who knows, maybe there was something to that Thracymacus guy's view that "might is right" and justice is "the interest of the stronger," and that because "in a state the Government is the strongest, it will try to get--and it will get--whatever it wants for itself."

***

Special thanks to the incredible editorial cartoonists, Cox & Forkum, for authority to use the inset cartoon from this 2005 post entitled Backsliding.

***

6/05/09 Update:  See my analysis of the Chrysler Sale Opinion (Part I) here.

[6/09/09 Update:  See also my analysis of the Chrysler Sale Opinion (Part I) and (Part II).]

Well, the initial pleadings have been filed, and Chrysler's argument is essentially that it's a "dead man walking."  In it's opening memorandum of law in support of its motion to approve the sale, Chrysler argues that if the "sale" doesn't close on the accelerated timetable proposed, it will wither on the vine, resulting in "a rapid and severe loss of value."  (Mem. at 10).  Surprisingly, though, Chrysler's opening memorandum doesn't squarely address the issue laid bare in my previous post and in the preliminary objection of the dissident lenders; that is, why isn't the proposed transaction a sub rosa plan of the kind prohibited under the law of the Second Circuit?

In dancing around this question, Chrysler's lawyers submit a two-pronged response, arguing that the transaction should be approved because, first, Old Chrysler is receiving "fair consideration" in the transaction and, second, Chrysler's going concern value will be preserved, jobs will be retained, and an extensive network of independent dealers and suppliers will live to see another day.  Chrysler's opening memorandum of law, however, does not address the important question of why, absent the consent of the dissident lenders, 65% of the equity in New Chrysler should go to junior creditors in satisfaction of their respective claims against Old Chrysler while the claims of senior dissenting lenders go unpaid?

One thing's for sure, Chrysler's (and soon GM's) court battles will afford us a rare opportunity to witness one of bankruptcy law's most fundamental questions being litigated in the highest stakes battles of all time, that being:

When does the "absolute priority rule" (compare FRB-Cleveland's strict construction of the rule back in 1996 here with the Administration's position today), which establishes a hierarchy of recovery rights among creditor classes, take a back seat to the "fresh start," rehabilitative policy of chapter 11? 

Chrysler's opening memorandum touched upon this question by focusing on the US Supreme Court's classic pronouncement in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984), where the Court stated that the "fundamental purpose of reorganization is to prevent the debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources."  This principle, Chrysler argues, is paramount and (quoting NY's judicial patriarch, Bankruptcy Judge Lifland, in the old Eastern Airlines case) "all other bankruptcy policies are subordinated" to it.  (Mem. at 4).

Many, however, will surely disagree with Judge Lifland's statement from 20 years ago that all bankruptcy policies should be subordinated to the reorganization objectives of the Bankruptcy Code.  Indeed, even on a very practical level, as the authors of this 1997 article entitled "Chapter 11's Failure in the Case of Eastern Airlines" note, such a policy is a failure:

Eastern Airlines' bankruptcy illustrates the devastating effect of court-sponsored asset stripping-using creditors' collateral to invest in negative net present value "lottery ticket" investments-on firm value.  During bankruptcy, Eastern's value dropped over 50%. We show that a substantial portion of this value decline occurred because an over-protective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear Eastern should be shut down. 

Relying on Bildisco to establish an unwavering rule of law is also risky because Supreme Court jurisprudence on bankruptcy matters is anything but a seamless web.  Indeed, Ken Klee points out in his remarkable new book, Bankruptcy and the Supreme Court, Justice Rehnquist once wrote to Justice Stevens:  "I do not feel that I am qualified to make any sort of exegesis on the meaning of the Bankruptcy Code."  (Klee, p. 48).

For those looking for some alternative Supreme Court pronouncements favoring the dissenting lenders, consider Raleigh v. Ill. Dep't of Rev., 530 U.S. 15, 24-25 (2000) (argued in victory by now Chicago Bankruptcy Judge Ben Goldgar), where the Court stated:

Bankruptcy courts are not authorized in the name of equity to make wholesale substitution of underlying law controlling the validity of creditors' entitlements, but are limited to what the Bankruptcy Code itself provides. 

Consider also these two important pronouncements in Howard Delivery Serv., Inc. v. Zurich American Ins. Co., 547 U.S. 651 (2006) (pdf) (discussed at length in this previous blog post), where Justice Ginsburg, writing for a 6-3 majority, stated:

In holding that claims for workers' compensation insurance premiums do not qualify for § 507(a)(5) priority, we are mindful that the Bankruptcy Code aims, in the main, to secure equal distribution among creditors. We take into account, as well, the complementary principle that preferential treatment of a class of creditors is in order only when clearly authorized by Congress.... (Id. at 655-56)

[W]e are guided in reaching our decision by the equal distribution objective underlying the Bankruptcy Code, and the corollary principle that provisions allowing preferences must be tightly construed....  Any doubt concerning the appropriate characterization [of a bankruptcy statutory provision] is best resolved in accord with the Bankruptcy Code's equal distribution aim.  We therefore reject the expanded [i.e., "plain meaning"] interpretation Zurich invites.  (Id. at 667) (citations omitted).

