BANKRUPTCY REORGANIZATIONS AND THE TROUBLING LEGACY OF CHRYSLER AND GM (English version)

The Chrysler and General Motors (GM) bankruptcy reorganizations represent the culmination of a sea-change in corporate restructuring practice that has occurred largely over the course of just the past decade. A bankruptcy reorganization has traditionally been effectuated though a chapter 11 plan of reorganization, with elaborate requirements for disclosure, creditor voting, and allocation of stakes in the reorganized debtor entity’s new capital structure among creditors and owners. Such an internal boot-strap reorganization, though, is on the decline, and many reorganizations are now accomplished through a relatively expeditious going-concern sale of the debtor’s business and assets to a third-party purchaser, with a subsequent distribution of the proceeds to creditors and shareholders in accordance with their relative priority rights. What Chrysler and GM vividly illustrate is that there actually is no clean, clear distinction between reorganization by “plan” and reorganization by “sale”—through the wonders of sophisticated transaction engineering, each can be the precise functional equivalent of the other. The acute danger this presents, and that actually came to pass in the GM case, is that a nominal “sale” structure can be used to effectuate a purely internal boot-strap reorganization that distributes the value of the reorganized debtor entity among creditors in a manner that indisputably contravenes their relative priority rights in the debtor’s assets. Indeed, when examined in the context of a longer historical perspective on corporate reorganizations, one can readily discern that what transpired in GM (and what the Second Circuit’s Chrysler opinion fully sanctions) is precisely what the Supreme Court prohibited in a series of decisions in the late 1800s and early 1900s, which formed the basis for chapter 11’s codification of creditors’ priority rights in corporate reorganizations. Contrary to the received wisdom regarding the implications of Chrysler and GM, their combined effect foretells the literal death of the fundamental distributive principles that are the essence of bankruptcy law and that have been the bedrock of bankruptcy reorganizations for at least a century. Moreover, no one (and particularly not the judges presiding over those cases) seems to appreciate that fact! Amazingly, we find ourselves in the midst of a sub silentio destruction of the very core of bankruptcy reorganization law.