Government Influence Apparent
The U.S. Government and the Treasury played an active role in GM's case. Judge Gerber set the tone of the Decision by citing a speech by President Barack Obama early on, as follows:
What I'm talking about is using our existing legal structure as a tool that, with the backing of the U.S. Government, can make it easier for General Motors . . . to quickly clear away old debts that are weighing [it] down so that [it] can get back on [its] feet and onto a path to success; a tool that we can use, even as workers stay on the job building cars that are being sold. What I’m not talking about is a process where a company is simply broken up, sold off, and no longer exists. We’re not talking about that. And what I’m not talking about is a company that’s stuck in court for years, unable to get out. (Decision, 12).
Sale to be Funded by Government Loans; Saturn Likely to be Liquidated
The sale will be funded by loans from the governments of the United States, Canada and the City of Ontario (Decision, 14). The U.S. loan was contingent upon the approval of the sale on or before July 10, 2009. (Decision, 35-36). Following the sale, the US Treasure will own 60.8%, the Canadian governments will own 11.7%, a new GM employee benefits association will own 17.5%, and, assuming a reorganization plan is confirmed, “Old GM” will own 10% of the new company (Decision, 19-20). Old GM is set to receive approximately $45 billion in assets, plus the value of equity interests that it will receive in New GM. (Decision, 18). Saturn and certain other entities will be left with Old GM and liquidated. (Id.)
Lack of National Health Care Played Role
Judge Gerber noted that lack of a national health care system made GM less competitive than it could have been. One of the U.S. Treasury's conditions for providing funding was negotiation of a new agreement with the United Auto Worker's Union, which was accomplished (Decision, 20). A concession by the employees was agreement to a new health care structure. Judge Gerber opined that the lack of a public health care system and GM's attempts to provide health care benefits directly kept the company from being competitive, as follows:
Workers in the U.S. do not have government provided healthcare benefits of the type that the employees of many of GM’s foreign competitors do. Over the years, GM and the other members of the Big Three committed themselves to offer many of those healthcare benefits, resulting in decreased competitiveness and enormous liabilities. GM tried to reduce the costs of healthcare benefits for its employees, but these costs continued to substantially escalate. Many of these costs were in the form of obligations to pay healthcare costs of union employees on retirement. (Decision, 21-22).
Sale Approved Over Objection of Creditors
The sale was approved over the objection of certain bondholders. The sale to New GM was a so-called “Section 363” sale, free and clear of liens and other interests, including certain personal injury claims. Section 363 of the Bankruptcy Code provides that a debtor's assets may be sold free and clear of the interests of third parties under certain circumstances, and the sale may be accomplished quickly, prior to confirmation of a reorganization plan.
Several bondholders objected to the sale, arguing that a debtor cannot circumvent the protections of chapter 11 and short circuit the plan confirmation process by selling substantially all of its assets through a Section 363 sale (Decision, 26). It is important to note that creditors, such as bondholders, are entitled to vote upon a reorganization plan, but there is no vote prior to a Section 363 sale. Nevertheless, the Second Circuit Court of Appeal does not limit Section 363 sales to emergency situations, and substantially all of a debtor's assets may be sold if there is some articulated business rationale for the sale, such as the need to preserve a company's going concern value (Decision, 30-31). In support of his Decision, Judge Gerber cited from the Chrysler cases, as follows:
A debtor may sell substantially all of its assets as a going concern and later submit a plan of liquidation providing for the distribution of the proceeds of the sale. This strategy is employed, for example, when there is a need to preserve the going concern value because revenues are not sufficient to support the continued operation of the business and there are no viable sources for financing.(Opinion, 34, quoting from In re Chrysler LLC, 405 B.R. 84, 96 (Bankr. S.D.N.Y. 2009).
Judge Gerber also quoted from the U.S. Supreme Court's recent Piccadilly Cafeterias case. Although the propriety of a 363 sale was not the main issue, the Justices wrote:
Chapter 11 bankruptcy proceedings ordinarily culminate in the confirmation of a reorganization plan. But in some cases, as here, a debtor sells all or substantially all its assets under § 363(b)(1) before seeking or receiving plan confirmation. In this scenario, the debtor typically submits for confirmation a plan of liquidation (rather than a traditional plan of reorganization) providing for the distribution of the proceeds resulting from the sale. Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc.,128 S.Ct. 2326, 2331 n.2 (2008).
The Judge found that a quick 363 sale was necessary to avoid liquidation, and he noted that: “As the Court’s Findings of Fact set forth at length, GM, with no liquidity of its own and the need to quickly address consumer and fleet owner doubt, does not have the luxury of selling its business under a plan.... And if that is not by itself enough, the U.S. Treasury’s willingness to fund GM is contingent upon the approval of the 363 Transaction by July 10.” (Decision, 35-36). The bondholders argued that the Judge should delay the sale of GM's assets in hopes that the U.S. Treasury would offer a better deal, but he declined to play “Russian Roulette” with the U.S. Government. (Decision, 38).
Sale to be Free and Clear of Personal Injury Claims
Judge Gerber clarified that the sale will be free and clear of personal injury claims, including accident- and asbestos-related claims (Decision, 57-61). The Judge cited to the Chrysler cases, where Justice Ginsburg briefly stayed the sale of the debtor's assets. One blogger suggests that the Justice might have misgivings about the sale cutting off personal injury tort claimants from recovery (see ”What's Bothering Ruthie?”). While the law of the Second Circuit clearly holds that Section 363 permits sale free and clear of personal injury claims, there are conflicting authorities from other circuits. Did the Supreme Court miss an opportunity to clarify Section 363?
Shakeup Expected
One thing is clear: It is no longer business as usual at GM. Frederick "Fritz" Henderson, GM's CEO, says “Business as usual is over at GM,” and he expects hundreds of middle managers to be let go in the coming weeks, reports the Wall Street Journal.
By Reno F.R. Fernandez III