Let's also not forget an absolute favorite of Chicago's Chief Bankruptcy Judge Carol A. Doyle, Northern Pacific Railway Co. v. Boyd, 228 U.S. 482 (1913).  There, following the Panic of 1893, shareholders and bondholders combined in a proposed reorganization plan to transfer the debtor's assets to a new company that they would own, while freezing out the railroad's general unsecured creditors, whose priority fell between the bondholder and shareholder classes (proving, yet again, that the more things change, the more they really just stay the same).  The unsecured creditors argued (much like Chrysler's dissident lenders today) that the foreclosure sale contemplated by the plan "was the result of a conspiracy between the bondholders and shareholders to exclude general creditors" from the new company.  The trial court overruled the unsecured creditors' objection, holding that (as argued by Chrysler and the Administration today) because the debtor was insolvent and there was no value for unsecured creditors (or in this case, the dissident lenders), the unsecured are entitled to nothing.  The Supreme Court, however, reversed in a 5-4 opinion written by Justice Joseph Lamar (see 4/29/1913 NY Times article), in which he stated:

If the value of the road justified the issuance of stock in exchange for old shares, the creditors were entitled to the benefit of that value, whether it was present or prospective, for dividends or only for purposes of control.  In either event it was a right of property out of which the creditors were entitled to be paid before the stockholders could retain it for any purpose whatever. 

This conclusion does not, as claimed, require the impossible, and make it necessary to pay an unsecured creditor in cash as a condition of stockholders retaining an interest in the reorganized company.   His interest can be preserved by the issuance, on equitable terms, of income bonds or preferred stock.  If he declines a fair offer, he is left to protect himself as any other creditor of a judgment debtor; and, having refused to come into a just reorganization, could not thereafter be heard in a court of equity to attack it. 

Nowadays, collusive efforts to squeeze out the dissenting middle are often called "reverse cramdowns."  As noted in this previous blog post, the Third Circuit held that plans proposing such "reverse cramdowns" may violate the so-called "absolute priority rule."  More significantly, however, the Second Circuit in Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452 (2007), recently addressed attempts to squeeze out the middle in the context of a settlement that the debtor sought to have approved under Bankruptcy Rule 9019.  While the Court in that case approved the settlement, it provided critical guidance in gauging the authority of Judge Gonzalez to approve the proposed "sale" transaction in contravention of the requirements of the absolute priority rule.  The court stated:

Although the statute by its terms applies only to plans of reorganization, the Supreme Court has held that a settlement presented for approval as part of a plan of reorganization, because it constitutes part of the plan, may only be approved if it, too, is "fair and equitable" in the sense of conforming to the absolute priority rule.  See TMT Trailer Ferry, 390 U.S. at 424 ("The requirements . . . that plans of reorganization be both 'fair and equitable,' apply to compromises just as to other aspects of reorganizations.").  When a settlement is presented for court approval apart from a reorganization plan, however, the priority rule of 11 U.S.C. § 1129 is not necessarily implicated.  Without the requirement that pre-plan settlements conform to the absolute priority rule, only the bankruptcy court's invocation of Rule 9019 factors would protect the interests of any nonsignatory intermediate or impaired creditors.

In response to this concern, the Fifth Circuit held that the absolute priority rule should also apply to pre-plan settlements, concluding that "a bankruptcy court abuses its discretion in approving a [pre-plan] settlement with a junior creditor unless the court concludes that priority of payment will be respected as to objecting senior creditors."  United States v. AWECO, Inc. (In re AWECO, Inc.), 725 F.2d 293, 298 (5th Cir.1984).

The Fifth Circuit accurately captures the potential problem a pre-plan settlement can present for the rule of priority, but, in our view, employs too rigid a test....  Rejection of a per se rule has an unfortunate side effect, however: a heightened risk that the parties to a settlement may engage in improper collusion.  Thus, whether a particular settlement's distribution scheme complies with the Code's priority scheme must be the most important factor for the bankruptcy court to consider when determining whether a settlement is "fair and equitable" under Rule 9019.  The court must be certain that parties to a settlement have not employed a settlement as a means to avoid the priority strictures of the Bankruptcy Code.

[6/09/09 Update:  See also my analysis of the Chrysler Sale Opinion (Part I) and (Part II).]

"Be careful what you wish for," the old saying goes, and so too for those who wished for Chrysler to file for bankruptcy in order to achieve their objectives.  Chrysler and all its major constituents will argue that the house is on fire and absent a quick sale on the agreed-upon terms (well summarized in this Treasury release), 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 363 sale context.

So what's the risk for the proponents of the sale?  As Chrysler's own counsel at Jones Day wrote in this 2002 publication:

[U]nder certain circumstances a debtor may sell all or substantially all of its assets without making the sale part of a plan of reorganization. Where a chapter 11 debtor proposes to sell its assets or business "outside of a plan of reorganization," creditors are entitled to notice of the sale and an opportunity to voice any objections they may have with the court. However, the sale will not be subject to the same creditor disclosure and voting rights attendant to a sale as part of a plan of reorganization. Moreover, the proposed sale will be subject to the less exacting "business judgment" standard of review. For this reason, some courts refuse to approve a proposed sale outside of a plan of reorganization if it appears that the transaction is really a "sub rosa" or "de facto" plan because the terms of the sale will necessarily dictate the provisions of any future plan.

You don't have to be a bankruptcy maven to see from the face of the term sheet that the proposed sale dictates the provisions of a future plan of reorganization and sure has the feel of a "sub rosa" or "de facto" plan under which:

• Lenders with a first priority interest in Chrysler's assets will receive $2 billion, nothing more.
• The junior VEBA claimants will receive a $4.6 billion note payable over 13 years at a 9% rate of interest and additionally will receive 55% of the equity of New Chrysler.
• Unsecured trade payables of about $1.5 billion get paid in full.
• The US Treasury will receive 8% of the equity of New Chrysler as repayment of its $4 billion junior TARP loan while the Canadian government gets a 2% stake for its junior loans.

