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House Hearing, Once Again, Questions Auto Bailouts and Dealership Closings

Rearview mirror look continues the debate on actions long taken and congressionally approved.

by on Jul.24, 2009

U.S. Capital WADC

The rulings, by the two different judges who handled the cases, cited Bankruptcy law precedents that ultimately went back to the 19th century.

Politicians are not known for their memories or consistent application of laws they have passed, as the latest hearings on the bankruptcy reorganizations of Chrysler and General Motors demonstrate. The decisions by two different judges, who handled the cases with surprisinging speed, cited U.S. Bankruptcy law precedents that went back to the 19th century.

The Bankruptcy code was established as law and subsequently modified by the U.S. Congress, the same institution that is now raising questions about its validity. Some members seemed shocked that the Auto Task Force used a well-tested legal strategy that at its core is consistent with the purpose of bankruptcy law, which is the preservation of the maximum value of the corporation, or “estate” in legal terms.

At least two areas of the proceedings continue to evoke concern in Congress. One is the closing of dealerships; the other is the use of the so-called Section 363 sale under Chapter 11 of the code, which allowed Chrysler and GM to survive by preserving some assets and contracts in newly formed corporations while liquidating other assets and voiding contracts that threatened the survival of the new entities.

Both of these broad issues were raised this week at hearings by the Subcommittee on Commercial and Administrative Law in the House of Representatives. One clear danger of government ownership of large stakes in the new auto companies is the possibility of political meddling in what should be straightforward business decisions. And although the Obama Administration at the executive branch level appears to have handed over the running of the Chrysler Group and General Motors Company to seasoned business and industry professionals, the same cannot be said about the legislative branch, which continues meddling by way of hearings and proposed new laws.

Section 363 Sale

Objections to the 363 sale are easily dealt with in my view. There was no other way to preserve as much of the companies as was saved by using this method. Liquidation where everybody looses, except the lawyers, was the other choice. Taxpayer financing during the bankruptcies was made available since the private credit markets were not interested in advancing money to either ailing company, a fact proven by the complete absence of other bidders under the sale procedures.