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Posted on May 30, 2009 by Teri Rasmussen

363 Bankruptcy Sale FAQ - What You Need to Know to Understand What's Going On with Chrysler and GM

I've been writing a lot lately about the Chrysler bankruptcy and will probably be writing a lot more about the GM bankruptcy to come (it's happening Monday - mid-day press conference in NYC). As a creditor oriented bankruptcy attorney in a Michigan based firm with more than twenty plus years of experience, I just can't help myself - this really is the biggest thing to come down the pike in my professional life as far as actual relevance to the real world. I've even written a fair amount about the 363 sale process itself -- and for those of you wanting more detail about how all this works, please visit -- but I thought it might be helpful to address the basic questions about 363 sales in general (and with respect to Chrysler and GM in particular) in one place with, hopefully, a minimum of legalease...

1. What is a “363 sale”?

It is a sale of assets in a bankruptcy case, generally in a Chapter 11 reorganization, so named because of the section of the Bankruptcy Code dealing with the procedure. A discrete asset or assets, such as a particular piece of equipment or parcel of real estate, may be sold pursuant to 11 USC §363, or, especially recently, several bankruptcy courts will authorize a sale including all, or substantially all, of the bankrupt company’s assets. The assets will be conveyed to the purchaser free and clear of any liens or encumbrances. Those liens or encumbrances will then be attached to the net proceeds of the sale and paid as ordered by the Bankruptcy Court.

2. What is the purpose of a 363 sale?

According to the legislative history, the purpose of section 363 of the Bankruptcy Code is to “define the rights and powers of the [bankruptcy] trustee [or Debtor] with respect to the use, sale, or lease of property and the rights of other parties that have interests in the property involved.” It permits the disposition of assets of the bankrupt company outside the ordinary course of business

3. What is the process for a 363 sale?

The bankrupt company (known as the Debtor or Debtor-in-Possession) or bankruptcy trustee in chapter 7 cases must file a Motion with the Bankruptcy Court in which the case is pending seeking the Bankruptcy Court’s approval of the terms and conditions of the proposed sale. Opponents of the proposed sale will have a designated response period determined by the pertinent Bankruptcy Court (often 10 or 20 days) in which to file written objections to the proposed sale. Frequently, although not always, this time period will be shortened considerably and be little more than a few days.

The Bankruptcy Code then requires “notice and a hearing” on the Motion at which each side can present its argument. Although an “actual” hearing is not required, typically there will be one. Then the Bankruptcy Judge considers the arguments made and either approves the sale as outlined by the Motion or denies approval. If the sale is approved, then the Debtor will proceed with making it a reality.

4. What is the timeline for a typical 363 sale?

A 363 sale may take anywhere from a few days to several months to complete, depending upon whether there is opposition to the sale and how many parties are interested in purchasing the assets being offered. Generally speaking, the process can be completed in a few weeks.

5. What information does the motion seeking approval of a 363 sale have to contain?

The Motion or exhibits attached to it must provide detailed information about all of the essential terms and conditions of the contemplated sale, including the identity of the prospective purchaser, purchase price, assets to be sold, and the like. Frequently, the actual Purchase Agreement between the Debtor and prospective purchaser (sometimes referred to as a “stalking horse”) is attached to the Motion as an exhibit.

Generally, the Motion will also contained specific detailed provisions regarding the timing and manner applicable to the submission of any competing offers for the assets to be sold.

It is also possible that the Motion will simply seek approval of a auction or other sales procedure to determine who the successful purchaser will be.

6. What are the requirements for approval of a 363 sale?

The Bankruptcy Court must determine:

Whether the terms of the sale constitute the highest and best offer for the assets to be sold;
Whether the negotiations concerning the terms and conditions of the proposed sale were conducted at arm’s length;
Whether the sale is in the best interests of the bankruptcy estate and its creditors
Whether the purchaser has acted in good faith and the sale itself is being made in good faith [we’re big on “good faith” in bankruptcy law]

Unless the answer to all of these is “yes”, the sale will not be approved. In addition, there are several other requirements designed to protect the interests of creditors who have previously been granted lien on the assets to be sold as collateral for loan or other credited previously given to the Debtor. Essentially, if the purchase price is not enough to pay all of these creditors in full, the sale cannot be approved over the objection of the creditor unless applicable non-bankruptcy law could force the creditor to accept the situation. Because junior lienholders sometimes do not get paid in state court foreclosures, it has been generally assumed that this requirement can be met fairly easily.

7. Who decides whether a 363 sale is appropriate?

The bankruptcy judge presiding over the case will determine if the requirements for approval of a 363 sale have been met.

8. How is a 363 sale different from a plan of reorganization?

It is sometimes argued that the approval of a 363 sale of substantially all of a bankrupt company’s assets early in a bankruptcy will have the practical effect of deciding many important issues that would ordinarily arise in due course during the bankruptcy proceeding and be addressed as part of the plan confirmation process.

A sale of assets in bankruptcy can often be accomplished more quickly with a 363 sale rather than in the context of a plan of reorganization. A 363 sale requires only the approval of the Bankruptcy Judge while a plan of reorganization must be approved by a substantial number of creditors and meet certain other requirements to be “confirmed.” A plan of reorganization is much more comprehensive than a 363 sale in addressing the overall financial situation of the Debtor and how its exit strategy from bankruptcy will affect creditors.

Additional statutory protections for creditors and greater emphasis on valuation and feasibility of the post-sale business operations made possible by the sale also exist in the case of a plan of reorganization. In addition, there are also statutory notice periods entailing several weeks applicable to the plan confirmation process that cannot be shortened (other than possibly in the context of a prepackaged bankruptcy).

A proposed plan of reorganization is a lengthy and extremely detailed document which classifies the claims of various sorts of creditors into designated “classes” and then prescribes various “treatment” concerning how those claims will be dealt with. The Bankruptcy Code requires that the proposed Plan of Reorganization be accompanied by a “Disclosure Statement” similar in purpose and appearance with a prospectus used in the sale of stock and securities. The Disclosure Statement explains how the debtor came to be in bankruptcy and must provide "adequate information" about a plan and its implementation and consequences such that a hypothetical investor would be able "to make an informed judgment about the plan".

9. What is a “sub rosa” plan?

A “sub rosa plan” is what opponents of a 363 sale may call it if they believe the terms and conditions of the proposed 363 sale extend well beyond what they believe is the meaning and purpose of Section 363 of the Bankruptcy Code. The argument here is that except in the context of highly perishable goods, a sale of substantially all of a company’s assets must only be done in the context of, and with the protections of creditors inherent in, the plan confirmation process and a 363 sale is intended only for more piecemeal disposition of assets.

10. What happens to creditors after a 363 sale occurs?

Once a 363 sale has been consummated and the purchase price paid, the bankruptcy court will decide how the proceeds of sale are allocated among secured creditors with liens on the assets sold. In the event additional proceeds exist, they will be allocated to unsecured creditors and other claimants in accordance with the statutory provisions of the Bankruptcy Code.

11. What is a “stalking horse”?

A “stalking horse” is the initial prospective buyer willing to set forth specific price and terms for the purchase of the bankrupt company’s asset or assets. The prospective purchaser usually negotiates for payment of a break-up or topping fee to it in the event it does not wind up being the approved purchaser to ensure that any competing bid is meaningfully more valuable to the bankrupt company.

12. What is a “topping fee” or “break-up fee”?

A “topping fee” or break-up fee” is a specified amount to be paid to a stalking horse in the event that it is not the successful bidder for the assets. The theory is that it will compensate the stalking horse for certain “due diligence” it undertook and ensure that any competing bid is meaningfully more valuable.

13. What are “bidding procedures”?

“Bidding Procedures” are the procedural rules proposed by the Debtor concerning the process and form by which offers for the asset or assets to be sold should be made by parties other than the “stalking horse”, if any. They are often included as part of the 363 Motion as a means of keeping the process orderly and avoiding chaos, but are sometimes seen by other prospective purchasers as designed to chill competing offers by imposing onerous procedural requirements.

14. What is a “credit bid”?

A “credit bid” occurs when a secured creditor can bid up to the amount of the debt owed it by the Debtor for the purchase price of the assets to be sold without having to come out of pocket for any actual cash. The difference between the amount owed and the credit bid will then become the amount of the lienholder’s unsecured claim.