What's the governing law?  Well, since the case was filed in New York, the law of the Second Circuit Court of Appeals applies.  The latest pronouncement from the Second Circuit on whether 363 sales are disguised "sub rosa" plans came in Motorola, Inc. v. Official Comm. of Unsecured Creditors, 478 F.3d 452 (2007), where the Court wrote:

The trustee is prohibited from such use, sale or lease if it would amount to a "sub rosa" plan of reorganization.  The reason "sub rosa" plans are prohibited is based on a fear that a debtor-in-possession will enter into transactions that will, in effect, “short circuit the requirements of [C]hapter 11 for confirmation of a reorganization plan.”  Pension Benefit Guar. Corp. v. Braniff Airways, Inc. (In re Braniff Airways, Inc.), 700 F.2d 935, 940 (5th Cir. 1983).  In this Circuit, the sale of an asset of the estate under § 363(b) is permissible if the “judge determining [the] § 363(b) application expressly find[s] from the evidence presented before [him or her] at the hearing [that there is] a good business reason to grant such an application.”  Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983).

The Court noted in a footnote a "number of factors that a judge might consider when determining whether there is a 'business justification' for the asset's sale."  These factors include, but are not limited to, the following:

The best recent case I've seen analyzing whether a 363 sale is a disguised "sub rosa" plan is an unreported decision from Houston's fiery Judge Wesley W. Steen in In re Gulf Coast Oil Corp., 2009 WL 361741 (Bankr. S.D. Tex. 2/11/09) (pdf).  Judge Steen methodically reviews case law, articles, treatises, and even this story from the WSJ Bankruptcy Beat Blog, in drawing the following conclusion: 

"It would be very helpful if the Fifth Circuit were to take another look at the boundaries of § 363(b) sales to provide more guidance to the bankruptcy courts in the circuit. Under the existing jurisprudence;

• The debtor in possession or trustee in a chapter 11 case must consider its fiduciary duties to all creditors and interest holders before seeking approval of a transaction under § 363(b).
• The movant must establish a business justification for the transaction and the bankruptcy court must conclude, from the evidence, that the movant satisfied its fiduciary obligations and established a valid business justification.
• A sale, use, or lease of property under § 363(b) is not per se prohibited even though it purports to sell all, or virtually all, of the property of the estate, but such sales (or proposed sales of the crown jewel assets of the estate) are subject to special scrutiny.
• Parties that oppose § 363(b) transactions on the basis that they constitute a sub rosa chapter 11 plan must articulate the specific rights that they contend are denied by the transaction.
• Although the bankruptcy court need not turn every § 363(b) hearing into a mini-confirmation hearing, the bankruptcy court must not authorize a § 363(b) transaction if the transaction would effectively evade the “carefully crafted scheme” of the chapter 11 plan confirmation process, such as by denying §§ 1125, 1126, 1129(a)(7), and 1129(b)(2) rights.
• If the bankruptcy court concludes that such rights are denied, then the bankruptcy court can only approve the transaction if it fashions an appropriate protective measure modeled on those which would attend a reorganization plan.
• Transactions that explicitly release all (or virtually all) claims against the estate, predetermine the structure of a plan of reorganization, and explicitly obligate parties to vote for or against a plan are not authorized under § 363(b)."

Judge Steen's analysis provides a wonderful guide on how to analyze the strength of Chrysler's position.  In concluding that the debtor in that case did not meet its burden of establishing that the assets of the debtor should be sold outside of the context of a reorganization plan, he asks:

• Is there evidence of a need for speed?
• What is the business justification?
• Is the case sufficiently mature to assure due process?
• Is the proposed APA sufficiently straightforward to facilitate competitive bids or is the purchaser the only potential interested party?
• Have the assets been aggressively marketed in an active market?
• Are the fiduciaries that control the debtor truly disinterested?
• Does the proposed sale include all of a debtor's assets and does it include the "crown jewel" (noting that "the likelihood of approval of the § 363 sale is inversely proportional to the percentage of the value of the debtor's assets that are to be sold")?
• What extraordinary protections does the purchaser want?
• How burdensome would it be to propose the sale as part of confirmation of a chapter 11 plan?
• Who will benefit from the sale?
• Are special adequate protection measures necessary and possible?
• Was the hearing a true adversary presentation?  Is the integrity of the bankruptcy process protected?
• What other factors apply to the case at hand that tip the balance or that overweigh the evaluative factors set forth above?

Looking at the pleadings filed thus far in the Chrysler case, Chrysler's CFO lays out the business justifications for the sale at pages 38-41 of this affidavit in support of the first day pleadings.  In the end, however, the matter will be determined by the opinion testimony elicited from the parties' opposing experts (with Houlihan Lokey's Eric Siegert representing the dissenting lenders and Capstone Advisory Group's Robert Manzo, who prepared this 166 page first day affidavit / expert report, representing Chrysler).  Notably, Manzo concludes in his affidavit (pp. 26-27) that:

Based on the Liquidation Analysis, the First Lien holders are expected to recover between 9% and 38% of their claims, on a net present value basis, [which] translates into a range of between $654 million and $2.6 billion.  It is my professional opinion that given the market developments subsequent to this analysis, coupled with the limited success of other OEM effort to move individual car lines, the First Lien holders would likely recover at the low end of this range as part of any liquidation of the Company. The U.S. Treasury is only expected to recover between 3% and 6% of its claims.

In effect, Chrysler is arguing that the Court should not be concerned that other junior creditors are receiving value while senior lenders are not paid in full because absent such payment to the other constituent groups, Chrysler would be forced to liquidate and the senior lenders would do worse than they will under the proposed alliance with Fiat.  An additional supporting affidavit on the need to consummate the transaction with Fiat and the marketing efforts undertaken to sell Chysler was submitted by Tommy LaSorda (no relation to this guy), Vice Chairman and President of the Board of Managers for Chrysler.

Finally, never forget that in litigation, nothing is guaranteed.  Indeed, much depends on the judge drawn.  The judge overseeing this case is Judge Arthur Gonzalez, who proved here in the Enron case that he will adhere to what he believes the law requires, even if the financial markets turn upside down because of it.

