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A Final Thought on the Chrysler Sale

posted by Stephen Lubben

A recent exchange with a commenter on the blog lead me to this conclusion: doesn't the argument that the consideration going to the Unions should have instead gone into the estate, for the benefit of the secured lenders, amount to little more than an argument that the buyer of the Chrysler assets (backed by the government) should have overpaid for the assets?


Okay, let me be the contrarian. There is an argument to be made that, if the buyer paid that group of creditors as part of the overall "price" it was willing to put up in order to acquire the asset, then that consideration ought to be factored into the "value" that the asset must have been "worth" to the buyer. The argument completes, then, with the proposition that that value should have been paid into the estate, for appropriate distribution in accordance with the scheme of distribution in the Code.

This is the argument made not so long ago in the Sharper Image case, where the buyer agreed to pay the unsecured creditors a sum of money in exchange for their dropping their objections to confirmation. The UST argued that that money was actually part of the "value" the buyer was giving to acquire the asset. The court concluded otherwise, saying that the buyer could spend its own money as it pleased, and could not be compelled to throw the money into the pot for redistribution in a way not beneficial to the buyer.

And this is the nub of it. If the consideration is paid in a way that is not beneficial to the buyer, then perhaps the consideration would never be paid at all. The buyer in Chrysler had economic reasons for satisfying the union claims differently -- doing so made the acquired assets more valuable in the hands of the buyer. If it had been required to instead simply put that money into the pot (and so not garner the support of workers on the other side of the sale), it arguably would never have committed that money to the sale in the first place.

These conceptual considerations support the abstract notion that a plan would be a better alternative than a sale. True enough, in the abstract. But both time and the lack of operational financing made that option essentially meaningless. As I recall from college days, it was Leibnitz who posited that we live in the best of all possible worlds, and Voltaire who jolted him back to reality.

Reluctantly, I have to agree: Seeing as the buyer of all the Chrysler assets was not outbid by someone else, the price paid to the estate must have been fair or an overpayment.

I'm not sure why the creditors did not have the choice of liquidation instead through.

I believe the reason liquidation wasn't an option is because there was an unrebutted assessment submitted to the court that a liquidation would yield less than $2 billion. The secured creditors did not contest that fact.

We have to assume a functioning market, though, right? I thought that there were eligibility thresholds imposed regarding "qualified bidders" vis. assuming the union CBAs. (Didn't Mark Roe write an op ed on this?)

In a post called "Do Bidding Procedures Matter," a certain law professor made the point that bidders who are going to top $2 billion bids know that its easy to get bidding procedures modified once you put cash on the table.

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