15. Is there any recourse after a Bankruptcy Court approves a 363 sale?

An Order approving a 363 sale can be appealed either to the applicable U.S. District Court or the Bankruptcy Appellate Panel for the applicable U.S. Circuit Court of Appeals, if there is one. Certain statutory provisions have limited the ability of any successful appeal to unwind the transaction, but more recent cases have raised some questions about the proper interpretation of those provisions.

16. How are the Chrysler and GM bankruptcy 363 sales the same or different from the ordinary 363 sale?

The Chrysler and likely GM contemplated 363 sales are considerably more complex than a typical 363 sale and involve a number of other provisions adjusting relationships with various creditors such as dealers and suppliers that would more often be found in a plan of reorganization. They are also proceeding much more rapidly than would ordinarily be the case.

PREVIOUS POSTS ON THIS BLOG ABOUT CHRYSLER AND GM BANKRUPTCIES:

Posted on May 28, 2009 by Teri Rasmussen

Chrysler/GM Bankruptcy Quick Update - Essentially Stay Tuned

In case you're wondering what's happened to Chrysler, the answer is: we don't know yet. Here's a good Q&A prepared by AP about the whole Chrysler/GM mess that are very helpful in understanding what's happening . And here's a bit more slanted analytical approach to what's going on.

CHRYSLER

Some early news reports suggest that Chrysler's got in the bag as far as getting approval of its so-called 363 sale (if we were really paying any attention to the Bankruptcy Code, there's no possible way this involved a plan of action would qualify as a 363 sale, but at least in this case, this may be water over the dam by now). However we're now in Day Two of the hearing on the Sale Motion and expected to go late (which by the way is something I've always admired about bankruptcy judges - they are always ready to conduct hearings into well into the evening if the situation merits it... and it doesn't have to be a Chrysler or GM case for them to do it.)

For summaries of what's been going on with the Chrysler hearing , click here and here)

Some reports have the judge overruling everything as early as tonight (Thursday), but i don't really see that. At this point, it does appear likely that any ruling approving the sale would be immeidately appealed. So while the judge undoubtedly has a goodly portion of his desicion already written (there's probably two versions, one approving the sale and the other denying it), I'd expect him to wait at least until morning. Plus I'm not convninced the hearing won't go into Friday anyway. And notwithstanding all the hue and cry from Chrysler and its attorneys that TIME IS OF THE VERY ESSENCE and every moment 's delay is excruciatingly harmful, seems like Judge Gonzalex would want to be seen as really considering all the testimony he's heard. All of which suggests to me a weekend relase or possibly even a Monday morning release of his decision and opinion.

As far as GM, documents submitted to the SEC and news reports (also click here) suggest that its Chapter 11 filing won't come until Monday, but that GM may have made some headway with the bondholders..

For more on where things stand for GM, click here and here. GM seems to have been making a number of very sensible preparations lately for a company contemplating bankruptcy - it almost seems like they actually do have an overall plan which includes not just a strategy, but also the tactics to get there.

Lots could happen with GM in the next 72 hours or so. Whatever news reports you see or read or likely to be behind almost as soon as you see or hear them

But here's my very quick update on where things are on this. SO it's looking like MONDAY could be a VERY BIG DAY in all of this.

Tags: 363 Sale, Bankruptcy, Chapter 11, Chrysler, GM, General Motors, bankruptcy sale, hearing, objection, plan of reorganitzation

Posted on May 3, 2009 by Teri Rasmussen

EXTRA! EXTRA! Get Your Chrysler Bankruptcy Info Here!

When you think the Chrysler bankruptcy is one of the most intellectually fascinating things ever to come down the pike ('cept maybe the coming GM extravaganza) and there's more interest amongst the general public in the swine, aka H1N1, flu, you know you're a purebreed bankruptcy law wonk. For those of like persuasion or who just want a handy reference guide, here's the basic 411 on the Chrysler bankruptcy:

We must of course begin with the Chrysler's press release.
In what might be seen as a dry run for a GM filing in about a month, Chrysler LLC and many of its subsidiaries and affilated companies filed Chapter 11 bankruptcy on April 30, 2009 - which now becomes the "Petition Date", an important dividing line -- in the U.S. Bankruptcy Court for the Southern District of New York, Case No. 09-50002. After only one day, there were already more than 130 pleadings filed. By Sunday afternoon, the Court's docket sheet shows 189 pleadings.
- For those with PACER access, the Bankruptcy Court has established a separate URL for Chrysler pleadings
- For those without access to PACER, the case can be followed directly by visiting the Chrysler Restructuring website which contains a docket containing PDFs of all of the court pleadings, as well as press releases by the company, and information and FAQ for various sorts of creditors and stakeholders. For those living under a rock for the past few months, it also has this useful Chapter 11 Fact Sheet
The case has been assigned to Judge Arthur J. Gonzalez whose biographical information is available on the website for the U.S. Bankruptcy Court for the Southern District of New York. He joined the bench in 1995 and previously handled the bankruptcies of Enron and WorldCom simultaneously. For more information about Judge Gonzalez, click here.
Chrysler will be represented by the international law firm of Jones Day, headquartered in Cleveland, Ohio, led by Corinne Ball out of the firm's New York office. Click here for a recent interview with Ms. Bell.

Both AP and NYT provided helpful FAQ about the filing and its meaning.
For a very brief overview of key components in the Chrysler bankruptcy filing, visit, "Chrysler Says 38.000 Jobs Would Be Lost if Liquidated" at Bloomberg.com

The Chrysler bankruptcy petition is fairly unremarkable except that it includes identification of the Fifty Largest Unsecured Creditors instead of the usual Twenty Largest .
For those wanting an in-depth overview of how Chrysler sees the game plan, the Affidavit of Ronald E. Kolka in Support of First Day Pleadings is a "must'" read.
More than TWENTY "first day" motions were filed. Sparing you the long technical description, these essentially dealt with the following:
- Procedural
  - Joint Administration of bankruptcies of all Chrysler entities. Intended to increase efficiencies. Cases not "substantively consolidated" and debts and creditors of each entity remain separate. GRANTED
  - Reassurance regarding application of automatic stay and related provisions of Bankruptcy Code
  - Seeking permission to file consolidated list of Top Fifty Unsecured Creditors instead of each entity having to file their own Top Twenty
  - Appointment of Epiq Bankruptcy Solutions, LLC as Claims and Noticing Agent - basically an outsourcing of the procedural aspects of proof of claim filing and general noticing; very common in large bankruptcies
  - Seeking to extend deadline for filing bankruptcy schedules and statement of financial affairs '[d]ue to the substantial size, complexity and geographic reach of their operations and the press of business preceding the filing of these cases" -- very common in large cases; nornally these would be due within fifteen days after the Petition Date (or May 15, 2009).
  - Procedures for the assertion and resolution of claims involving recently delivered goods and reclamation claims
  - Compensation arrangements for professionals, i.e counsel for Chrysler and related professionals
  - Seeking expedited" hearing on "first day" motions
  - Establishment of case management and scheduling procedures
  - Retention of counsel and other professionals for Chrysler
  - Permission for Jones Day attorneys not admitted to practice in New York to participate in case
- Commercial Relations
  - Payment of prepetition wages and benefits of employees to some extent
  - Honoring warranties and similar obligations
  - Continuation of workers' compensation programs
  - Reassurance of administrative priority for obligations incurred AFTER the Petition Date
  - Continuation of utility services - OBJECTION to Motion has been filed
  - Payment of prepetition obligations to certain "essential' suppliers
  - Payment of certin prepetition obligations to lienholders such as shippers, warehousemen, custom brokers, tooling suppliers, and artisans and repairmen
  - Payment of certain prepetition taxes
  - Provision of adequate protection to parties holing production tooling to allow revovery of same by Chrysler
  - Rejection of certain real estate leases in California, Hawaii, Indiana, Louisana, Michigan, New York, and Texas
- Business Operations
  - Permission to continue using cash management system
  - DIP finanancing
Here's a wrap-up of Friday's hearing.
The United States Treasury issued this press release (and the White House issued an identical press release) describing the government's view of the proper exit plan for Chrysler
The Am Law Daily takes a look at the holdout secured creditors.
A media teleconference presented by the American Bankruptcy Institute can be heard by clicking here and following instructions

Chrysler 'first day" motion hearing Round II kicks off on Monday, May 4, 2009 at 10 AM; spectators may use this handy agenda prepared by Jones Day to keep up

Chrysler has filed the expected 363 motion seeking to sell its viable assets to Fiat.. Attached to the Motion is a 96-page Purchase Agreement There is also a 40-plus page Memorandum of Law setting out the basis for the Motion. In addition, there is a Declaration of Bradley A. Robins in Support of the Sale of the Debtors' Assets to New Chrsyler has been filed. This is essentially a valuation support to support the proposed purchase price to be paid by Fiat. Hat tip to Burbage Waddell which also provides this summary of the "fairness" opinion

>>>> and finally, some interesting commentary from some of my fellow bloggers:

Stephen Sather of A Texas Bankruptcy Lawyer's Blog focuses on the terms of the sale to Fiat as outlined by the U.S. Treasury in "Chrysler Seeks the Ultimate 363 Sale as the Treasury Department Dictates the Pace"
Steve Jakubowski of The Bankruptcy Litigation Blog has a terrific two part analysis - first "Assessing the Financial Carnage" which looks at the creditors overall and then"Testing the Limits of Section 363 Sales" which focuses more specifically about whether a 363 sale outside the boundaries of a plan is really appropriate.

