Chapter 11: The Situation

Recommended reading: McDermott partner Geoffrey Raicht 's overview of the key bankruptcy cases of 2009 and their potential future impact (free sub req’d).

Raitch’s piece is in many ways a paean to the “creativity and power of the Bankruptcy Code” which he modestly credits with “perhaps” saving the overall global economy. He begins by noting that there actually weren’t nearly as many Chapter 11 filing in 2009 as one might have expected given the massive spike in junk high yield bond defaults (nearly 14%, as opposed to an annual average of under 5%). As anyone familiar with the process knows, being broke on a large scale is seriously expensive. Thus “[t]he fact that the number of business bankruptcies did not explode may be explained, at least in part, by the lack of financing necessary to support a bankruptcy filing.” So absent any sort of functioning credit market, the major 2009 Chapter 11 cases featured quick asset sales and speedy pre-packaged plans.

Obviously, the highest profile examples of this “quick strike sale” approach were the cases of Chrysler and General Motors. As Raitch describes it, “In such restructurings, certain prepetition junior creditors came away owning equity in the new company while certain senior creditors did not … the sales were objected to by certain parties on several grounds, including that the sales were sub rosa plans and violated bankruptcy's absolute priority.” That’s one way to put it. One can hardly blame Raitch—in the dry pages of the New York Law Journal—for eliding (or at least soft pedaling) the fact that these cases, because of their scale and import, became inevitably and intensely politicized. One side maintained that the government did what it had to do, within the spirit of the law, to avert a disaster. The other camp insisted the deals were blatantly unfair circumventions of established law.* This was strange territory for the bankruptcy bar.

The unresolved question: “Can 2009 be characterized as the year where ‘desperate times require desperate measures’? Or is it more accurate to say that the elasticity of the Bankruptcy Code proved to be a game saver for the economy?”

-posted by brian

*Bonus matching game! Guess the source of these negative characterizations of (one or both) of the automaker reorganizations:

a. “[A]n end run around long-established laws governing the priority of liquidation of assets in bankruptcies, in order to give a big political payoff to the union.”

b. “Financial engineering that ignores basic principles of fairness and economic realities to further political goals.”

c. “It resurrected discredited practices long thought interred in the 19th and early 20th century equity receiverships, and that its potential, if followed, for disrupting financial markets surrounding troubled companies in difficult economic times is more than small.”

1. A law review article by a couple of Ivy League profs

2. An avowedly rightwing blog

3. An unsigned editorial in The Washington Post

(ans: a2, b3, c1)