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:

 

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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. 
  • 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
    • Business Operations
  • 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

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

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. 

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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.

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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. 

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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.   

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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.

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