UPDATE: After a three day hearing which extended into the evening each day, closing arguments were made late Friday afternoon and early evening. Judge Gonzalez is expected to give his ruling regarding the 363 sale sought by Chrysler on Monday morning, June 1. It is likely that whatever the ruling, it will be immediately appealed. And yes, Monday is also the day GM is expected to file its Chpater 11 petition. BIG BIG day for all of us bankruptcy nerds!!

For more information about 363 sales, visit my post 363 Bankruptcy Sale - What You Need to Know to Understand What's Going On with Chrysler and GM

UPDATE (6/1/09) Late Sunday night, judge Gonzalez issued an opinion approving the proposed sale.

Posted on April 25, 2009 by Teri Rasmussen

Why GM Will -- or at Least Should -- File Bankruptcy in Michigan

Lately everyone has stopped talking about IF General Motors will file bankruptcy. Instead speculation has moved on to WHERE it will happen. (Click here and here for more speculation.)

It’s not like you can file just anywhere you want. Under 28 United States Code section 1408, a company can file ONLY in the following places:

Where their principal place of business is
Where the company was incorporated or formed
Where an affiliate or subsidiary has already filed bankruptcy

For GM, these choices boil down to:

Michigan where its headquarters and many other operations are located
Delaware where it is incorporated
Possibly New York if it has an affiliate or subsidiary located there

So let’s look at how these stack up.

Michigan

Michigan is the most obvious choice when one thinks about GM and where its business emanates from. Michigan's Attorney General has even taken the unusual step of sending letters to the CEOs of both Chrysler and General Motors urging them to file bankruptcy in Michigan rather than New York or Delaware. However, in the overall worsening economy, Michigan bankruptcy courts are likely to see significantly increased filings even apart from a GM bankruptcy filing. That, together with the relatively less experience Michigan bankruptcy judges have with “big” cases, might make the goal of a quickie “in and out” bankruptcy more difficult to obtain.

Delaware

Other things being equal, Delaware might well be the jurisdiction of choice, Its bankruptcy judges are very experienced in handling mega-cases, regularly handle cases with national and even international ramifications, and have tended to make many rulings favorable to debtor companies before them. As GM’s state of incorporation, Delaware falls squarely within the venue provisions. One drawback might be that Delaware does not have (or at least I couldn't locate) any specific local rules governing prepackaged bankruptcy. In addition, the governing law in the Third Circuit Court of Appeals (of which Delaware is a part) has fairly strict rules for breaking collective bargaining agreements.

New York

Like Delaware, the U.S. Bankruptcy Court for the Southern District of New York has bankruptcy judges with substantial experience in handling mega-cases of national importance. In addition, it has specific local rules governing procedures for prepackaged bankruptcies. In the past it has reeled in several large cases that would otherwise not have been filed there. However, while the lawyers GM has retained to assist it with a possible bankruptcy hale from NYC, New York is a bit of a stretch from a venue perspective. As others have also noted, only one of GM's many subsidiaries, and one fairly unrelated to its core business at that, is incorporated in New York.

>>>>>>> SO, assuming it's just too difficult to justify a filing in NYC, why choose Michigan over Delaware as the place to file a General Motors bankruptcy?

Well for one thing, it's like a death in the family. People in Michigan need closure. But if that's not enough, there's still...

ONE SIMPLE REASON -- Motion to Change Venue. Section 1412 of the United States Code provides:

A district court [28 USC 157(a) also gives bankruptcy courts the same authority] may transfer a case or proceeding under title 11 [the Bankruptcy Code] to a district court [and bankruptcy court in that district], in the interest of justice or for the convenience of the parties.

If General Motors chooses to file in Delaware rather than Michigan, it will be in for one heckuva a nasty fight over venue which will put the brakes on accomplishing anything else in the speedy manner whose importance has been so emphasized. And the stakes are so high, you can bet this one is going all the way up to the United States Supreme Court.

Whether the case gets transferred from Delaware to Michigan will be up to the Bankruptcy Judge in the jurisdiction General Motors has chosen to file (Delaware in our assumption). And the party seeking a change of venue does have the burden of demonstrating that a change should be made.

Nevertheless, consider the factors usually relied upon by bankruptcy courts in Delaware and elsewhereto decide whether a case should be moved to another bankruptcy court. A fairly recent Delaware decision (In re Buffets Holdings, Inc. , 397 B.R. 725 (Bktcy D. Del. 2008)), interestingly involving a motion to change venue to Michigan, enumerates the following factors as pertinent to determining what the interest of justice or convenience of the parties dictate:

plaintiff's [i.e. debtor] choice of forum
defendant's [i.e. creditors and parties of interest] forum preference
whether the claim arose elsewhere
location of books and records and/or the possibioity of viewing the premises if applicable
the convenience of the parties as indicated by their relative physical and financial condition
the convenience of the witnesses -- but only to the extent that the witnesses may actually be unavailable for trial in one of the fora
practical considerations that would make the trial easy, expeditious, or inexpensive
the relative administrative difficulty in the two fora resulting from congestion of the coourts' dockets
the public policies of the fora
the familiarity of the judge with the applicable state law
local interest in deciding local controversies at home

When one considers the place the auto industry holds in the Michigan economy and the numerous employees and retirees living there, it seems obvious that the case should unfold in Michigan. Now, I'm not saying an argument couldn't be made for Delaware, and perhaps even New York, based primarily on the experience of their bankruptcy judges with large cases. One might also argue that a Delaware bankruptcy court could be more objective than one in Michigan although one could also argue that the inate understanding of what a GM bankruptcy neans is precisely WHy it should take place in Michigan. All I'm saying is that if getting in and out really is a priority to General Motors, filing anywhere but Michigan is going to have the case tied up for weeks, if not months.

And the same goes for Chrysler...

UPDATE: Well they both wound up filing in NYC. Chrysler just got its sale approved although it appears there will be appeals. And GM, well,click here for details on its filing.

Tags: "bankruptcy, Bankruptcy, Chapter 11, Dicello, GM, General Motors, Michigan, New York, automaker, bankruptcy filing, change of venue, delaware, surgical bankruptcy, venue

Posted on April 18, 2009 by Teri Rasmussen

Two Week "Surgical" Bankruptcy for GM? REALLY!!!???!!!

Earlier this week The New York Times ran a story entitled "'Surgical' Bankruptcy Possible for G.M." . It suggested that the new plan being developed was for GM to be in and out of bankruptcy in TWO WEEKS!! REALLY!!????!! I didn't get off the boat yesterday.

I LOL (LAUGHED OUT LOUD for the uninitiated)!!!!!! It's a late April Fools joke, right? Two months maybe if everything went just so, but TWO WEEKS??? I don't think so.

GM continues to claim that a quick restructuring, preferably outside bankruptcy, is necessary so that its image and sales are not permanently damaged. NEWSFLASH!! GM's image and sales are already damaged - it has NOWHERE TO GO BUT UP!!!! In fact, bankruptcy might actually really help it do serious damage control.

One plan reportedly under consideration would essentially do a Bankruptcy Code section 363 sale. The idea would be to sell all the desirable "good assets" of GM to a newly created company, GM Newco, if you will. The less desirable assets would be left in the GM we know today (let's call it "old GM") and then liquidated, perhaps by converting the case to a Chapter 7. The "legacy" obligations such as pensions and health care costs would also be left in old GM; the idea would be that the funds received by old GM for the conveyance of the "good" assets to GM Newco would be used to pay only a portion of the obligations of old GM. The remaining portion would simply go unpaid, except to the extent paid by the Pension Benefit Guaranty Corporation which would be sorely challenged to fund this fully. Where would GM Newco get the money to do this? Probably from the taxpayers in the short run, although it would be possible to have the private sector buy new stock in GM Newco. Click here for a more detailed exp;lanation of how this would work.

