I must admit defeat in my prediction that disgruntled senior lenders to Chrysler might gain backing from the bankruptcy courts for their challenge to the government-imposed debt restructuring.
Well, not exactly. In a rather poetic twist, Chrysler is due to exit from Chapter 11 today while General Motors goes into it and Arthur Gonzalez, a New York judge, has written an admirably clear ruling on why he did not accept challenges to the restructuring.
The judge was asked both by Indiana retirement funds and a group of dealers that is due to lose its rights to sell Chrysler vehicles to block the deal, but he ruled that Chrysler was acting in good faith, and the federal government has the right to choose what it bails out and what it does not:
The underlying argument of many of those opposing the transaction is not against the Government Entities’ involvement. Rather, it is the desire to have the Governmental Entities protect every constituency within the auto industry from economic loss, and not to limit the protection to those interests that the government perceives as being essential to the survival of a successful “New Chrysler.” For example, any dealership rejection that is approved will cause hardship to the particular dealership involved but may well be necessary if New Chrysler is to survive. These are the kinds of economic decisions that have to be made in every bankruptcy case.
The extent to which a governmental entity should be involved in protecting certain industries is a political decision, and the Court does not express a view as to the Governmental Entities’ involvement here. Rather, the Court observes that these are the dynamics within which the case is presented to the Court. The economic reality is that no one was willing to lend other than the Governmental Entities. Further, in the current economic climate, the only alternative would be an immediate liquidation, which the evidence has shown would not bring a higher return to creditors.
The salient point here is the degree to which US courts – particularly the Delaware chancery court – give wide latitude to senior executives of companies to act as they see fit, as long as they do so in good faith and do not breach their fiduciary duties.
Shareholders, and bondholders, have very limited rights to insist on managements acting differently once those conditions are met.
In Delaware, this is known as the business judgment rule. The bankruptcy court appears to support the equivalent for the US government – the Obama judgment rule, perhaps.
Ps Read Gideon Rachman’s blog: General Motors, protectionism and deglobalisation
