The title of the October 14 NYU Law Forum, “Is What’s Good for GM Good for America?,” moderated by Vice Dean Barry Friedman, was a riff on a statement by Charles Erwin Wilson, former president of General Motors, who once famously said, “For years I thought that what was good for our country was good for General Motors, and vice versa.” Wilson spoke those words in 1953, during a period when GM was responsible for roughly three percent of the nation’s gross domestic product. But in June 2009, the 101-year-old company filed for bankruptcy.
GM’s assets were sold to a new entity comprised of the U.S. government; Canada’s federal government and the Ontario provincial government; two unions, United Auto Workers and Canadian Auto Workers; and GM’s unsecured bondholders. The auction was a 363 sale, named for a section of the Bankruptcy Code allowing for the quick sale of perishable assets that are rapidly depreciating.
Samuel Issacharoff, Bonnie and Richard Reiss Professor of Constitutional Law, argued that the 363 sale provision had been abused in the reorganizations of GM and its domestic competitor, Chrysler, because rather than specific assets, the entire company was deemed perishable. To Issacharoff, however, the circumstances were not sufficiently extraordinary to warrant a 363 sale.
Barry Adler, Bernard Petrie Professor of Law and Business, agreed, specifying the problem wasn’t that the government had taken the largest stake in the reorganized companies but that the 363 sales hadn’t been true free-market sales: any potential bidder had to agree to assume the companies’ liabilities to the United Auto Workers, increasing the possibility that the best price for the assets might not be obtained. In this case, Adler said, the government and its partners probably had paid fair market value, which, with the addition of the liabilities, meant that they had likely overpaid because of the strong determination not to let the companies fail and drag down the rest of the wobbling economy with them.
But even that, Adler said, wasn’t his main beef with what had happened: “The bankruptcy process was perverted. The court approved these sales despite these bidding restrictions, and this sets a precedent that would permit bidding restrictions like this in the future. The next time it may not be someone who is willing to overpay for the assets that comes along bidding, and the money that goes into the estate will be too little, and now the 363 process can be used to divert funds away from the investors. Investors are less likely to invest, and that can be a drag on the economy as a whole.”
Assistant Professor Troy McKenzie ’00 pointed out that this kind of 363 sale had become increasingly common, if not on the same scale as the GM and Chrysler reorganizations, and disagreed with Adler that the restricted bidding was a real perversion of the bankruptcy process. Speaking to Adler’s advocacy of a true free-market sale, McKenzie said, “That’s a great thought experiment, but I don’t think it goes beyond a thought experiment.” The companies’ finances were so dismal, he argued, that even without the restrictions, a viable competing bidder probably would not have emerged. Besides, McKenzie added, the unprecedented economic circumstances of that moment were not likely to repeat themselves.
Sander Esserman, a partner at the Dallas firm Stutzman, Bromberg, Esserman & Plifka who represents people with asbestos-related claims against GM, agreed with McKenzie’s latter point, reminding the audience about the faltering banks unable to help at the time, leaving the government as the only entity that could intervene. Nevertheless, he said, it “really was a perversion of the bankruptcy process, and a demonstration of the power of the government. In some sense I have to stand back and admire the audacity of the thing.” Calling the reorganizations “engineered government foreclosures of huge enterprises,” Esserman invoked the plight of claimants injured by design defects who would traditionally sue the successor to the failed enterprise. What recourse is left to them, he wondered, now that the government has taken over?
Issacharoff took exception to McKenzie’s argument that the reorganizations’ circumstances would not recur: “What if the casinos in Las Vegas are in trouble? Why isn’t there an invitation to every subgroup with political clout, and one powerful senator who may or may not turn a vote on something someone cares about, to say there should be government-sponsored reorganization of this industry also?... What’s the limiting principle?”
That limiting principle was politics, McKenzie acknowledged, and Issacharoff replied that the government could have seized the GM and Chrysler assets directly rather than doing so in a more convoluted, politically feasible manner: “There should be huge public accountability if the state wants to begin to nationalize major sectors of our economy.... The idea that you can do this sub rosa by running it through a bankruptcy court, so that the government’s role is not only putting up money but actually restructuring the organization and basically being the operating force of an ongoing enterprise, I think that’s a perversion of our political system.” McKenzie later added, “If there’s a process that maybe has some perversions as opposed to the use of outright political force, I still think there are benefits to going through the process.”
Watch the full recording of the event (1 hr, 12 min):
Posted on October 21, 2009