I actually think this sounds like a pretty good idea and one which would allow GM to regoup and move forward as a company with some potential to become profitable again. I'm just extremely skeptical about the timeline being suggested.

Supposedly, the "creditors committee", which is an important force in any large (and even some not so mega) Chapter 11 case, would be formed prior to the filing and work on hammering out details before the filing occurred While that would certainly help speed up the time in bankruptcy, the creditors' committe only includes the very largest unsecured creditors and there's really no way to negotiate with every single creditor GM has before filing.

It only takes ONE objection to the contemplated 363 sale to slow things down. It seems virtually impossible to me that every single creditor will agree that the funds coming into old GM represents "fair consideration" for the assets conveyed to GM Newco. An objection on this basis would HAVE to be heard by the Bankruptcy Court and it seems to me that due process would require at least a modicum of time for preparation for this hearing by the party raising the objection.

There's also a question of how the legacy debts for pensions and contracts with labor unions would have to be dealt with. Section 1113 (concerning collective bargaining agreements) and 1114 o(concerning pensions) of the Bankruptcy Code might have something to say about that.

And at least some Bankruptcy Courts have refused to allow section 363 sales when they are tantamount to a Plan of Reorganization because they deal with substantially all or the core assets of a debtor. If you do have to go the plan route, there are statutory provisions in excess of two weeks that must be observed before a hearing can be held.

Others are skeptical too. Click here for another blogger's assessment of the challenges faced in making a two week "surgical" bankruptcy happen. And the WSJ is skeptical as well, especially about getting the bondholders on board. In a story entitled"A Risky Bankruptcy Loons for GM", David Welch of Businessweek mentions still other obstacles to be overcome.

Bottom line, there are just too many different constituencies, some of which it may not be possible, and certainly hardly feasible, to reach and interact with before the filing. If the proper groundwork is laid - and from the sounds of it, GM is finally almost out of denial about its options and ACTUALLY has started to explore the bankruptcy option in a meaningful way - two months would be an ambitious, but at least possible period of time to get through a prenegotiated (or as we're apparently calling it now, "surgical") bankruptcy. But TWO WEEKS - i just don't see how.

As for Chrysler, does it even have enough any "good" assets that it could do the same thing? Based on press coverage, not likely.

UPDATE: Well, both Chrysler and GM did file in NYC. For the basic info about GM's filing, click here.

Tags: 363 sale' , Bankruptcy, Chapter 11, GM, General Motors, automaker, bad GM, bondholders, good GM, prenegotiated bankruptcy, prepackaged bankruptcy, sale", surgical bankruptcy

Posted on March 25, 2009 by Teri Rasmussen

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;

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.

Tags: Bankruptcy, Chapter 11, Chrysler Corporation, GM, General Motors, automaker, automaker bailout, automaker bankruptcy, bailout, bona fide debt, creditor, debt, debtor, involuntary bankruptcy, unsecured creditor

Posted on March 7, 2009 by Teri Rasmussen

The Long and Winding Road of Chapter 11 Bankruptcy: A Typical Timeline

I'm not sure how good I feel about the fact that far too many people now actually understand what I do as a bankruptcy creditors' attorney here in Central Ohio. If I was unsure before about the truly distressing condition of the economy, the car ad I saw on TV the other day - which sought to induce viewers to purchase a car by telling them that if they lost their source of income over the next year, they would be able to bring the car back - removed all doubt. Then I heard this morning that the unemployment rate is the highest it has been in TWENTY-FIVE YEARS, which is to say AS LONG AS I'VE BEEN WORKING!! Which certainily puts things in perspective and leads to the further disturbing conclusion that for lawyers like me working for creditors in the bankruptcy law area, job security is probably somewhat better than for the rest of America.

Unfortunately, for the country as a whole, the number of businesses becoming familar with the mechanics of Chapter 11 of the Bankruptcy Code is likely to increase in the year ahead. Either one of their customers or vendors will be going through this or they themselves will become a Chapter 11 debtor-in-possession or DIP, for short.

In addition, there has been a great deal of discussion recently about prepackaged bankruptcy for Detroit's Big Three automakers as being a possible antidote to the problems associated with the lengthy time frames associated with the the usual Chapter 11 bankruptcy, To understand that, it's useful to consider the timelines generally associated with a Chapter 11 bankruptcy proceeding.

OVERVIEW OF EFFECT OF CHAPTER 11 FILING

So what actually happens when a business "goes Chapter 11"? In many cases, those not in the know about the particular financial condition of a business may not even know that the business has sought the protection of the federal bankruptcy laws. Companies in Chapter 11 bankruptcy are allowed to continue operating their business as before and from the customer perspective, the filing of the bankruptcy does not necessarily change the customer experience. However, it is the bankrupt company's vendors and suppliers that will notice an immediate difference in their relationships as various restrictions imposed by the Bankruptcy Code on the activities of the debtor company come into play.

Technically, everything grinds to a halt when a bankruptcy petiton is filed and the world - for that company (who has now become a Debtor-in-Possession or DIP), its employees, customers, and vendors - was now become divided into

"prepetition" involving claims arising and events occurring BEFORE the bankruptcy petition was filed AND
"post-petition" involving claims arising and events occurring AFTER the bankruptcy petiton was filed

Prepetition claims cannot be paid - and collection cannot be pursued against the DIP company - absent specific authorization by the Bankruptcy Court. Post petition claims can be paid in many instances if they arise in the ordinary course of the company's business and even if further authorization by the Bankruptcy Court is required, generally go to the head of the line of unsecured creditors as administrative claims.

OVERVIEW OF TYPICAL CHAPTER 11 TIMELINE

The U.S. Courts' website provides a great summary of the typical Chapter 11 process, as well as the Offical Forms to be used by the company filing bankruptcy. While there is no set timeline in a Chapter 11 (for an excellent visual representation of precisly how complicated things can get, look at the well known LoPucki's Bankruptcy Procedure Charts designed by UCLA law professior Lynn M. LoPucki) , some of the usual benchmarks might include the following:

ONE YEAR BEFORE PETITION IS FILED - "Preference" period for "insiders" begins

NINETY DAYS BEFORE PETITION IS FILED - "Preference" period for noninsiders begins

PETITION DATE ("P") - Day that Chapter 11 VOLUNTARY Bankruptcy Petition is filed (Assume this is January 1, 2009)

Bankruptcy Petition is only a few pages and easy to complete
Must also include Creditor Matrix - list of names and addresses of all creditors
List of Credtiors Holding 20 Largest Unsecured Claims must also be filed.
Numerous "first day" motions filed (different ones in different cases), including motions for
- Appointment of Debtor's Counsel
- Appointment of other professionals being retained by Debtor (CPA, etc.)
- Payment of prepetiton employee wages and benefits
- Interim financing
- Interim use of "cash collateral", i,e. proceeds generated from collateral on which a creditor has a lien
- Authorizing honoring of Prepetiton Obligations to Customers in the form of warranties or gift certificates
- Ensuring uninterrupted use of utlities
- Extension of time to file bnakruptcy schedules

>>>> Meet with U.S. Trustee, open DIP (debtor-in-possession) bank accounts

>>>> Resolve use of cash collateral issues, if not (hopefully) already done

P+15 days: (January 16, 2009) Statement of Financial Affairs and Schedules of Assets and Liabilities must be filed unless deadline extended by Bankruptcy Court, (In large cases, deadline often extended several times.) Schedules include a Summary, as well as the following (Schedule I-Current Income and Schedule J-Current Expenditures relate only to individuals).

Schedule A Real Property
Schedule B Personal Property
Schedule C Property Claimed as Exempt (not relevant for non individual debtors)
Schedule D Creditors Holding Secured Claims (includes both fully secured and only partially secured creditors)
Schedule E Creditors Holding Unsecured Priority Claims (continuation sheet)
Schedule F Creditors Holding Unsecured Nonpriority Claims
Schedule G Executory Contracts and Unexpired Leases
Schedule H Codebtors

Completing the Statement of Financial Affairs which relates to debtor's prepetition behavior with respect to its assets, liabilities, and revenues, and especially all of the above bankruptcy Schedules relating to the debtor's assets and liabilities, is extremely time consuming. The larger the business, the more complicated the process becomes. in addition, companies needing to file bankruptcy often may not have had the best recordkeeping to begin with.

