Bankruptcy Courts: Ignore Chrysler Bailout
When the Obama administration overrode the legal rights of Chrysler creditors, many worried about the effect of this legal upheaval on future bankruptcy cases.
We've just received our first answer via the Phoenix Coyotes hockey team bankruptcy case: The legal system is reacting to the Chrysler case like a cat spitting out a hairball.
On September 30, Judge Redfield T. Baum rejected a bid by the National Hockey League (NHL) to purchase the bankrupt Coyotes in part because the NHL’s purchase plan, which would use cash to fully repay all but two of the team’s unsecured creditors, would violate a core bankruptcy principle that all similarly-situated creditors be paid out equally.
Lawyers for the NHL had relied in part on the Chrysler case to argue that the NHL purchase plan was legal. While there are significant legal distinctions between the Coyotes and Chrysler cases, Judge Baum’s reaction to the mere suggestion of using Chrysler as legal precedent is striking, according to a report by the American Lawyer's Zach Lowe:
[The NHL lawyer] barely got the word "Chrysler" out of his mouth before Judge Baum interrupted: "Let me say something about these two cases [the Chrysler and General Motors bankruptcies]," Judge Baum said during the Sept. 10 hearing, according to a transcript. "You know, those two cases were so unusual that I'm not sure how helpful the precedent of those two cases is to this court or any court. When the United States government comes in and says, 'I'm going to buy' what at one time was the biggest company in America... I mean, I had to get a little smirk when I thought of that poor pension manager from Indiana who was trying to fight that. It was kind of like the gentlemen in Tiananmen Square when the tank came rolling."
And that was the last substantial mention of Chrysler and GM during the hearing, the transcript of which goes on for 333 more pages.
Warren Buffet worried at the time of the Chrysler bankruptcy: “If we want to encourage lending in this country, we don’t want to say to somebody who lends and gets a secured position that the secured position doesn’t mean anything.” Looks like the bankruptcy courts share that worry - and that as a result the extraordinary government interventions during the financial crisis will eventually be considered one-of-a-kind responses to one-of-a-kind situations. Until the next one-of-a-kind situation, that is.