So, who will win?  Really, only the true speculator and/or holder of Chrysler credit default swaps will (and perhaps Fiat if they--unlike their predecessors--can make it work), as my first post on the financial carnage at Chrysler demonstrates.  My guess is that after much briefing, discovery, and expedited litigation over the next 60 days, Judge Gonzalez will show enough angst to worry both sides that they stand to lose, thus resulting in a compromise that settles the matter and allows the transaction to go forward.  But with all Chrysler plants and operations now idled pending a final sale, the pressure to get the deal consummated and return people to work will be so overwhelming that it's hard to imagine Judge Gonzalez not approving the transaction in some form that's acceptable to everyone (except perhaps the dissenting lenders).

Good luck to all and thanks for reading!  Continue here to Part I - Assessing the Financial Carnage and here to Part III - Will the Absolute Priority Rule Kill the Sale?.

5/1/09 Update:  Special thanks to the following sites, some new, some favorites, who linked to this post:  

Calculated Risk, Volokh Conspiracy, The Wall Street Journal, Truth About Cars, Daily Bankruptcy News (the best daily collection of links to bankruptcy-related stories around), ABI Blog Exchange, Simoleon Sense, i-Stock Analyst, Fear and Greed, Underbelly, R

[6/09/09 Update:  See also my analysis of the Chrysler Sale Opinion (Part I) and (Part II).]

And so, with these fighting words by President Obama, Chrysler files for bankruptcy in the Bankruptcy Court for the Southern District of New York.  Clearly, we're in uncharted waters as never has the Office of the President become so engaged in the restructuring of America's largest businesses.  In supporting Chrysler's filing, a visibly angry President Obama came out swinging, stating:

A group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. I don't stand with those who held out when everyone else is making sacrifices. They were hoping that everybody else would make sacrifices and they would have to make none. We will use the bankruptcy laws to clear away remaining obligations. It will be designed to deal with the last remaining holdouts. It was unacceptable to let a small group of speculators endanger Chrysler's future by refusing to sacrifice like everyone else.

For his part, Congressman John Dingell, the longest serving member of the House, promised that “[t]he rogue hedge funds that refused to agree to a fair offer to exchange debt for cash from the U.S. Treasury – firms I label as the 'vultures' – will now be dealt with accordingly in court."

The secured debt holdouts didn't see things quite the same, obviously, and issued this statement justifying their holdout, saying:

[W]e offered to take a 40 percent haircut even though some groups lower down in the legal priority chain in Chrysler debt were being given recoveries of up to 50 percent or more and being allowed to take out billions of dollars. In contrast, over at General Motors, senior secured lenders are being left unimpaired with 100 percent recoveries, while even G.M.’s unsecured bondholders are receiving a far better recovery than we are as Chrysler’s first lien secured lenders. We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests. Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well-established legal framework and cannot be rationalized as being commercially reasonable.

So the petition is now filed.  Let's examine the carnage:

But in assessing the real carnage to existing claimants, one only has to look at the current balance sheet, filed with the petition, in which $52.6 billion in real liabilities are broken into the following categories:

• Trade and Related Payables:  $5.7 billion
• Accrued Expenses and Other Liabilities:  $33 billion
• Financial Liabilities:  $13.9 billion

With the plan presently on the table proposing basically an all equity plan, except for $2 billion to the senior lenders, a $4.6 billion note to the VEBA trust, and about $1.5 billion in trade payables and $4 billion in pension obligations assumed in the sale, we're talking about losses of about $40 billion in claim value and an additional $43.4 billion in equity value!

That's a summary, ugly as it is.  My next post will look at the proposed sale, one that will surely test the limits of chapter 11's 363 sale process as never before.

Finally, the most interesting of the first day motions is the so-called "critical vendor" motion.  Chrysler argues in this supporting memorandum of law that the payments of prepetition claims of vendors are justified regardless of whether the "necessity" doctrine or the stricter standard of the 7th Circuit in K-Mart is applied. Here's the motion seeking authority to make such payments to suppliers and dealers along with supporting affidavits of Chrysler's Chief Procurement Officer (Scott Garberding) and EVP-Manufacturing (Frank Ewayshyn) and affidavits from two independent dealers (John Schenden - Denver and James Arrigo - Florida).

Thanks for reading!  Continue here to Part II - Testing The Limits Of Section 363 Sales.  Here's Part III - Will the Absolute Priority Rule Kill the Sale?.

5/1/09 Update:  Special thanks to the following sites, some new, some favorites, who linked to this post:  

Calculated Risk, Volokh Conspiracy, The Wall Street Journal, Truth About Cars, Daily Bankruptcy News (the best daily collection of links to bankruptcy-related stories around), ABI Blog Exchange, Simoleon Sense, i-Stock Analyst, Fear and Greed, and Underbelly.

You can hear some of my comments in this latest podcast, just released today.  The interview starts at 6:16 minutes into the podcast.  Be sure to also listen to the fine introductory song, The Fear, by Britain's Lily Allen (full version and lyrics here).

Many thanks to Kathleen Brooks, David Kestenbaum, Laura Conway and the staff at Planet Money for the call and the opportunity to share some of my thoughts with others!

Well, to the delight of the ISDA, which filed an amicus brief in support of the appellant-purchasers of natural gas under various supply contracts with the debtor, the 4th Circuit yesterday reversed Judge Small and remanded with instructions that the Bankruptcy Court "allow the customers to attempt to demonstrate facutally and legally that their natural gas supply contracts were swap agreements based on the classification included in § 101(53B)."  Hutson v. E.I. du Pont de Nemours and Co. (In re Nat'l Gas Distribs., LLC), 2009 WL 325436 (4th Cir. 2/11/09) (pdf)

In reaching this decision, the 4th Circuit undertook to determine the meaning of "commodity forward agreements," and ultimately concluded that "the bankruptcy court in this case construed 'commodity forward agreements' too narrowly--i.e., by requiring that they be traded on an exchange and not involve physical delivery of the commodity."  In so doing, the 4th Circuit found:

• First, that "the Bankruptcy Code does not require that a 'forward contract' [which necessarily is narrower in scope than "forward agreements"] be traded on an exchange or in a market";

• Second, that the contracts at issue were not "simple supply contracts" because "they also were part of a series of contracts in which the customers hedged their risk of future fluctuations in the price of natural gas ... that were only a part of a larger risk management program in which the customers 'regularly use[d] forwards and other derivatives."