>>>> UNSECURED CREDITORS' COMMITTEE FORMED (usually within the first couple of weeks following the Petition Date) based on the identity of the Twenty Largest Creditors as listed by the Debtor. Generally selected by U.S. Trustee. Motion for Appointment of Counsel for Creditors' Committee filed. In smaller Chapter 11 cases, often no Unsecured Credtiors Committee is ever formed. Purpose of Creditors' Committee is to represent the interest of creditors with smaller unsecured claims .

P+30 Days (February 1, 2009) - first Monthly Operating Report due showing results of postpetition activities.

>>>>>FIRST MEETING OF CREDITORS (aka 341 Meeting because it is mandated by 11 U.S.C. 341) conducted by U.S. Trustee at which debtor's representative answers questions under oath from creditors about the factors triggering the filing, status of assets (including those pledged as collateral), and plans for restructuring.

>>> continued filing of Monthly Operating Reports

>>>>Miscellaneous stay relief, adequate protection, lease and executory contract assumption/rejection issues arise; adversary proceedings filed

>>>>Revisit or further establish cash collateral arrangements and post-petition financing arrangements

>>>Establishment of a BAR DATE for when proof of claims must be filed by creditors

>>>>Begin formulation and negotiation with pertinent creditors regarding terms of Plan of Reorganzation, including proposed classification and treatment of claims

>>>Begin analysis of potential preference recoveries.

P+120 DAYS (May 2009) - Expiration of "exclusive period" during which only DIP is permitted to file plan of reorganization. Exclusive period often extended at request of DIP by Bankruptcy Court.

>>>> PROOF OF CLAIM BAR DATE - all creditors not agreeing to amount of claim shown in bankruptcy schedules must have filed proof of claim form to participate in any distributions

>>>>> Continued formulation and negotiation of Plan of Reorganization. Proposed PLAN OF REORGANIZATION and proposed DISCLOSURE STATEMENT filed. Disclosure Statement must summarize contents of proposed Plan and provide "adequate information" concerning the Plan and its implementation.

At least a 25 day notice period is required for hearing on Disclosure Statement
Once Disclosure Statement approved, proposed Plan of Reorganization, approved Disclosure Statement, and Ballot for voting on Plan must be distributed to all creditors and parties in interest.
Revision and extensive negotiation of Plan often required

>>>>> CONFIRMATION HEARING on proposed Plan of Reorganization

At least a 25 day notice period is required for confirmation hearing
Ballots must be tabulated - at least a majority in number and two-thirds in amount of claims voted in at least one class of impaired claims required for confirmation
Other confirmation requirements (including provisions governing contents of plan) set forth in sections 1126 and 1129 of the Bankruptcy Code such as feasibility must be satisfied

>>>>PREFERENCE ACTIONS and other adversary proceedings intiiated.

>>>> Claims determination and allowance proceedings

That, somewhat oversimplified, is the timeline of a typical Chapter 11 case. Because there is often no way to know how long it may take to reach agreement or determination of such crucial issues as the valuation of particular property securing creditor claims, it is rarely easy to predict how long any particular case may take to resolve sufficient issues for the company to emerge from bankruptcy. Along the way, questions as to whether the company has the ability to service even a debt burden as permitted to be modified under the Bankruptcy Code may arise.

Posted on December 15, 2008 by Teri Rasmussen

What's Good for General Motors is Good for America? Analyzing Some Alternatives

As a business/commercial attorney whose practice is becoming increasingly weighted towards the Chapter 11 bankruptcy, workout, and general creditors' rights side of the ledger, I freely acknowledge being completely captivated (in the intellectual isn't it cool that something I do work about is being talked about a lot way) by the distressed financial plight of Detroit's Big Three automakers and the various proposals being bandied about as possible solutions. The bankruptcy alternative - prepackaged or otherwise - has of course been of particular professional interest to me, mainly because it - properly tweaked - may just be the only way out of this mess.

One could easily spend entire days just Googling away on this topic without running out of interesting and informative blog posts, news feeds, and websites to read. Everyone seems to understand and agree that SOMETHING has to be done, but after that, the WHAT and HOW become murky and a source of great disagreement. And most recently, we're now hearing that a "study" - to which we all tend naturally to give great weight -- claims that a bankruptcy of at least two U.S. automakers would cost as much as FOUR times more than a "bridge loan" from the federal government.

So, how to make sense of all this and figure out what it really makes sense to back? Three detailed discussions of proposed strategies for addressing the crisis have caught my attention which I think help illustrate the various arguments being made. I wanted to highlight those, along with some commentary of my own.

NYU School of Business Professor Edward Altman, who recently testified on Capital Hill presents "My View: Why GM Should File for Bankruptcy" on the Turnaround Management Association website.
Weathorford School of Management (Case Western Reserve University) Professor of Economics Susan Helper and Wharton School of Business (University of Pennsylvania) Associate Professor John Paul MacDuffie, self described "scholars who have spent our professional lives studying the auto industry" advocate a "Better Than a Bailout" nonbankruptcy plan in a recent issue of The New Republic magazine.
Corporate bankruptcy attorney Richard N. Tilton sets out a very detailed proposal in "GM Death Watch 219: GM Prepackaged Reorganization" in a guest post on the Truth About Cars blog which I think comes closest to my view that some form of bankruptcy is necessary, but the significant participation of the feds is still a crucial component

Altman: Bankruptcy IS the Answer. Altman advocates forcing General Motors (and presumably at least Chrysler, if not Ford, as well) into Chapter 11, although he acknowledges that the U.S. government may have to be the DIP (debtor-in-possession aka post banklruptcy filing company for the uninitiated - see, isn't bankruptcy fun with its terms of art?) lender. Altman's conclusion:

Management and boards of Detroit's Big Three "which have been in a state of denial, should face up to the reality of their dismal outlook and request the DIP loan. The government should be given the choice of supporting this unique rescue, concluding that it would be better for the country and the economy to 'right-size' the U.S. Auto business now and make it more competititive, rather than to have it deteriorate further and to be sold off at a later date with even ore lost jobs and cuts in pensionn, /health care benefits. "

In support of his conclusion, Altman makes the following points:

"All this talk about a government rescue of General Motors and other automakers is misguided, likely a waste of taxpayers' money, and a potential dimunition in the creditworthiness of the U.S. government."
Absent bankruptcy, the automakers face not only the prospect of a severe prolonged U.S. recession, but also "the weight of their own inefficiencies, huge pension and health care benefit packages, and their now clear bankrupt profiles," things much more difficult to address outside bankruptcy.
Chapter 11 provides enormous benefits and options to companies availing themselves of its protections, including protecting their assets, suspending fixed payments on most liabilities, allowing superpriority lending to occur in the form of DIP lending which substantially reduces the risk to lenders, and "enhanc[ing] the ability of management to renegotiate existing and legacy pension and health care claims."

Avoid Bankruptcy - It's the Kiss of Death. In contrast to Altman, Susan Helper and John Paul MacDuffe contend that a nonbankruptcy solution is the preferable choice. They start, logically enough, with an examination of the companies themselves and their strengths and weaknesses. Unlike many commentators, their view is that "labor costs are no longer a big problem," (although they do acknowledge that obligations to retirees remain an issue). They also point out that labor costs only account for perhaps ten percent of the overall cost of an automobile . Helper and MacDuffe say that larger challenge for the automakers is relations with parts suppliers and having a better understanding of how to utilize their leverage with suppliers appropriately. As they see it,

The companies really are too big, although the problem starts with the number of brands, rather than the number of factories. Each brand has its own set of delaers, each of whom demands vehicles and attention to their product lines. It's impossible for the companies to fill out each brand's lineup with innovative, quality products -- let alone to market each of them appropriately. In other words, it's hard for GM to push Pontiac, when it's also pushing Buick, Chevrolet, and Saturn. (emphasis supplied)

Helper and MacDuffe see several problems with forcing bankruptcy on the Big Three automakers:

Incentives inherent in Chapter 11 might discourage the automakers from further integrating production techniques in favor of focusing on short-term profits even more relentless.
Consumers may be concerned about warranties, continued availability of service and parts, and other drawbacks of purchasing a vehicle from a company in bankruptcy.
Suppliers would be unsecured creditors and would receive substantially reduced payouts on their debts, something their precarious financial situation may not be able to weather.

