Guest post: Is the GM section 363 bankruptcy plan really a stealth re-organization plan?

Submitted by Edward Harrison of the site Credit Writedowns.

We have just learned that Fiat has successfully completed its deal with Chrysler.  This means that the bankrupt ‘Old Chrysler’ will now have far fewer cash and assets available for creditors and that it will be liquidated with large or total losses likely for creditors.  Dissident creditors tried to get their case heard by the Supreme Court.  But this was rejected, paving the way for the Fiat deal. 

Key to why things turned out as they did is the use of section 363 of the bankruptcy code, which allows a company to sell assets without creditor approval and before a re-organization plan can be submitted.  The sale produces cash available to creditors in the eventual liquidation of the company. The sold assets can continue to operate as before, but in a re-organized fashion.  This is exactly what the Obama Administration wanted for Chrysler. So, in the case of the government versus bondholders count round one to the government.

Now, it’s time to turn to General Motors. This is a very important case because GM is such a big player in so many arenas. Think of Chrysler as a  test run of GM, the real US auto emergency.  A bankrupt GM that does not receive the same quick section 363 treatment that Chrysler received would be a very nasty  shock to the U.S. and global economy. 

The problem is that General Motors is a whole different case altogether.  And I am not so sure the government is going to be successful here. Here’s why. While the Chrysler deal involved a sale of the principal assets, the GM bankruptcy looks more like a stealth re-organization which violates the spirit of section 363. Back in 2004, Daniel Glosband, a bankruptcy expert at the law firm Goodwin Proctor reflected on this issue at the site FindLaw. (emphasis added below)

Advantages of a Section 363 sale include speed, transfer of assets free and clear of encumbrances and interests, transfer of restricted contracts and avoidance of exposure to claims under fraudulent transfer laws. For a seller, the Section 363 process eliminates director and officer exposure for the sale and limits exposure for breach of representations and warranties. Cosmic balance, however, requires a few clouds to accompany the silver linings.

Traditionally, the sale of a business in chapter 11 was accomplished through a plan of reorganization that identified and dealt with each class of creditors and equity holders. The sale plan was described to the affected creditors and equity holders in a prospectus-like disclosure statement and put to a vote. Bankruptcy law required acceptance of the plan by specified majorities of affected parties, a cumbersome process that lasted for several months and sometimes several years. Initially, courts were skeptical of Section 363 sales that circumvented the protective reorganization plan process. Early cases required the debtor to prove that a sale outside of a reorganization plan was necessary, for example by showing that the debtor’s business had insufficient cash flow to survive the full plan process. Lately, however, the Section 363 sale, which can be completed in as little as two to three months, has become the preferred method for sales of distressed businesses.

Clearly, if the courts decide that the government is trying to circumvent the normal Chapter 11 process by invoking section 363, you are going to have a problem.  The Obama people are going to argue that GM is dependent on government monies to exist and that it cannot ‘survive the full plan process.’  But, creditors are going to contest this case and they may have more success than they did at Chrysler.

Stay tuned.

As for Fiat, the last paragraph of the FindLaw article describes quite well why their stock has popped on the news of a successful Chrysler deal.

The goal of the purchaser at a Section 363 sale is to take advantage of the financial distress of the seller and the power of the Bankruptcy Code to make a safe, profitable investment. While a Section 363 sale is a complex exercise with risks for the unwary, it can be an efficient avenue for a well-prepared buyer to acquire a financially troubled business.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Slappy

    Am I wrong to not feel bad for the Chrysler investors? When Cerberus bought Chrysler through a highly-leveraged transaction didn't pretty much every one go, ohhhhhhh bad idea?

    This sure seems like a case of "they brought this on themselves, let them sink!"

  2. DownSouth

    I'm always taken aback by the raw emotions these proceedings unleash. There seems to be this seething, pent-up loathing of labor, just laying in wait for the slightest happening to trigger its eruption. This was seen in comments to Monday's post, "Supreme Court Stays Chrylser Sale," as well as others since the Chrysler saga began. I was at quite a loss to understand where these passions came from.

    But as I was reading an essay by Hannah Arendt the other day, a light bulb suddenly went off in my head. She provides a clue as to where the intense hatred of labor comes from.

    "As the elementary activity necessary for the mere conservation of life," Arendt writes, "labor had always been thought of as a curse, in the sense that it made life hard, preventing it from ever becoming easy and thereby distinguishing it from the lives of the Olympian gods." "Marx is the only thinker of the nineteenth century," she continues, "who took its central event, the emancipation of the working class, seriously in philosophic terms. Marx's great influence today is still due to this one fact…"

    So I believe it is the reopening of this Manichean battle between labor and capital, between Marxism and capitalism, that triggers these highly charged emotional responses. Arendt goes on to elaborate:

    The really anti-traditional and unprecedented side of his [Marx's] thought is his glorification of labor, and his reinterpretation of the class–the working class–that philosophy since its beginning had always despised. Labor, the human activity of this class, was deemed so irrelevant that philosophy had not even bothered to interpret and understand it…

    What Marx understood was that labor itself had undergone a decisive change in the modern world: that it had not only become the source of all wealth, and consequently the origin of all social values, but that all men, independent of class origin, were sooner or later destined to become laborers, and that those who could not be adjusted into this process of labor would be seen and judged by society as mere parasites. To put it another way: while others were concerned with this or that right of the laboring class, Marx already foresaw the time when, not this class, but the consciousness that corresponded to it, and to its importance for society as a whole, would decree that no one would have any rights, not even the right to stay alive, who was not a laborer. The result of this process of course has not been the elimination of all other occupations, but the reinterpretation of all human activities as laboring activities…

    Needless to say, such thoughts are anathema to the slothful and leisurely lifestyles of the Masters of the Universe, not to mention their multi-million dollar pay packages.

