Chrysler Bondholders Seek "Judicial Activism" From SCOTUS

By Big Tent Democrat, Section Economy
Posted on Sun Jun 07, 2009 at 09:51:52 AM EST
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AP:

Three Indiana state pension and construction funds want the Supreme Court to block Chrysler's sale to Fiat so they can pursue an appeal in hopes of getting a better deal. The funds filed emergency papers at the high court early Sunday.

. . . U.S. Judge Arthur Gonzalez, the bankruptcy judge overseeing Chrysler's case, approved the sale last Sunday, finding that the deal with Fiat was Chrysler's only alternative to liquidation. . . . [Second Circuit] Chief Judge Dennis Jacobs . . . asked Thomas Lauria, the lawyer representing the Indiana funds, why he believed his clients would be better off if the deal with Fiat went away and Chrysler was forced to liquidate. "You can't wait for a better deal to come in from Studebaker," Jacobs said. Lauria responded that the sale could be restructured to provide a better return for the secured debtholders.

My own view is that these Chrysler bondholders have no case under the Bankruptcy Code. But heck, the Roberts Court could rewrite it. After all, they seem poised to rewrite Title VII of the Civil Rights Act. Worth a shot with the judicially activist Roberts Court.

Speaking for me only

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Chrysler Bondholders Seek "Judicial Activism" From SCOTUS | 18 comments (18 topical)

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You think RBG will tell them to get lost? (none / 0) (#1)
by andgarden on Sun Jun 07, 2009 at 10:08:47 AM EST

All the talk (none / 0) (#2)
by Steve M on Sun Jun 07, 2009 at 10:14:13 AM EST

about how the "rule of law" is being demolished by the Obama Administration is starting to look quite silly, thanks to actual courts following the actual rule of law.

The bankruptcy judge overruled the objections, but just to make sure the issues are fully aired, he gave the pension funds permission to appeal immediately to the Second Circuit - bypassing the District Court level entirely, if I understand the relevant procedure.

The Second Circuit took 10 minutes following the conclusion of oral argument to rule against the objectors - but nevertheless, stayed its ruling until Monday to allow the filing of a petition to the Supreme Court.

Independent judges, from an independent judiciary, unanimously in agreement to this point that there has been no violation of the Bankruptcy Code and all the overheated rhetoric about the Administration was just idle chatter.

Who would have thought that the WSJ editorial page could have gotten it so wrong?

"Secured creditors" (none / 0) (#3)
by gyrfalcon on Sun Jun 07, 2009 at 11:38:29 AM EST

I am a total ignoramus about bankruptcy, so I wonder if somebody who knows can explain the concept of "secured creditors" as it applies to this situation.

I heard the Indiana state treasurer make his case in an interview the other day. He insists this class of bondholders are secured creditors and therefore must by law be paid off at "100 cents on the dollar" in a bankruptcy before any others. He said further something to the effect that if the bonds the funds hold don't get fully paid off, the state of Indiana will be required to make up the difference from state funds. If that's the case, I feel his pain, but it doesn't make him right.

If I understood him correctly, he was saying that blowing off secured creditors was flatly illegal and also unheard of in bankruptcy proceedings.

He must be wrong about how black and white this is or he wouldn't have to be appealing to the SC, but I'd appreciate an explanation of why. Are bondholders not "secured creditors"? Are secured creditors not supposed to be paid in full before anybody else in a bankruptcy, by law? Or does the law explicitly allow the judge to override that requirement?

There is great coverage (5.00 / 1) (#4)
by Steve M on Sun Jun 07, 2009 at 12:57:53 PM EST

of the Chrysler bankruptcy at the Credit Slips blog.

The short answers to your questions are that the bondholders are indeed secured creditors, they are indeed entitled to be paid first under the absolute priority rule, and they ARE being paid first.

Chrysler is getting paid $2 billion for its assets in the proposed sale that is before the Bankruptcy Court. Every penny of that amount will go to the secured lenders. The only valid objection would be that $2 billion is not fair value, and there has been no evidence that that is the case.

What the pension funds are really complaining about is that other folks who are not secured creditors are going to receive stakes in the "New Chrysler" entity that is paying the $2 billion and is funded by, among other things, an injection of government capital. The Bankruptcy Code doesn't entitle them to anything of the sort. Secured creditors are only entitled to a fair valuation of Chrysler's assets and absolute priority in receiving the proceeds of that valuation, and they are getting both.

There are some interesting issues in this appeal - among them, whether the government has exceeded the scope of its statutory authority under TARP - but the Bankruptcy Code issues, as best as I can tell, appear to be open and shut. You might reasonably infer, notwithstanding the anguished cries of the WSJ editorial page, that if something as fundamental as the absolute priority rule were being blatantly violated, you probably wouldn't be able to get a bankruptcy judge and a unanimous panel of the Second Circuit to go along with it.


