Chrysler Group LLC’s restructuring may change the way bankruptcy reorganizations play out in the future. Within days of a bankruptcy court approval of the plan to sell Chrysler assets to Fiat SpA and leave secured creditors holding their debt, the National Hockey League’s Phoenix Coyotes attempted the same 363 strategy in trying to rush a sale of the team. The judge did not approve the attempt to allow the Coyotes to be sold quickly, citing that there was no emergency as the NHL was underwriting the team for the foreseeable future. Had the court done so, it would have denied creditors the kind of input typically afforded them under bankruptcy law.
Bankruptcy and financial professionals have speculated that such scenarios where the expected outcome of the application of rules of law could make investors and lenders demand higher interest rates on debt given the uncertainty over how they might fare should the borrower encounter financial difficulties.
The concern is that lenders have factored certain expectations of identifiable events happening having a predictable result based on precedent of rules and laws.
How are investment decisions to be made and quantified when lenders are faced with bankruptcy courts that appear to disregard the rules? Are such arguments for speed a short-term concern that likely will not be followed when the financial crisis ends? Chrysler maintains that it used established bankruptcy procedures, and that extraordinary measures were needed during the unprecedented economic crises.
Lawyers who represent secured creditors fear the Chrysler precedent could be used to allow companies to get around established procedures for reorganizations which require negotiations and creditor vote approving a plan of reorganization.
At issue with Chrysler was a procedure called a “363 sale,” which refers to a section of the U.S. Bankruptcy Code which allows the court to approve a sale assets without the approval of creditors. Such sales are typically used to sell a single or group of asset(s) in bankruptcy proceedings, such as a building that needs to be sold quickly to maximize its value, and can be done without creditor approval. Creditors claim Chrysler used the procedure to effect a restructure of the entire company, not just a single or group of asset(s).
Lawyers are citing these examples in the name of speed, claiming emergency circumstances. The question remains how these impact future attempts at 363 sales will.