  3. VG Chicago

    I was able to obtain these top-secret photos of the 2011 Jeep Cherokee model, after it was purchased by Fiat. A little industrial espionage was necessary on my behalf, but it was a risk well worth it. Also, I had to bribe the new CEO of Chryster, a true Italian well-versed in all sorts of illegal activities, of which bribing is the least dangerous one. I know you all want to get to the pictures, so here they are:

    This picture shows the impressive all-terrain capabilities of the SUV. Notice how tall the grass is, which posed no obstacle to the vehicle's single cylinder engine. During tests, the vehicle had no trouble negociating through the filth and knee-deep trash of the average Italian town, so the growing potholes of most American cities will pose no obstacles either:×960.htm

    And here is the convertible model of the new 2011 Jeep Cherokee. It is a vehicle targeting the truly romantic customers, so notice that once the driver is in the car, there is more than enough room on the passenger seat for a small dog or cat. So, those romantics that engage in bestiality with small dogs, cats, or rats, will be very pleased with the model:×960.htm

    The new 2011 Jeep is also a car for beautiful people everywhere. Notice here how great looking these obviously non-Italians are (because Italians tend to be short, dark, dirty, and ugly), and how the paparazzi follow them around, even in the countryside. You too can be just as famous and just as beautiful as these "special" people are:×960.htm

    Finally, for all the dumb Miss-California wannabes everywhere, Chrysler-Fiat will make available a new Jeep Cherokee model to suit their obsession with the color pink. Stupidity not included, though:

    Kind regards,
    Vinny GOLD (formerly known as the scandalous contributor named "Vinny GOLDberg)

  4. profnickd

    A bankrupt GM that does not receive the same quick section 363 treatment that Chrysler received would be a very nasty shock to the U.S. and global economy.

    Even if accurate, this is not an argument for violating creditor/bondholder rights or for continued taxpayer bailouts.

    Large firms — especially those having a multiplicity of complex relations with subcontractors and other businesses — that goes bankrupt may very well have a shocking effect on the economy.

    But that's what happens when a firm produces goods & services nobody wants.

    Either allow bankruptcy and that "shock" or a.) screw over creditors b.) screw over taxpayers with bailouts, or c.) some combination of a.) and b.).

  5. RTD

    Fiat's stock popped because they acquired most of the assets but none of the liabilities of Chrysler and didn't spend a dime to do it. I still don't get the idea that they bought Chrysler not with cash, but rather with the promise to "share technology with them". Isn't that sharing technology with themselves now?


  6. VG Chicago


    Your insightful remarks are truly remarkable. I’ll add my own remarks below.

    What I don’t understand, is how could a marriage between two losers (Chrysler and Fiat) make into a winner? If my memory serves me right, wasn’t Chrysler bought by Mercedes a while back, and what a disaster that turned into! If Mercedes could not turn this shit*y company (Chrysler) around, what makes our glorious, oh how great art thou, almighty, wise, beautiful and eternal Oh’bama think that Fiat could?

    As an European-American… err… “American-European”… I can tell our uninformed American readers that Fiat is the biggest automaker loser in Europe, and possibly in the world. Their claim to fame is that stupid 500 series, which is an utter joke.

    Speaking of the 500, I have a friend in Italy who owns one. His house is at the top of a hill, so when we would return from a trip into town, I had to get out of the car and push it, because its pathetic engine could not negotiate the hill (which was not that steep, anyway) with two people inside. And even with one person inside, it could only do it in first gear.

    Now, “my fellow Americans”, do you really, really want that “technology” in the United States of America?

    Let me be blunt here. Let me make this personal. Tax-paying American chumps everywhere: do you really want your sons and daughters, your grandsons and granddaughters to grow up watching the Fiat 500 negotiating your neighborhood’s beautiful hills in first gear? Do you?!…LOL

    Vinny GOLD
    PS — what I like most about this blog is the depth and thoughtfulness of the comments… especially mine… :)

  7. Kyle S

    Appended at the end of the DIP motion filed in the GM bankruptcy is a 9 week consolidated cash flow, probably prepared by AlixPartners. It highlights the reasons why a traditional PoR doesn't make sense for this case. Namely, the forecast shows that GM will burn through $7 billion of cash on an operating basis in the 9 weeks ending August 2nd, and when including non-operating cash expenditures will burn through almost $19 billion. That is a melting ice cub if I've ever seen one. Somehow I don't envision the bondholders are willing to front $7 billion (making the conservative assumption that NONE of the non-operating disbursements would need to be made, which isn't realistic) to the company to give it 9 weeks more time to find a buyer…

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