The Involuntary Bankruptcy Solution to the Automaker (But Not AIG) Financial Distress Saga
With all the speculation swirling around about whether the automakers (or at least GM or Chrysler) will eventually file bankruptcy, we've all overlooked one pretty important thing. It's really not that hard to start involuntary bankruptcy proceedings against a company. And, when it comes to Chrysler or General Motors, NOBODY has.
Section 303 of the Bankruptcy Code requires only the following:
1. To file an involuntary bankruptcy proceeding under Chapter 7 or Chapter 11 [no, you can't do an involuntary Chapter 13 against an individual], the target company (or individual) must owe at least $13,475 in unsecured debt - THAT'S ALL!!! This amount is indexed and will increase from year to year, but for right now, that's the number.
2. If there are at least 12 unsecured creditors, then at least three (3) must join in the petition. If there are fewer than twelve creditors, then a siingle creditor is all that is required.
3. The unsecured creditors joining in the bankruptcy petition must have a claim that is not EITHER (A) "contingent as to liability"; or (B) "the subject of bona fide dispute". If you've got a judgment, you're definitely in, but if you're a trade creditor and there's been no stink about the quality of what you've delivered, you're probably still "good to go", even if you don't have a judgment yet.
4. There must be appropriate indicia of fincancial distress as demonstrated by EITHER
A. A state law custodian or receiver has been appointed in the preceding 120 days;
OR
B. The target company is not paying bona fide debts as they come due.
That's basically it. For those wondering why this wouldn't also work for AIG, the answer is that Section 109 of the Bankruptcy Code (when read in conjunction with section 303) prohibits an involuntary bankruptcy filing against banks and insurance companies, primarily because there are other specialized insolvency proceedings for these entities.
It is of course possible that the Bankruptcy Court could require the posting of a bond by the petitioning creditors or by the target debtor (if it wants to regain possession of its assets), depending upon its view of whether the filing is frivilous or meritorious. And the target debtor does have an opportunity to object and dispute the filing or to decide just to convert the whole thing to a voluntary Chapter 11 filing. But the point is, it would be a start.... and no one seems to be biting.
Now, in real life, I usually try to discourage clients owed money from filing involuntary bankruptcy against another company. Why share whatever assets and cash flow exist with other creditors according to the bankruptcy priority scheme when you might be able to do better through the "squeaky wheel' theory of interaction? So maybe that's what's happening here too.
Or perhaps the automakers are still paying all of their debts in a timely manner? And so nobody actually has standing yet.
Generally, an involuntary proceeding works best when one is concerned about the activities of the management of the company or the possible dissipation of assets, either through legitimate activities by the target debtor, or as a result of less than honest behavior by those in charge. Now I'm not suggesting for an instant that anything shady is going on in the corporate suites in Detroit, but i have to think that at least some folks are getting a little worried about where the automaker managment is taking these companies and what may be a deterioration in value of their assets.
So, again I come back to the question: if so many people think GM and Chrysler should be bankruptcy, why hasn't anyone actually done something about it? And why NOT?
I don't have an answer - I just think it's an interesting question.