• Third, that while BAPCPA's legislative history, which Judge Small quoted, "does provide support for the notion that traditional supply agreements are not 'swap agreements' ... the conclusion that the contracts in this case are traditional supply contracts overlooks the fact that the contracts in this case contained real hedging elements ... [and thus] Congress did not preclude physical delivery in connection with a 'commodity forward agreement,' as defined in § 101(53B)(A)."

Notably, however, the Court "[did] not direct the bankruptcy court to find that the contracts in this case are 'commodity forward agreements' or 'swap agreements.'"  Recognizing that § 101(53B) "contains its own counterintuitive definitions, as well as inconsistencies," the 4th Circuit would not attempt to provide its own definition.  Instead, it "point[ed] to certain nonexclusive elements that the statutory language appears to require," those being:

• "Second, a forward commodity contract, in being 'forward,' must require a payment for the commodity at a price fixed at the time of contracting for delivery more than two days after the date the contract is entered into. Cf. 11 U.S.C. § 101(25)(A) (requiring the same of 'forward contracts'). A maturity date in the future means that the benefit or detriment from the contract depends on future fluctuations in the market price of the commodity."

• "Third, as a forward agreement in relation to a commodity, in addition to the price element, the quantity and time elements must be fixed at the time of contracting."

• "Finally, while the broad class of 'swap agreements' includes contracts that are readily assignable and therefore tradable, 'swap agreements' also include forward contracts, which are not necessarily assignable.

The 4th Circuit's citation to Morrison and Riegel's article, Financial Contracts and the New Bankruptcy Code: Insulating Markets from Bankrupt Debtors and Bankruptcy Judges, 13 Am. Bankr.Inst. L.Rev. 641 (2005), is most telling, for--as noted in my previous post on this case--Morrison and Riegel argued in their article that in BAPCPA's amendments to the definition of "swap agreements" and related sections, "judges are strongly discouraged from engaging in functional analysis of financial contracts."  In the end, the 4th Circuit did just that by focusing on four "nonexclusive" elements, none of which involve a functional analysis of the agreements at issue.  Guess this means Judges handling these cases, and their clerks, get to leave work earlier than before.

Thanks for reading!

What motivated Jon to commit himself to this public service?  Apparently, frustration!  Now while most lawyers let out their frustrations on some hapless administrative assistant or airline gate agent, not so Jon, who writes:

This book was born out of frustration.  Beginning several years ago, I noticed that more and more companies in need of a restructuring or sale could afford neither the time nor cost of a Chapter 11.  My frustration came from the fact that I, like so many other lawyers who focus their practices on the representation of parties in Chapter 11 and out-of-court workouts, simply did not have the same rich resources of information at my fingertips with respect to nonbankruptcy alternatives for distressed business as I did with respect to bankruptcy.

The need for a book like this was brought home to me when, in several deals, we decided that we likely needed an Assignment for the Benefit of Creditors, and likely had the ability to do one in any of several different states.  I needed to understand the pros and cons of each state's procedure.  I found that more information resided in the heads of a few people here and there than in any book.  I wanted a single volume that compiled relevant statutes from across jurisdictions.  I looked and looked, but there simply was nothing like that.  This book seeks to fill the void.

On this score, Jon is right.  Many state bar and continuing education associations have developed outlines covering a particular state's law and practice regarding ABC's (such as this excellent one covering ABC's in Illinois).  Bob Eisenbach also has neatly summarized in this blog post "the ABC option," with links to various excellent works (including Geoffrey Berman's 118 page practical guide, published by the ABI and now in its second edition, entitled General Assignments for the Benefit of Creditors: The ABC's of ABC's).  None, however, point to any comprehensive 50 state review of strategic alternatives to bankruptcy.

Jon's role in this project is as principal author and editor-in-chief (or as he humbly calls it, "Chief Logistics Manager").  DSI's Geoffrey Berman also lends his considerable talents as executive editor to the project.  26 other restructuring professionals from around the country (including such household names as Will Kohn, Carl Lane, Patty Redmond, and Nancy Ross) also joined to contribute to the 1,211 page treatise, which divides into the following sections:

• The second part of the book, which Jon calls "the trees," provides a 256 page "nuts and bolts guide" that focuses on one particular non-bankruptcy alternative in the following 14 states: CA, CO, CT, DE, FL, IL, IN, MI, MO, NY, OH, TN, UT, WI.  This section adopts the unique approach of positing a hypothetical fact pattern for an insolvent company (with enough value to provide a recovery for unsecured creditors) and having each state's contributing author–in Jon's words–"choose the best liquidation procedure available under the relevant state's laws [and] answer a series of questions about how the procedure would work."  There are 47 questions in total, including subparts.  They alone are an invaluable guide for any practitioner contemplating the benefits and burdens of any non-bankruptcy alternative for a distressed business.  Still, it's the answers provided by each contributing author's years of practical experience that make the book well worth its 12 cent per page price tag.  As an added bonus to those of you who've read this far, you'll find all the questions posed at the end of this post.

