In ‘Dealing with the Mob’, I wrote about administration threats and intimidation of Chrysler’s non-TARP secured creditors, and in particularly I extolled the virtues of their attorney, Tom Lauria of White & Case. As you’ll recall, he related the pressure he was feeling to roll over on his own clients and let the administration illegally deprive them of their contractual rights.
Well, Lauria’s firm filed an ‘in your face’ objection in the Bankruptcy Court in the Southern District of New York objecting to the government’s motion to sell Chrysler’s assets. Because all the debtor’s assets are under the jurisdiction of the court, one of the first thing that the debtor does in a Chapter 11 case is file a motion under section 363 of the Bankruptcy Code ‘to use, sell or lease’ its own assets. Lauria’s clients objected to the government’s attempt to deprive them of their contractual rights using a provision within section 363 that permits a sale of secured creditor’s assets.
This provision provides that a debtor ‘after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate….’ Such a sale of the non-TARP creditors’ collateral would be free and clear of their lien only if one of the following conditions is met:
(1) applicable non-bankruptcy law permits sale of such property free and clear of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.
It’s hard to see how the government could obtain the court’s approval to sell the secured bondholders interests, which attached to specific items of collateral. Non-bankruptcy law wouldn’t permit such a sale. There’s no consent and the property isn’t going to be sold for a price greater than the liens on it. There’s no dispute as to the validity of the liens themselves and it’s doubtful that the bondholders could be compelled to accept a money satisfaction. Further, case law mostly states that section 363 can’t be used as a substitute for a Chapter 11 plan of reorganization. For a taste of the creditors’ pushback, read the motion here. There’s a good deal of clunky bankruptcy stuff in there, but one portion is brassy indeed:
13. The Treasury Department relies on TARP as the purported authority to justify the disparate treatment under the 363 Sale, even though TARP was enacted after the Senior Lenders’ liens on the Debtors’ property were already in place. The Supreme Court long ago recognized, however, that a secured creditor’s interest in specific property is protected in bankruptcy under the Fifth Amendment. Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555, 594 (1935). That case involved a Depression-era statute that was intended to help bankrupt farmers avoid losing their land in mortgage foreclosure. The statute in Radford provided that the bankrupt debtor could achieve a release of the security interests either (i) with the lender’s consent, purchasing the property at its then appraised value by making deferred payments for two to six years at statutorily-set interest rates; or (ii) by seeking from the bankruptcy court a stay of the proceedings for up to five years during which time the debtor could use the property by paying a rent set by the court, which payments would be for the benefit of all creditors, with a purchase option at the end of that period. Id. at 856-57.
14. Justice Brandeis noted that the “essence of a mortgage” is the right of the secured party “to insist upon full payment before giving up his security [i.e., the property pledged].” Radford, 295 U.S. at 580. In invalidating the statute, the Court stated that “[t]he bankruptcy power . . . is subject to the Fifth Amendment,” and that the pernicious aspect of this law was its “taking of substantive rights in specific property acquired by the bank prior to the act.” Id. at 589-90 (emphasis added). Thus, Congress could not pass a law that could be used to deny to secured creditors their rights to realize upon the specific property pledged to them or “the right to control meanwhile the property during the period of default.” Id. at 594. That is precisely what the Treasury Department would have Chrysler do here, with respect to the Chrysler Non-TARP Lenders’ property rights that were acquired prior to the enactment of TARP.
15. Relying on purported authority provided by TARP, the Treasury Department is demanding that Chrysler’s assets be stripped away from the coverage of the Senior Lenders’ liens – thereby impairing the rights of the Senior Lenders to realize upon those assets – so that those assets may be put in New Chrysler and used to the benefit of unsecured creditors in this proceeding, who will then be paid much more than the Senior Lenders. But, even assuming that TARP provides the Treasury Department with authority to provide funding to the Debtors and impose the transfer of collateral away from the Senior Lenders, TARP was enacted long after the Senior Lenders contracted with the Debtors and received senior liens on the Debtors’ property. Radford specifically disallowed the use of a law to retroactively alter existing liens on property.
16. Here, the proposed sale of the Debtors’ assets will leave the Senior Lenders with a diluted pool of assets and no further interests in the operating assets covered by their specific liens. The Constitution forbids this application of a law retroactively to undercut the Senior Lenders’ pre-existing property rights in favor or inferior creditors.
17. Finally, that the Treasury Department would take these unconstitutional actions to help the United States address difficult economic times is not an answer. Indeed, the same justification was expressly rejected in Radford, where Justice Brandeis noted that a statute which violated secured creditors’ rights, but which was passed for sound public purposes relating to the Great Depression, could not be saved because “the Fifth Amendment commands that, however great the nation’s need, private property shall not be thus taken even for a wholly public use without just compensation.” Id. at 602.
18. What is really striking here is that what is being proposed by the Sale Motion would strip the Collateral away and allow it to be put to use as new capital in New Chrysler for the benefit of existing and other creditors – even though the Chrysler Non-TARP Lenders have been given no opportunity to realize upon that Collateral to the point of full repayment ahead of at least $14 billion of selectively identified unsecured creditors.
In reviewing the bankruptcy court docket, it doesn’t appear that the court has ruled on the government’s motion or the creditors’ objection. One nasty development, however, is that the judge decided to publicly reveal the names of the objecting creditors. In view of the threats against them, the creditors wanted to remain anonymous. No such luck.
For the sake of the country, I hope the remaning creditors don’t fold in the face of the Peronist threats coming from the White House.
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The Most important challenge GM faces is to win back the trust of the tax payers. Giving away billions of tax payer money is not going to go under good sights of the consumers