Sub Rosa Plans

Lots of discussion of sub rosa plans lately, but little discussion of the fact that the 2d Circuit has never really embraced the Braniff-type analysis of this issue.  For example, the sale objection filed by the "Committee of Chrysler Affected Dealers" --- who don't seem to have filed a 2019 statement, so this may be academic -- quotes from the Iridium opinion, qutoing Braniff on the reasons why the 5th Circuit has prohibited sub rosa plans. (Obj. at 20).

But the Dealers don't quote the next sentence in Iridium, where the 2d Circuit goes on to say:

In this Circuit, the sale of an asset of the estate under § 363(b) is permissible if the “judge determining [the] § 363(b) application expressly find[s] from the evidence presented before [him or her] at the hearing [that there is] a good business reason to grant such an application.” Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir.1983).

Motorola, Inc. v. Official Comm. of Unsecured Creditors (In re Iridium Operating, LLC), 478 F.3d 452, 466 (2d Cir.2007).

"In this CIrcuit," sounds a lot like "unlike the 5th Circuit," by my reading.  And the Iridium court goes on to uphold the bankruptcy court's ruling that the settlement in question did not constitute a sub rosa plan, despite violating the absolute priority rule.  (Which, as I've said before, I don't think is being violated in this case in any event).

Comments

[Lawrence D. Loeb]

Professor:

Lionel requires a good reason for rushing to a 363(b) sale of substantially all of the assets, correct?

Have you seen this article http://hosted.ap.org/dynamic/stories/U/US_CHRYSLER_DEALERS?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT or this article http://www.bloomberg.com/apps/news?pid=20601103&sid=aox927ehmA70&refer=news?

They seem to provide evidence that the main business reason being advanced is nonsense. Chrysler is selling MORE cars in bankruptcy. They could argue that they are giving excessive incentives. The counter argument, of course, is that, in the current economic environment, customers require those incentives and, therefore, getting out of bankruptcy will not change the ability of Chrysler to sell cars.

The other "business reason" is the timeline required by the DIP, but, if the question is argued, will the Court opine that a coercive DIP is a "good business reason?"

[Stephen Lubben]

In addition to the potential cut off of financing, there is the need to close before Fiat moves on to GM, and the need to close before GM dumps similar assets on the market (improving Fiat's bargaining position). But the first reason is probably sufficient -- many recent chapter 11 cases have gone the 363 route at the direction of the DIP lender.

[AMC]

Just so everyone knows what is being discussed here - a "sub rosa plan" is a term that recognizes the effect that a Section 363 sale of assets can have on the tragectory of a DIP's reorganization efforts.

In Chapter 11, creditors get certain protections as part of the Chapter 11 Plan confirmation process, including a formal disclosure statement, the right to vote on the Plan, and make legal objections to the proposed manner of distribution under the "absolute priority rule", etc.

The sale of assets under Section 363 has rules and is done under bankruptcy court supervision, but it does not include all of the creditor protections that are part of the Plan confirmation process. And yet, a sale of all, or a substantial portion of the debtor-in-possession's assets has the effect of limiting where a DIP's Plan can go. Thus, there is a concern that a Section 363 asset sale can be a "creeping Plan", or a "defacto Plan" - on in the title of this blog entry, a "sub rosa Plan".

[Anon]

"many recent chapter 11 cases have gone the 363 route at the direction of the DIP lender"

For the non-lawyers watching this it would be great if you could give us some examples -- since this is really the issue that makes the whole fuss over "rule of law" ridiculous.

[Stephen Lubben]

A recent example: http://www.millerbuckfire.com/html/news/viewNews.asp?newsID=1189

[Stephen Lubben]

This article also explains the role played by DIP lender in 363 sales: http://www.abiworld.org/committees/newsletters/assetsales/vol5num7/Asset_Sales_Sept_2008_Liquidating_Cases_Lender_Control.pdf

[Lawrence D. Loeb]

Professor, thank you for your answer.

I do not believe that Fiat would, or could, move on to GM. That would truly be a minnow swallowing a whale. Fiat is negotiating to buy Opel, and that's all they would want from GM.

They have had a chance at the Saturn division, and passed.

In my opinion, the Government is treating Chrysler and GM as if they were simply financially distressed (good business, bad balance sheet). If that were the case, then a quick trip through bankruptcy could make sense (although the creditors would not get the benefits of the full process).

In fact, both GMA and Chrysler are both operationally distressed in addition to having bad balance sheets.

Chrysler was unable to generate a positive EBITDA last year is are forecast, under Capstone's projections, to have negative EBITDA in 2009 (as a private company, there is limited information available). GM's automotive operations had a negative Operating Cash Flow last year of almost $6 billion! Operating cash flow was positive in the two prior years, but was not high considering the size of the balance sheet (the return on assets was awful).

These businesses need to make serious changes to their operations, throughout their supply chain and manufacturing businesses, so that they are viable.

The express train that these firms are on seems to doom them to another trip through court in a few more years and the loss of tens, if not hundreds, of billions of US taxpayer money.

Already, politicians are using the Treasury's position in the bankruptcy to try to force GM and Chrysler to maintain poor economic relationships to improve employment in their districts. This process is becoming more like the Pentagon budget!

The only benefit that could be realized by a quick trip through the bankruptcy court would be if that would get the Government out of the auto business. Instead, the current plans have the US taking significant equity and debt positions in those companies - leading to further lobbying in Washington.

The DIP terms discussed in the Miller Buckfire article are not quite as coercive as those given by Treasury in Chrysler's case. One of the cases mentioned relates to a pre-pack, not a 363(b).

Retailers like Circuit City and Sharper Image ended up as liquidations because of, among other things, the 2005 change in the law. Given the 210 day window to reject leases, the banks want a quick resolution or to use the full store network to sell the remaining inventory.

There has never been a case with the operational complications and the size of Chrysler. Lehman had a different set of circumstances, so the accelerated 363b was warranted. As a financial institution it depended on assets that would melt away if the uncertainty continued (their customers and their employees). Industrial companies do not have the same issues.

In my opinion, there is no operational reason that Chrysler should be allowed to do a 363(b) sale. The terms of the sale were dictated by Treasury and have been based on the opinions of experts paid to justify the price. The value of the operations could only increase through a bankruptcy, thus an expedited 363(b) sale is grossly unfair to ALL of Chrysler's creditors.

The judge may not have a choice but to allow the sale, partly because of the lack of DIP availability (although I believe he has the authority to participate in negotiating the terms if he finds them too onerous).

We'll have to see what happens next week in the Bankruptcy and District Courts.