[6/9/09 Update: See Part II of my analysis of Judge Gonzalez’s sale opinion here.]
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!
© Steve Jakubowski 2009