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

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."

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

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

© Steve Jakubowski 2009