• The third part of the book, in Jon's words, "presents the leaves [in an] attempt to compile all the statutes across the 50 states (as well as relevant federal statutes) that speak to ABC's and ABC-like procedures."  This section also is extremely valuable for practitioners because, as we all know, the relevant state laws governing the liquidation and disposition of distressed businesses are not neatly bundled together in a single statutory scheme, but rather are scattered and buried across a broad regulatory and procedural landscape.  Jon and the West Publishing editorial staff have done an excellent job culling from each state's corpus the particular statutes and procedures relevant to ABC's and ABC-like procedures.

• The fourth part of the book contains the following indices:
  
  • a 40 page listing of all applicable federal and state laws with a cross reference to the section of the book where they are referenced;
  • a nine page alphabetical listing of cases cited in the book; and
  • an 11 page topical index, arranged alphabetically.

                 *                                      *                                        *

Summary and Conclusion:    Clearly, every restructuring professional should have ready access to Jon's treatise.  It is a giant leap forward, if not for mankind, then at least towards Jon's admirable goal of "filling the void."  Still, Jon readily admits, there's much more to be done.  In the works are additional chapters in the book's first section, including one covering state court receiverships and another providing investment bankers' perspectives on distressed businesses (i.e., those that presumably are not their own and otherwise lack access to TARP money).  Jon also hopes that by publishing this first edition, he will motivate other professionals in the 36 states not included in the book's state-by-state practical guide to come forward and offer to contribute a chapter to the treatise.  Anyone interested should email Jon immediately at jfriedland@lplegal.com.  I guarantee he'll respond before you have a chance to entertain any second thoughts.

What else can be done?  Here are some suggestions:

• Include a CD-ROM with relevant sample forms.

• Split the book, which already is about 3 inches thick and weighs nearly 4 pounds, into two volumes (one being the practice manual and the second being the selected statutes).  Alternatively, and even better, make it an environmentally-friendly loose leaf binder that can be updated without having to "throw out the baby with the bathwater," as the old saying goes.  West Publishing, however, seems to frown upon the loose leaf format, at least for bankruptcy-related books requiring annual updates.

• Provide a detailed table of contents that contains each chapter's subparts and subheadings.

• Include a comprehensive state-by-state index of relevant case law to match the excellent state-by-state index of relevant statutes and procedural rules.

• Add three more questions to make an even 50, such as:
  
  • Is federal or state bailout or stimulus money available?
  • Can a politician be paid to help?  (Note: this question is not necessarily limited to Illinois businesses)
  • What are the assignee's options when the business is a criminal enterprise?

Take a moment and order your copy now.  Given West's liberal review and return policy, what's the risk?  Plus, given the way things are going, it's likely the book will soon have several cracks in its spine.

Best wishes to all my readers for a healthy and happy 2009!

Steve Jakubowski

                 *                                      *                                        *

47 QUESTIONS THAT ADVISORS SHOULD ASK WHEN CONSIDERING STRATEGIC ALTERNATIVES FOR DISTRESSED BUSINESSES:

1. Name of the process?

2. Is the proceeding statutory or governed by case law?

3. What facts are required to establish jurisdiction for the procedure in the state?

4. Is the process available only to general business corporations, or may non-profits, insurance companies, railroads, financial institutions or other special entities liquidate using the process?

5. Is a court involved in the process and, if so, to what extent?

6. How is the liquidation process commenced?

7. How quickly can a liquidation and distribution of assets be completed?

8. Is there a minimum time period for creditors to filed claims in liquidation after a required notice?

9. What priority scheme, if any, provides for the distribution of assets?

10. Is a third party involved (e.g., as a receiver or assignee) and, if so:

a. What qualifications must that third party satisfy?

b. How is that third party selected?

c. Is there a process to direct the actions of the third party or to approve decisions made by the third party?

d. Who typically serves in the third party role?

e. What compensation may the third party receive, and by whom is the compensation paid?

f. What standard of care must the third party meet?

g. To whom does the third party owe a duty?

h. To what other risks is the third party exposed?

i. What protections are afforded to the third party by the governing law?

j. Does the third-party typically obtain insurance against potential liability or an indemnification from one or more parties involved in the process?

k. What powers does the third party have, such as:

i. To stay or otherwise defend lawsuits, foreclosures, eviction proceedings or other collection claims?

ii. To avoid preferential transfers, either voluntary or involuntary and to or for the benefit of insiders or otherwise?

iii. To avoid fraudulent transfers, either voluntary or involuntary and to or for the benefit of insiders or otherwise?

iv. To assert rights of existing or hypothetical secured or unsecured creditors?

11. Are the company’s assets insulated in any way from judgment liens, attachments, or other collection actions of a single creditor?

12. What filings with a court, government office, or other entity are required?

13. What notices must be published or posted to advise creditors of the process?

14. Is the consent of all or some portion of the creditors required to use the process?

15. Is the process available if no funds are likely to be distributed to unsecured creditors?

16. What type of professionals are likely to be retained during the process?

17. What other costs can be expected to be incurred as a part of the process?

18. How commonly is the process used?

19. What are the pros and cons of the procedure for each of the following parties:

a. Officers, directors, and controlling shareholders of the liquidating company.

i. Protections from lawsuits for breach of fiduciary duty?

ii. Likelihood of payment of trust fund taxes under the relevant priority scheme?

iii. Likelihood of avoidance of payments made to or for the benefit of insiders.

b. Secured creditors.

i. Ability to wipe out junior liens on the assets?

ii. Speed of liquidation of collateral and ability to have company finish work in process and otherwise achieve highest value for assets?

iii. Ability to recover preferential or fraudulent transfer made voluntarily or involuntarily by the company?

iv. Protection from lender liability claims by unsecured creditors or junior lienholders?

c. Unsecured creditors.

i. Speed of liquidation of assets and ability to have company finish work in process and otherwise achieve highest value for assets?

ii. Ability to recover preferential or fraudulent transfers made voluntarily or involuntarily by the company?

iii. Status under priority scheme, savings of attorneys fees in collection actions, and equality of distributions?

d. Judgment creditors.

i. Increased status under priority scheme?

ii. Possibility that any lien obtained via judgment or subsequent collection actions may be voided?

e. Employees.

i. Continued employment through the period of liquidation?

ii. Status under priority scheme for past wages and for those incurred during the liquidation process?

f. Guarantors.

i. Higher or lower recovery on guaranteed obligations?

ii. Ability to recover past transfers made by the company on guaranteed obligations?

