Speed of GM, Chrysler bankruptcies invoke awe in legal industry

Submitted by Jen Jones on Wed, 07/08/2009 - 2:30am

Speed of GM, Chrysler bankruptcies invoke awe in legal industry

The bankruptcies of General Motors and Chrysler have created a buzz in bankruptcy law circles because of their rapid movement through the court system. The sale of GM was formally approved on July 5, marking the nation's birthday by giving court approval to one of its favorite corporate sons.

Both the GM and Chrysler bankruptcies sped through the courts in under 45 days with the help of sell-off strategies largely orchestrated by the US government. Countless legal professionals did not think this sort of time-frame was possible, especially with companies as complex as two of the world's largest car manufacturers. As a result, law students nationwide will have a new topic of study come next semester.

General Motors was sold by the powers of Section 363 of the federal bankruptcy code. The guidelines of this segment of law are most commonly used to dispose of unneeded company assets, such as specific factories that have suffered diminished usefulness.

Washington's presence in the bankruptcy decisions should not go un-discussed, however. Many of the legal entities hired to handle the cases felt somewhat powerless under the guiding hand of the Obama administration, which was responsible for a good deal of the pre-court negotiations. The pace at which the filings were handled was also encouraged by the recession, as many believed a prolonged battle over such an immensely influential business would have serious effects on a down market.

For creditors, these two cases now mean the debt collection game has been changed. Should more bankruptcies follow the same path, the window of opportunity for creditors to collect what is owed will close much sooner than before, hampering their ability to get a say in how proceeds are distributed. Again, the government's lending of so much money put it in the driver's seat, rendering smaller collectors all but invisible to the presiding judges.

The situations caused obvious resentment from attorneys who represented GM bondholders owed millions of dollars. In fact, one attorney challenged the court to defy the federal government imposed deadline for completion in favor of a more traditional approach, which would have taken many more weeks.

President Obama went so far as to say the pressure put on the courts to expedite the bankruptcy proceedings was due only to the nature of the companies' collective impact on the rest of the country's workforce. However, you can't shut the lid on Ms. Pandora's box. Now, many in the legal profession believe there is reason to approach the bankruptcies of other companies in the same manner.

In approving the GM plan, the bankruptcy judge cited the cases of Lionel (the toy company) and United Airlines as examples of how Section 363 can be used to quickly sell a company as part of a bankruptcy plan. However, both cases took more than three years and did not involve taxpayer money.

There were several challenges along the way that were pushed aside. Actions in the Chrysler sale, like a ruling against a number of pension holders from Indiana trying to block the sale, established reasoning to ignore similar stances in the GM proceedings.

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