The Role of Bankruptcy Code 363 Sales in the Chrysler and GM Bailouts

A 363 sale played a key role in the speed of the Chrysler bankruptcy (to date) and is also about to be used in the GM bankruptcy:

GM's decision to also file for bankruptcy in New York was key because it allows the automaker to engage in a section 363 sale of its good assets to the new GM, said Lawrence Young, a bankruptcy attorney and partner at Hughes, Watters Askanase LLP in Houston. That will allow it to avoid having to file time-consuming reorganization plans subject to voting and the approval of at least one class of creditors and move much more quickly.

It also will allow GM to sell its good assets to a new GM clear and free of liens, including pension and other retiree benefits, and liquidate bad assets over time.

"This jurisdiction, the second circuit, New York in particular, has done this frequently," Young said. "In other circuits it wouldn't be allowed."

That last line raised a red flag for yours truly. Fortunately, the Business Law Prof has posted an explanation of how a 363 sale works and why it's a bad idea. Here's his conclusion:

These 363 sales are, in essence, total cram downs without a vote.  The danger?  Managers sell the company cheap to reward themselves and their go along creditor buddies (read, the UAW and the government as debt holder here).  Bankruptcy judges, eager to avoid a year of hearings and decisions, and eager to "save" jobs of employees by keeping the company doors open, have a strong incentive to go alone.  In these cases, first Fiat and now a Chinese company (and the government itself in buying the "new GM") are getting too sweet a deal in these 363 sales.  In the government's case, the sweet deal is an avoidance of the difficult question of whether the "new GM" will survive - whether it should be thrown into a Chapter 7.  Taxpayers and unsecured, non-union creditors are taking the hit.  The bankruptcies should go through the full plan process.  Old time test procedures work -- new emergency reasons to avoid them are -- well, trouble in river city. 

Now go read the whole thing.

Update: Marshall Heubner reviews the SDNY's decision in the Chrysler bankruptcy 363 sale:

Among the objecting parties were: a group of pension funds from the State of Indiana (the “Indiana Funds”) objecting, inter alia, on the grounds that the Sale Transaction amounted to a sub rosa plan; certain Chrysler dealers objecting to the attempted rejection of their dealership agreements and arguing that state dealer protection laws are not preempted by the Bankruptcy Code; and various tort and consumer claimants objecting that their claims were not “interests in property” and that Chrysler’s assets could not, therefore, be sold free and clear of them pursuant to section 363(f)(5) of the Bankruptcy Code. Judge Gonzalez (i) distinguished a valid sale transaction under section 363 of the Bankruptcy Code (a “363 sale”) from a sub rosa plan, (ii) enforced contractual provisions that restrict a minority secured lender’s standing to object and (iii) ruled that tort claims are extinguished in a 363 sale. ...

This decision further undercuts sub rosa challenges, restricts individual secured lenders’ rights to object in bankruptcy and limits tort claimants’ rights to assert claims against the new owner of assets sold in a 363 sale.

Comments

[Randy]

See David Skeel on the same topic:

http://www.american.com/archive/2009/may-2009/why-the-chrysler-deal-would-horrify-a-new-dealer

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