          *                                  *                             *

I followed Lehman's free fall into bankruptcy through a number of posts in the first week of Lehman's case (start here).  Today, the Tribune Company performed its own spectacular free fall into chapter 11, taking not only itself down, but also another 111 subsidiaries (including The Chicago Tribune, WGN, The LA Times, KTLA. The Times Mirror, The Baltimore Sun, WPIX, and even forsalebyowner.com).

Like the Lehman chapter 11 filing, the Trib's filing was accompanied by none of the motions one would expect to see at the outset of the case (such as for approval of use of cash collateral and a DIP lending facility, payment of basic employee benefits for accrued and unpaid wages, maintenance of its cash management system and business forms, and assumption of various customer programs, all accompanied by an affidavit of a senior executive explaining the cause of the filing and the need for the requested relief).

My guess is that the senior secured lenders, led by JP Morgan Chase, as agent for a host of banks and hedge funds in an $8.571 billion senior credit facility (compared with stated total assets of $7.6 billion), are balking at management's business plan for the near- and long-term, and have been unable to reach agreement with management over the terms by which the Trib and its subsidiaries would have access to cash to fund operations during the case.  Given the widespread recognition that DIP lending facilities simply have dried up, this standoff comes as no surprise.  Until then, the Trib's operations will run on fumes supplied by the goodwill of its trade vendors and employees.

Here's the Tribune Company's voluntary petition, and here's the docket in the Trib's main case, which as of 5:30pm EST has a single entry, that of the petition.  Though the other 111 or so subsidiaries identified in the Trib's petition are listed as co-debtors, none of these entities have yet filed their respective individual petitions, thus potentially enabling three wily creditors of each subsidiary to really throw a wrench in the works by filing an involuntary petition against that subsidiary in a venue other than Delaware (where the parent Tribune Company filed its petition).

Most people in Chicago were appalled by last summer's dramatic changes to the layout of The Chicago Tribune.  I wonder what's going to show up tomorrow. 

Special thanks to Alex and NPR for the call and their plugging the blog!

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Rick B. Antonoff, BANCREDIT AND THE APPLICATION OF BANKRUPTCY CODE SECTION 108 IN CHAPTER 15 CASES, 26-JAN Am. Bankr. Inst. J. 48

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Cory Aronovitz and Jon Topolewski, CASENOTE: THE EMERALD CASINO FIASCO, 40 J. Marshall L. Rev. 1305

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Geoffrey L. Berman and Catherine E. Vance, STATE LAW PREFERENCE ACTIONS: STILL ALIVE AFTER SHERWOOD PARTNERS V. LYCOS, 26-JAN Am. Bankr. Inst. J. 24

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Bert Black and Robert L. Whitener, DIRECTOR LIABILITY FOR BAD JUDGMENT AND BAD FAITH, 43-JUN Trial 26

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C.R. "Chip" Bowles Jr., THE FIRST SMALL STEP ON A LONG JOURNEY: THE FINAL REPORT ON THE CHAPTER 11 PROFESSIONAL FEE STUDY, 26-JAN Am. Bankr. Inst. J. 16

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Timothy T. Brock, HOW THE ASSAULT ON OFFSHORE HAVENS IN BEAR STERNS UNDERMINES THE NEW CHAPTER 15: PART 1, 26-JAN Am. Bankr. Inst. J. 34

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Karen Codry, I MAY BE PARANOID, BUT THEY'RE STILL OUT TO GET ME: NEGOTIATINGTHE INTERFACE OF E-DISCOVERY AND CONSUMER PRIVACY, 26-JAN Am. Bankr. Inst. J. 10

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Richard J. Corbi, DOES THE SEC HAVE STANDING AS A CREDITOR?, 26-JAN Am. Bankr. Inst. J. 32

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Frank B. Cross, THE SIGNIFICANCE OF STATUTORY INTERPRETIVE METHODOLOGIES, 82 Notre Dame L. Rev. 1971

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H. Slayton Dabney Jr. and Richelle Eisendrath, WHEN HEDGE FUNDS COMPETE, 26-JAN Am. Bankr. Inst. J. 22

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Ryan Preston Dahl, COLLECTIVE BARGAINING AGREEMENTS AND CHAPTER 9 BANKRUPTCY, 81 Am. Bankr. L.J. 295

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Michael D. Fielding, PRACTICAL POINTERS FOR YOUR PRACTICE: BANKRUPTCY, ESI AND THE ATTORNEY-CLIENT PRIVILEGE, 26-JAN Am. Bankr. Inst. J. 52

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Julia Patterson Forrester, STILL CRAZY AFTER ALL THESE YEARS: THE ABSOLUTE ASSIGNMENT OF RENTS IN MORTGAGE LOAN TRANSACTIONS, 59 Fla. L. Rev. 487

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Shelby D. Green, TO DISCLOSE OR NOT TO DISCLOSE? THAT IS THE QUESTION FOR THE CORPORATE FIDUCIARY WHO IS ALSO A PENSION PLAN FIDUCIARY UNDER ERISA: RESOLVING THE CONFLICT OF DUTY, 9 U. Pa. J. Lab. & Emp. L. 831

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Andrew Gold, Sidney Swinson, and Ivan Reich, IN THE ZONE: FIDUCIARY DUTIES AND THE SLIDE TOWARDS INSOLVENCY, 5 DePaul Bus. & Com. L.J. 667

