GM Will Be Navigating an Unusual Bankruptcy Process
With the GM bankruptcy filing apparently about a week away, it is interesting to listen to this Bloomberg podcast from January 15th, 2009 with Harvey R. Miller, partner at Weil Gotschal & Manges LLP, James Sprayregen, a partner at Kirkland & Ellis LLP, Larry Gottlieb, a partner at Cooley Godward Kronish LLP (a specialist in retail bankruptcy), Richard Allen Posner, a judge at the U.S. Court of Appeals for the Seventh Circuit (one of the most visible and frequent writers on legal matters), and Thomas Moers Mayer, a partner at Kramer, Levin, Naftalis & Frankel LLP.
Lasting about 47 minutes, I was riveted by the whole discussion on how much the bankruptcy code has been amended since the current re-write dating from 1979. Many of those amendments have limited the discretion of bankruptcy judges. Miller in particular thought it was dangerous and not in the company’s or the economy’s best interests to have that discretion limited because more cases lead to Chapter 7 liquidation more often, retailers in particular.
Perhaps the most interesting theme to emerge is the notion that the judge’s hands are largely tied, and there are no disinterested parties today in the Chapter 11 process. One of the speakers even noted that due to credit default swaps you often don’t know which creditor has what economic position in the bankruptcy. It doesn’t have to be disclosed fully, so the meetings of cthe creditors sometimes look like a forum for settling the values of credit default swaps.
Harvey Miller is representing GM in bankruptcy court, the others are noted practitioners of the Chapter 11 practices at their firms.
Interesting moments happen at about minute 2, when Harvey Miller points out what’s different this time is that Chapter 11s used to flow through the economy sequentially, this time all sectors of the economy have collapsed at the same time. Worst, the funders of reorganizations, the banks and those providing DIP (debtor in possession) financing, essential for starting the whole Chapter 11 process are among the worst hit. We need capital to grease the wheels of the re-organization process and because of the financial markets collapse it is expensive and hard to come by. Hence the necessity for the government to step in for GM.
Another interesting topic comes up at about minute 26, when the question turns to whether the government prime (step ahead of) secured creditors that are lien holders. Liens have traditionally been viewed as property and the question is raised can secured creditors use the takings clause of the Fifth Ammendment as a defense against being “primed” by the government. Great discussion but the answer seems to be, “no.”
