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Understanding the Bankruptcies of Chrysler and General Motors: A Primer

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Document pages: 52 pages

Abstract: The federal government’s investment in the American automotive industry in 2008 and 2009 has sparked controversy over the government’s role in private enterprise, in general, and the bankruptcy process, in particular. Critics of the reorganizations assert that the bankruptcies threaten to undermine the rule of law. To save the politically powerful union, the government elevated the unsecured claims of organized labor above the secured claims of investors, according to critics, overturning well-established creditor priorities in bankruptcy. This precedent-setting distortion of bankruptcy priorities, critics argue, will have severe consequences, resulting in a greater cost of capital for borrowers. Supporters reply that the restructurings comply with existing bankruptcy law and practice. According to the supporters, the critics are bothered by the fact that the government was a major participant in the transactions, and that it chose to favor the union over investors. The scope and intensity of this debate suggests that these cases might have a crucial impact on the future of bankruptcy. This Article explores that possibility. The Article describes how the two automotive companies structured their bankruptcies, and how those structures were challenged in the courts. The Article presents the arguments made on each side of the debate, in a point-counterpoint format. Unlike existing studies, which argue either for or against the restructurings, this Article takes an even-handed approach, exploring the arguments and counterarguments on both sides. The Article advances certain reforms which, by responding to the concerns on both sides of the debate, promise to bring greater clarity to bankruptcy practice. The Article also takes an early glimpse at effects the Chrysler and General Motors decisions may have on bankruptcy law, by examining the initial cases that cite or discuss the court decisions.

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