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Diana L. Hayes, BANKRUPTCY LAW: AN EXERCISE IN STATUTORY INTERPRETATION--STAYING TRUE TO THE BROAD AIM OF THE CODE OR IGNORING PLAIN MEANING AND PURPOSE?, 59 Fla. L. Rev. 697

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Melissa B. Jacoby, INDIVIDUAL HEALTH INSURANCE MANDATES AND FINANCIAL DISTRESS: A F
EW NOTES FROM THE DEBTOR-CREDITOR RESEARCH AND DEBATES, 55 U. Kan. L. Rev. 1247

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Michael Korybut, TEACHING SELECTED ETHICAL ISSUES IN BANKRUPTCY,  51 St. Louis U. L.J. 1317

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Stuart Larsen, NINTH CIRCUIT BAP TEACHES CREDITORS SOMETHING NEW ABOUT SECTION 503(B)(9) PRIORITY CLAIMS, 26-JAN Am. Bankr. Inst. J. 50

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Margit Livingston, CORPORATE GOVERNANCE: THE INS AND OUTS FOR DS AND OS, 5 DePaul Bus. & Com. L.J. 639

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Hugh M. McDonald, Todd S. Fishman, and Laura Martin, LAFFERTY'S ORPHAN: THE ABANDONMENT OF DEEPENING INSOLVENCY, 26-JAN Am. Bankr. Inst. J. 1

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Richard E. Mikels and Adrienne K. Walker, IN RE IRIDIUM OPERATING LLC AND ITS IMPACT ON SPM CARVE-OUT ARRANGEMENTS, 26-JAN Am. Bankr. Inst. J. 38

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Seymour Moskowitz, DISCOVERING DISCOVERY: NON-PARTY ACCESS TO PRETRIAL INFORMATION IN THE FEDERAL COURTS 1938-2006, 78 U. Colo. L. Rev. 817

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Hon. Geraldine Mund, APPOINTED OR ANOINTED: JUDGES, CONGRESS, AND THE PASSAGE OF THE BANKRUPTCY ACT OF 1978 PART THREE: ON THE HILL, 81 Am. Bankr. L.J. 341

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Lisa A. Napoli, REAFFIRMATION AFTER THE BANKRUPTCY ABUSE PREVENTION AND CONSUMER PROTECTION ACT OF 2005: MANY QUESTIONS, SOME ANSWERS, 81 Am. Bankr. L.J. 259

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Dr. Thomas L. Porter and Dr. Airat Chanyshev, UNITED STATES: THE SUBPRIME MELTDOWN: UNDERSTANDING ACCOUNTING-RELATED ALLEGATIONS (PART II OF A NERA INSIGHT SERIES), Mondaq ID: 55304

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Frederick (Fritz) Reed, Lee McCorkle, William (Bill) Schorling, HERE AND NOW: TRENDS IN THE D&O WORLD, 5 DePaul Bus. & Com. L.J. 705

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Jean R. Robertson and Karen A. Visocan, CONSIDERATIONS FOR NONPROFIT HEALTH CARE FACILITY DIRECTORS AND OFFICERS BEFORE FILING, 26-JAN Am. Bankr. Inst. J. 20

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Faten Sabry and Thomas Schopflocher, UNITED STATES: THE SUBPRIME MELTDOWN: A PRIMER (PART I OF A NERA INSIGHT SERIES), Mondaq ID: 50464

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Luis Salazar, DON'T FEAR THE CONSUMER PRIVACY OMBUDSMAN, 26-JAN Am. Bankr. Inst. J. 42

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Dr. Israel Shaked, Paul D'Arezzo and David Plastino, LIQUIDITY AND CONTROL: VALUATION DISCOUNTS/PREMIUMS AND THE BANKRUPT FIRM, 26-JAN Am. Bankr. Inst. J. 54

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Sharif A. Shivji, Anton Smith, and Adrian Walters, THE CROSS-BORDER INSOLVENCY REGULATIONS 2006: AN EMERGING JURISPRUDENCE, 26-JAN Am. Bankr. Inst. J. 40

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Carmel Sileo, SECOND CIRCUIT EXPANDS AUDITORS' LIABILITY FOR SECURITIES FRAUD, 43-JUN Trial 15

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Stephen C. Stapleton, A NEW STANDARD FOR RULE 12(B)(6), 26-JAN Am. Bankr. Inst. J. 18

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David P. Stromes, THE EXTRATERRITORIAL REACH OF THE BANKRUPTCY CODE'S AUTOMATIC STAY: THEORY vs. PRACTICE, 33 Brook. J. Int'l L. 277

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Deborah L. Thorne, NO GOOD DEED GOES UNPUNISHED: PROVISIONAL LIENS ON DEPOSITS, PREFERENCE LIABILITY AND UCC SECTION 4-210, 26-JAN Am. Bankr. Inst. J. 36

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Stephen J. Ware, “MEDICAL-RELATED FINANCIAL DISTRESS” AND HEALTH CARE FINANCE: A REPLY TO PROFESSOR MELISSA JACOBY, 55 U. Kan. L. Rev. 1259

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Jay Lawrence Westbrook, AVOIDANCE OF PRE-BANKRUPTCY TRANSACTIONS IN MULTINATIONAL BANKRUPTCY CASES,  42 Tex. Int'l L.J. 899

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Bruce H. White and Bryan L. Elwood, ARE YOU SAILING IN SAFE HARBORS? AN OVERVIEW OF SAFE-HARBOR PROTECTIONS, 26-JAN Am. Bankr. Inst. J. 44 

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Clifford J. White III and Thomas C. Kearns, BAPCPA UPDATE: DEBTOR AUDIT PROCEDURES AND THE REPORTING OF MATERIAL MISSTATEMENTS, 26-JAN Am. Bankr. Inst. J. 14

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