I think I read somewhere (none / 0) (#5)
by andgarden on Sun Jun 07, 2009 at 02:11:07 PM EST

that the secured creditors would rather Chrysler implode, because their investment is 100% insured.


Dunno about that (none / 0) (#6)
by Steve M on Sun Jun 07, 2009 at 02:14:35 PM EST

and considering the overwhelming majority of the secured creditors have consented to the sale, it seems kind of unlikely. Even assuming it's true, though, what would "implode" mean? The secured creditors are either going to get $2 billion through the bankruptcy process or they're going to get some lesser amount, the company is bankrupt either way.


: It's probable that what I read was wrong (none / 0) (#7)
by andgarden on Sun Jun 07, 2009 at 02:16:50 PM EST

or I'm just remembering incorrectly.

Aren't the bondholders (none / 0) (#8)
by oculus on Sun Jun 07, 2009 at 02:37:56 PM EST

entitled to questions preferences and/or challenge arrangements they think may be fraudulent transfers? Shouldn't they?


Sure (none / 0) (#9)
by Steve M on Sun Jun 07, 2009 at 02:51:12 PM EST

As far as I know, there is no allegation of a fraudulent transfer here.


How about preferences? (none / 0) (#10)
by oculus on Sun Jun 07, 2009 at 02:55:20 PM EST

It is customary to pre-structure to the detriment of the bondholders before filing for bankruptcy?

[Full disclosure: I am the grateful recipient of retirement benefits from a public entity retirement fund, which, I hope and pray, didn't invest in any of the Big Three auto companies.]


Well (none / 0) (#11)
by Steve M on Sun Jun 07, 2009 at 03:22:37 PM EST

It is absolutely common to pre-structure. But a preference or fraudulent transfer would refer to a transfer or sale of assets that actually occurred before the bankruptcy filing. At issue here is a proposed sale that has not taken place, but has simply been submitted to the bankruptcy court for its approval.

The court's task is simply to determine whether the proposed sale of assets results in fair value for the company and, by extension, its secured creditors. If it does, then the creditors have nothing to complain about. And in fact, the secured creditors have not presented any evidence that the current assets of Chrysler could be sold for more than the $2 billion Chrysler stands to receive in the proposed sale, so there you have it.

The pension funds may be upset that they don't get to participate in the new Chrysler-Fiat entity being formed, but that's outside the scope of the bankruptcy court's inquiry. The creditors aren't entitled to any such thing, they're merely entitled to the fair value of Chrysler's present assets and that's what they're getting.


: Thanks. (none / 0) (#12)
by oculus on Sun Jun 07, 2009 at 03:24:16 PM EST

Thanks, Steve (none / 0) (#14)
by gyrfalcon on Sun Jun 07, 2009 at 03:49:05 PM EST

So the Treasurer when I heard him was presenting his case in pretty grossly simplified form, no? I have no idea what the bondholders are getting, but let's say for the sake of argument that the $2 billion in assets amounts to 50 cents on the dollar for them. Their argument would then be that they should get, in addition to the cash money, a stake in the new entity that amounts to the other 50 cents worth?

Honestly, I can't wade through most of the coverage of this and keep track of it, so I appreciate your explaining this part of it, which in the simplified form the treasurer presented it, is what most non-specialist media coverage is focusing on.


If you junked Chrysler... (none / 0) (#13)
by diogenes on Sun Jun 07, 2009 at 03:30:06 PM EST

If you sold all of Chrysler's land, cars, parts, etc and then sold the dealership network (the Saturn is doing to distribute foreign cars), then you might well get two billion dollars.
The reason a lot of the secured creditors went along is that they were banks who were under the Obama blackmail thumb (bailout money) or were being singled out in speeches for asserting their rights.
If Ford ever needs money, you can be sure that no one will give them a lower interest rate as a "secured lender" anymore. Thank you Obama for assuring that any carmaker in the country who is in trouble can only access the US government to borrow money.

: Perhaps (1.00 / 1) (#16)
by Steve M on Sun Jun 07, 2009 at 04:20:10 PM EST

you should volunteer your services as an expert valuation witness, because the secured creditors have as yet been unable to present a lick of evidence that the assets of Chrysler are worth more than $2 billion.
But go on believing that all the secured lenders are being "blackmailed" if you like. Feel free to believe that this single event represents the end of secured lending as a concept even though there is no evidence that Chrysler's secured lenders are being screwed out of even a penny. Whatever helps you sleep at night.

Republicans go back to 1930s playbook (none / 0) (#15)
by MKS on Sun Jun 07, 2009 at 04:06:35 PM EST

Just like trying to get the Supreme Court to invalidate the New Deal.

Pathetic.

But,... Ginsburg...? (none / 0) (#17)
by EL seattle on Mon Jun 08, 2009 at 05:06:23 PM EST

Nothing's ever over until it's over, I suppose.

: She just granted the stay. (none / 0) (#18)
by oculus on Mon Jun 08, 2009 at 05:10:57 PM EST