Helper's and MacDuffe's solution is similar to what has been recently been discussed on Capital Hill in the sense that it seeks to mimic the effect and benefits of a Chapter 11 proceeding without the "disgrace" of filing. According to them, this solution

could not only spare GM -- and its counterparts -- much of the messy, wasteful litigation that goes with Chapter 11 filings; it could also encourage the right kind of restructuring. Instead of simply paying people less for doing the same inappropriate tasks they used to do, the Detroit Three would further change the way they design, build, and sell cars -- yielding a set of smaller more sustainable automakers headquartered in the United States. (emphasis supplied)

Their plan:

instead of letting a bankruptcy judge supervise the process, the government would appoint a special advisory committee to oversee the process. This committee would consist of knowledgeable, independent monitors -- a mixture of former industry executives with experience working for Toyota or Honda' academics who study the industry; and experts in aternative engine technology or labor-management collaboration. It would, naturally, have a director and full-time staff, plus the ability to work with outside consultants. Under the scenario we envision, the committtee would set goals and require the companies to report on progress quarterly, as a condition for obtaining additional funds. If a company missed its goals for, say, two quarters in a row, the committee would then provide only enough funds to prepare for liquidation or nationalization. (Leftover money could go to retraining workers and softening the blow of downisizing on communities.}

Prepack Bankruptcy - with a Twist - Is the Way to Go. Finally, Richard Tilton (who is apparently keeping a really low internet profile since I really wanted to add a link to him and couldn't find anything), in a somewhat lengthy (by internet blog posting standards), but useful article, succinctly recognizes the basic problem facing the Big Three:

GM's legal obligations to bondholders and trade creditors cannot be changed or modified without a bankruptcy, or the written consent of ech individual creditor. That's a near impossible task. Attempting to reorganize GM outside of a legal proceeding would encourage creditors to holdouts (sic) for special treatment, delaying any chance at restructuiring.

His points:

While a true "prepack" Chapter 11 bankruptcy would by definition involve the agreement of all major stakeholders, that is not absolutely essential so long as the U.S. Treasury as sgined on to be the DIP lender.
Because Chapter 11 allows DIPs to stop paying interest or principal on unsecured debt, cash available for operations will be increased.
Although the automakers have significant obligations to retirees, these are unsecured claims under the Bankruptcy Code and therefore would be frozen and entitled to less favorable treatment in a Chapter 11 bankruptcy.
The assertion of Detroit's Big Three that "millions of jobs will be 'lost' ignores the simple fact that companies continue to operate their businesses while in chapter 11, albeit under a great deal of scrutiny .... While it is definitely a lot of paperwork, legal and turnaround professionals do this type pf work every day."
"A GM reorganization paln must be based upon a realistic projection of future profitability. Future cash flows will determine the enterprise value of the reorganized company, and hence the value of new common shares which will be distributed under the plan."

His plan:

U.S. Treasury extends a secured DIP loan in the amount of perhaps $40 billion. "Taxpayers should demand that any loan made to GM be made only in connection with GM's Chapter 11 filing, that it be fully secutred, and only disbursed pursuant to detailed written budgets."

A portion of the U.S. Treasury DIP loan "should be available to support essential suppliers throough loans, letters of credit and pre-payments."

"Since the government lacks experience in administering secured loans to insolvent companies in Chapter 11 reorganizations, it might be preferable to have the loan guaranteed by the U.S. Treasury. Funds would be advanced periodically by a consortium of financial institutions experienced in lending to Chapter 11 debtors. They'd be better able to monitor day-to-day compliance within the terms and covenants of the loan."

"potential future liabilities [for payments to the retiree trust for rtiree benefits]... not only would weigh heavily on GM's post reorganization success. but also would depress the market value of ay new common shares issued by GM. With creditor consent, the retiree trust could receive  subordiated debt, with future maturity dates timed to GM's future profitability."

Existing shareholders get NOTHING.

New Board of Directors includes representation from major creditor stakeholders and constituencies..

Under his hypothetical plan, Tilton forsees:

Taxpayers getting a warrant for 10% of GM's post-confirmation stock as security for the repayment of the DIP loan.
GM's existing secued creditors will stay in place and be treated in accordance with federal bankruptcy law
Warranty claims assumed under plan
Unsecured debt, including bondholder, trade payables, legacy/retiree claims, and other unsecured claims get their pro rata share of the stock of the reorganized automaker

I don't pretend to know the answer to the crisis presented by the financial problems of Detroit's Big Three automakers, although I am beginning to form a definite opinion which I'll share in a subsequent post. I do, however, think it's very important for each of us to think hard about this and about what should be done. Hopefully, these three proposals can be helpful in ordering and organizing that analysis.

Tags: Altman, Bankruptcy, Bankruptcy Code, Big Three, Chapter 11, Chapter 11 bankruptcy, Chrysler Corporation, Detroit's Big Three, Ford Motor Company, General Motors, automaker bailout, automaker bankruptcy, legacy costs, prearranged bankruptcy, prepackaged bankruptcy, reorganization

Posted on December 7, 2008 by Teri Rasmussen

Detroit's Big Three Just Haven't Done the Work Needed for a Prepackaged - or Even Prenegotiated - Bankruptcy

Unless you've been living under a rock for the last few weeks, you are all too painfully aware that General Motors, Chrysler Corporation -- and to a lesser, but still significant extent, Ford Motor Company --- are in DEEP DEEP TROUBLE. And that like any other red-blooded American when the "going gets tough", they are looking to the government to make it all better... or else.... >>> well, no one really wants to find out if it really would be the end of American prosperity as we know it.

General Motors has even established a website called GM Facts and Fiction to present its position.

The New York Times Live Blog summary of last week's hearings on Capital Hill as they were occurring is well worth a click for Thursday's Senate Banking Committee proceedings and here for Friday's House Financial Services Committee hearing.

Problem Solved? Based on the most recent news reports, it sounds as if the Big Three Detroit automakers may have managed to stave off the day of reckoning for at least a while. Apparently, Congress has decided to give them the proverbial "half a loaf" by allowing $$ already ticketed their way to assist in the development of more fuel efficient vehicles to be utilized more generally. (Click here for the NYT perspective, here for Detroit Free Press perspective, together withn its rundown of the Sunday morning news talk shows,

Unfortunately, no one really believes that this is anything remotely approaching a permanent solution. Chrysler is already apparently hedging its best, having reportedly retained Jones Day as potential bankruptcy counsel.

SO the question remains, ultimately what should be done? Is the American automobile manufacturing industry really too big and too intrinsic a part of the overall American economy to "let" fail? Or are those who say that bankruptcy with its unique provisions is really the only true hope for a beneficial solution actually correct? A couple of my favorite quotes (and there are many) so far on this whole mess:

Courtesy of Friday's, Grand Rapids Press in a story entitled "Hey Congress: 'Prepackaged bankruptcy' for automakers is bad idea -- and impossible" >>> "The Detroit Lions have a better chance of winning the Super Bowl than GM has of getting a prepackaged bankruptcy," said John Wykamp, a business restructuring expert at the Grand Rapids office of Crowe Horwath LLP.
"Congress must save the industrial infrastructure that these companies control and the jobs they create…. And Congress must do all this by NOT giving GM, Ford and Chrysler the $34 billion they are asking for in "loans" (a few days ago they only wanted $25 billion; that's how stupid they are -- they don't even know how much they really need to make this month's payroll. If you or I tried to get a loan from the bank this way, not only would we be thrown out on our ear, the bank would place us on some sort of credit rating blacklist)." - Michael Moore >>> Read the WHOLE post !

Prepackaged Bankruptcy a Solution? Although a part of the answer to this question is certainly politically based, depending in part perhaps on how one views labor unions and/or "legacy costs", or one's overall philosophy on economic policy, there is also a more pragmatic element which is sometimes misunderstood or overlooked. One of the possiblities being thrown around of late is something now being referred to as a "pre-arranged bankruptcy", a variant of the "prepackaged bankruptcy" option. (For a general discussion of this variety of Chapter 11 bankruptcy and its basic operation, read my previous post "How Prepackaged Bankruptcy REALLY Works".

Prepackaged bankruptcy - that's gotta be "the ticket", the one terrific solution, for the mess America's Big three automakers find themselves in, right? And what could possibly be more interesting for business bankruptcy practitioner like myself than the ultimate Chapter 11 prepack?!!!? (Click here, here, here, and here for general discussions of the push towards the prepack option.)

The problem is - it's not. While I, like many others, found the concept initially attractive (and let's face it, downright exciting from a professional creditors' rights attorney perspective), as I've thought harder about it, I've realized it's just not the panacea we're all looking for to solve this aspect of our growing financial crisis. Some form of a a prepack still has a role to play, but it it won't be the pure form of a prepack, prenegotiated, or even pre-arranged bankruptcy; substantial government involvement will still be required to maximize the opportunities offered by the prepack option. Why?

Those jumping on the "why not bankruptcy?" bandwagon early with respect to Detroit's Big Three tended to focus on (1) the ability under the Bankruptcy Code for the automakers to rid themselves of burdensome contracts such as perhaps obligations to the autoworker unions and dealers, as well as "legacy costs" for retiree benefits; and (2) the perceived efficiency of the prepackaged bankruptcy option in comparison with the average Chapter 11 proceeding.

>>> Breaking Burdensome Contracts

As far as the ability to make changes to union collective bargaining agreements and other burdensome contracts, it is certainly true that the Bankruptcy Code has some useful provisons the auto companies might be able to utilize to their benefit. However, the full benefit of section 1113 of the Bankruptcy Code with respect to union contracts, section 1114 of the Bankruptcy Code with respect to pension and retiree benefits, and section 365 of the Bankruptcy Code would almost certainly NOT be a part of a prepack. Rather full exploitation of these provisions from the automaker perspective would almost certainly prolong any bankruptcy proceeding. At most the power of these provisions might allow the automakers to drive a harder bargain in the context of a possible prepack.

>>> Prepack Efficiencies

Although the time ACTUALLY SPENT IN BANKRUPTCY is generally less by design in prepacks, it would be fallacious to conclude that the overall time to a solution is in fact any shorter than when the more traditional Chapter 11 path is followed. Key to the success of any prepack variation is the prepetition agreement of the major players to the financial reorganization of the financially distressed company. In the case of Detroit's automakers, there are a number of different constituencies with conflicting objectives and needs who have yet to reach common agreement.

Given what appears to be an especially stubborn refusal on the part of the automakers to even remotely consider any sort of bankruptcy type scenario of any kind until quite recently, it seems unlikely that any substantial productive discussions have yet occurred with any of these crucial partners to a successful prepack. To achieve the benefit of a prepack, votes for a specifically delineated plan of reorganization have to have been successfully solicited before any filing is ever made. Because the automakers don't even have such a plan, let alone gotten the requisite buy-in, or even the beginnings of the negotiation of acceptable terms, the prepack option isn't realistically even on the table!

Recent reports suggesting some willingness on the part of union leaders to discuss union contracts and the "legacy costs" of retiree benefits is certainly a hopeful sign that the productive discussions with major stakeholders so necessary to a successful prepack may actually be beginning. But it is only a beginning and a long way from the uanimity or at the very least general agreement needed among the principal players!!

Where Things Stand. Hopefully,the brief respite Detroit's Big Three Automakers may now receive will be put to good use. What needs to happen now is for them to focus on building a specific restructuring plan and developing a strategy for obtaing the needed support from lenders, unions, and others, including Congress. Within limits - mainly relating to the likely need for involvement of the feds in some capacity with respect to some sort of postpetition DIP and exit financing -- a prepack is still a possible alternative. There's just a heckuva lot Detroit's Big Three need to do to position themselves properly to beneift from such an option.

Tags: 1113, 1114, 365, Bankruptcy, Bankruptcy Code, Big Three, Chapter 11, Chrysler Corporation, Detroit, Ford Motor Company, General Motors, auto manufacturers, automaker, automobile manufacturing industry, bailout, legacy costs, prearranged bankruptcy, prenegotiated bankruptcy, prepackaged bankruptcy

Posted on December 1, 2008 by Teri Rasmussen

How Prepackaged Bankruptcy REALLY Works

If you've been paying any attention at all to the national news of late, you know that Detroit's Big Three automakers are in deep trouble and that a substantial number of folks seem to think that forcing them into a "prepackaged " bankruptcy is the ANSWER. When I first heard this, I thought this seemed like a pretty good idea .... until I started really thinking about both what can and can't be accomplished with this sort of Chapter 11 bankruptcy proceeding.

So in a two-part post, I want to first explore the nature of the beast those of us in the "biz" call a "prepack" and then focus more specifically on how it might actually operate in the context of the problems being faced by America's automakers. While superfically appealing, a prepack is far from the panacea some seem to think it could be. To understand why, you first have to understand how prepacks work in general.

Prepack Coming of Age. Chapter 11 (and they always are Chapter 11 reorganizations) prepackaged bankruptcies came to the fore about twenty years ago. Many say that Dallas based hospital owner Republic Health Corp. was the first successful prepack with a plan confirmed less than five months later. Prepacks became somewhat more popular during the 1990's in the context of failed LBO's, to implement mass-tort settlements, or as a vehicle to consummate sales or mergers of companies. In the August issue of the Turnaround Management Association's Journal of Corporate Renewal, an article by Douglas Foley and James Van Horn entitled "Prepacks on the Rise in Chapter 11 Bankruptcies Prenegotiated Plans Can Accelerate Reorganization", asserts that there has recently been renewed interest in this variation of Chapter 11 with four filed in 2007 and more than a dozen filed in the first half of 2008.

Companies utilizing the prepackaged option have included Donald Trump's Taj Mahal Casino in Atlantic City, Zenith Electronics, Aurora Foods-Pinnacle Foods merger, and TWA. More recent participants have included Davis Petroleum (Case No. 06-20152, Bankr. S.D. Tex.) (whose plan was confirmed less than a week after filing), Blue Bird Body Co. (Case No. 06-50026, Bankr. D. Nev.), Bally Total Fitness (Case No.07-12395, Bankr. S.D.N. Y.), and Mrs. Fields' Original Cookies (Case No. 08 - 11953 , Bankr. D. Del.) (plan confirmed in less than sixty days after bankruptcy filed).

To promote organization and judicial economy, some jurisdictions such as the Northern District of California Bankruptcy Court and the Southern District of New York Bankrptcy Court have even adopted local rules governing prepackaged bankruptcies.

Prepack Advantages. The hallmark and principal advantage of a successful prepack is a substantial savings in time and disruption as compared with the ordinary Chapter 11 bankruptcy case. The average Chapter 11 case, even a relatively small one, is rarely likely to be completed in less than a year and it can often take two or three years, or even longer, for a company to emerge from Chapter 11. By contrast, prepackaged cases typically take less than six months, thus saving both time and money typically spent on case administration. Conventional wisdom also holds that deterioration of the intrinsic value of a business which is often a consequence of a Chapter 11 filing and the attendant uncertainty is lessened through use of the prepackaged option. (For a general discussion of the general effect of a Chapter 11 bankruptcy on a public company's shareholders, visit the discusssion of "What Every investor Should Know ... Corporate Bankruptcy" on the SEC's website.)

Technically, a prepackaged bankruptcy differs from a prenegotiated bankruptcy in that votes for a plan of reorganization have already been solicited and agreed upon prior to the filing, thereby leaving nothing to chance when it comes to achieving a successful confirmation of the Plan of Reorganization. In a prenegotiated bankruptcy, actual votes or agreements to vote have not yet been reached with the critical mass of creditors, although resolution has typically been reached with those creditors deemed most crucial to success.

The most important characteristic of a prepack (or a prenegotiated bankruptcy) is that the major players in the bankruptcy have come to an agreement among themselves about the most important issues of subsequent financing, lien priority, and the extent to which the debt owing will be discounted or terms of repayment extended. This reduces the potential for the debtor to lose control of the proceeding and allows it to proceed directly to its contemplted reorganized operations. By minimizing the time spent subject to the restrictions and various oversight provisions embodied in the Bankruptcy Code and reaching important agreement before even filing, the liklihood of full blown creditor second-guessing and need to balance the influence of various interests is thought to be significantly and productively decreased.

Nuts and Bolts. Section 1126(b) of the Bankruptcy Code and Bankruptcy Rule 3018(b) explicitly allow prepetiton solicitation of votes for approval of a Plan of Reorganization as long as certain procedures are observed. The key elements to a successful prepetiton solicitation crtical to making a prepack a "go" are:

The proposed plan must have been transmitted to substantially all creditors or equity security holders entitled to vote in a class;
Sufficient time must have been allowed for voting (or in the words of the statute, the time allowed must not be "unreasonably short" which is of courae a case by case judgment call)
Those solicited must have been provided with "adequate information" in connection with the solicitation of their vote.
The provisions of any applicable nonbankruptcy law such as federal securities law governing communication with shareholders of public companies must be complied with.

In essence, a prepack allows the debtor to bypass the lengthy time (starting with a 25 day notice period for a hearing on the Disclosure Statement) involved in getting a disclosure statement approved by the Bankruptcy Court, distributed to creditors, and gathering/tabulating ballots approving or rejecting the proposed Plan of Reorganization. There is of course the risk that the Court will determine after the fact that the prepetition solicitation process did not meet the requirements set forth above; this can happen either as a result of a motion by a party in interest on the Court can make such a finding on its own initiative.

What a prepack does not do, however, is change the requirements concerning creditor approval of a Plan of Reorganization. Pursuant to section 1126(c), a class of "impaired" creditors (i.e. those not being paid in full) will be deemed to have accepted the plan if and only if the creditors in that class voting hold two-thirds in amount and at least a majority in number of claims voted do in fact vote to accept the plan. In addition, pursuant to section 1129(a)(10), the plan cannot be confirmed unless at least one class of impaired creditors vote to accept the plan. there are also the other usual requirements of feasibility and the like.

Prepack Risks and Obstacles. Prepackaged bankruptcies tend to work best where there are a limited number of sophisticated secured creditors involved with whom productive negotiations can actually be had. They tend to work less well when a debtor has a large number of creditors, especially if unsecured, with a variety of different claims ( e.g. trade creditors, employees, landlords, equipment lessors,etc.) entitled to varying treatment under the Bankruptcy Code and which may fluctuate considerably during the period immediately preceding a filing. Large numbers of contingent claims can also be an obstacle for the obvious reason that time must be spent determining how to estimate the amount of such claims.

In addition, by immediately proceeding to the plan confirmation phase, a debtor does lose the benefit of the "breathing spell" provided by the automatic stay which arises immediately upon the filing of the petition. And, of course, it does tip the debtor's hand as to its financial distress (which may often be obvious anyway).

Drawing Conclusions. While there are certainly some useful rights and remedies available to Detroit's Big Three should they decide to file Chapter 11 - being able to shed burdensome labor and/or dealer contracts springs to mind - there are also substantial risks - will consumers continue to spend thousands of dollars to buy vehicles from a car company in bankruptcy. Prepackaged bankruptcy seems to be advanced by many of its advocates as a way to maximize the advantages of being a Chapter 11 debtor while eliiminating the "down side" of a bankruptcy filing. I just don't think it's that simple.

So next time I will focus more specifically on how well suited the prepack option really is for Detroit's Big Three and what it might and might not be able to do for them.,

UPDATE: In the first quarter of 2009, prepackaged bankruptcies hit an 8 year high with more than in all of 2008.

Also thanks to Scott Jagow of American Public Media's Scratch Pad for putting a practical spin on how this would apply in a Chrysler bankruptcy.

Tags: Bankruptcy, Bankruptcy, Big Three, Chapter 11, Creditors' Rights, Disclosure Statement, Ford Motor Company, General Motors, Plan of Reorganizarion, automaker bankruptcy, confirmation, prenegotiated bankruptcy, prepackaged bankruptcy

Posted on October 24, 2007 by Teri Rasmussen

Dealing with a Customer's Bankruptcy

Sooner or later every business experiences the bankruptcy of one of its customers. If the customer has a large unpaid balance, this can be an especially unnerving experience. There are, however, some basic things to know and do.

1. Don't Ignore the Filing. The most important thing not to do is continue collection action against the debtor. When a bankruptcy is filed, it triggers an "automatic stay". The "automatic stay" prohibits any further action or activities against -- or affecting -- the debtor, the debtor's interest, or the debtor's property. This includes foreclosures or sheriff's sales, garnishments, collection calls and, of course, the commencement or continuation of a lawsuit. Violation of the "automatic stay" can result in monetary fines and sanctions against the offender.

One important "exception" to the "automatic stay" does exist for creditors who have shipped goods to the debtor which have not yet been delivered at the time the bankruptcy is filed. In this situation, the creditor may stop the goods in transit and refuse delivery unless paid in cash.

2. Document the Debt Owed by Filing a "Proof of Claim". To have any reasonable hope or expectation of receiving any payment on the debt owed, a "proof of claim" must be filed with the Bankruptcy Court by the designated deadline. Frequently, though not always, a "proof of claim" must be filed within the first four to six months after the bankruptcy has been filed so prompt action is often necessary. You do not have to be a lawyer to complete and file the proof of claim.

The initial notice of the bankruptcy will often contain a proof of claim form that can be filed out. The "proof of claim" should set forth the basis for the debt (i.e. the service or product purchased), attaching copies of any written contracts or documents giving rise to the debt, identify any collateral pledged to secure the debt and specify the exact amount owed to the creditor.

Filing this document with the bankruptcy court ensures that a creditor will share in any subsequent distribution of the debtor's assets. It also makes it more likely that the creditor will receive notice of important events and deadlines in the bankruptcy.

3. Read and Analyze the Initial Basic Documents. At the time the bankruptcy is filed, or shortly thereafter, the debtor is required to file its "Statement of Financial Affairs" and "Schedules of Assets and Liabilities". These documents list the names of creditors and amounts owed to each. They also provide insight into the recent history and current state of the debtor's financial affairs and can be useful in determining the prospects and potential amount of any repayment of the debt owed.

4. Attend the "First Meeting of Creditors". Within the first month or so after the bankruptcy has been filed, a "first meeting of creditors" will be held. Creditors who have been listed by the debtor will receive written notice of the time and place of this meeting; others can check with the bankruptcy court or the office of the United States Trustee for the district. Attendance at this meeting is not mandatory for creditors. However, the debtor is required to appear and answer questions under oath by the United States Trustee and any creditor in attendance about events causing the bankruptcy, prospects for repayment and other matters related to the bankruptcy. You do not have to have a lawyer to participate and ask questions. Thus, a creditor who fails to attend loses a valuable opportunity to learn about the debtor's financial situation and intentions.

5. Don't Expect Prompt Payment of Past Debt. What happens next in the bankruptcy depends upon what type it is and the number and type of creditors affected by the filing.

In Chapter 7 liquidation proceedings, a trustee in bankruptcy (not the United States Trustee) will evaluate and dispose of the debtor's unencumbered assets, if any; after analyzing the claims made by creditors, the Chapter 7 trustee will then distribute those assets pro rata among eligible creditors who have filed a proof of claim.
In a Chapter 13 "wage earner" proceeding, designed for individuals with ongoing income, a portion of the debtor's "regular income" over a period of generally three years, though sometimes longer, will be paid to a Chapter 13 Trustee to repay creditors in accordance with the terms of a "plan" approved by the bankruptcy court.
In Chapter 11 reorganization proceedings, the debtor remains in control of its financial affairs and operation of its business while it attempts to develop and negotiate a "plan of reorganization" which provides for the treatment of creditor's claims; this treatment frequently involves large discounts of the amounts owed. Chapter 11 proceedings are often complex and take months, or even years, to reach a conclusion. The largest creditors in these cases may be invited by the United States Trustee to serve on an Unsecured Creditors Committee which acts as a fiduciary on behalf of the general creditor body with respect to evaluation of the "plan of reorganization" and other events during the course of the bankruptcy.

6. Decide How to Participate. A creditor's appropriate level of participation will naturally depend upon the nature and amount of the indebtedness, as well as upon the perceived prospects for repayment. Creditors holding collateral will generally have the most leverage and the highest level of interest in the case; they may want to seek a lifting of the automatic stay so they can pursue their state court remedies and will undoubtedly have a number of other concerns raised by the bankruptcy. Landlords and lessors are also afforded significant rights under federal bankruptcy law. Trade creditors and other owed relatively small amounts may often find it cost effective to restrict their involvement to filing a proof of claim.

Many creditors view the "fresh start" philosophy of the federal bankruptcy laws as just another dodge for delinquent debtors. However, there are also many provisions designed to protect creditors and assure an equitable distribution of the debtor's assets among all creditors. A basic understanding of the fundamental aspects of bankruptcy can help avoid inadvertent pitfalls while maximizing the possibilities of at least some recovery of a bad debt.

Tags: Bankruptcy, Chapter 11, automatic stay, business, collection action, customer, delinquent debt, law, proof of claim, supplier

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Ohio Practical Business Lawyer & Attorney, Teri Rasmussen of Plunkett Cooney Law Firm, offering services relating to business and commercial law, secured transactions, creditors' rights, loans, bankruptcy, litigation, real estate, corporate law, business formation, owner disputes, serving Columbus, Dublin, Franklin County, Delaware County, Ohio.

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