Fear and Greed Blog

7/8/09 1:30 PM Update

After 24 hours, my comment has been posted.

From what I understand, many people that are involved with DealBook are on vacation. I guess my comment, and several others, fell through the cracks.

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I don't know.

I grew up with The New York Times asserting itself as THE newspaper of record. And even though a decision was made to reduce the scope of "All the News That's Fit to Print," I continue to have great respect for the paper (and I've been a daily subscriber for longer than I can remember).

I was quite surprised, when they published an article last night (later picked by Felix Salmon), a version of which was also posted on their DealBook blog that discussed some of the specifics of Judge Gerber's GM decision, but referred to the wrong Lionel bankruptcy (Lionel, LLC).

As many readers know, the case that Judge Gerber was referring to involved Lionel Corporation, not Lionel, LLC. In re Lionel Corp. is the seminal case in relation to Section 363(b) sales (see page 3 of Section 363 Issues–Acquiring Troubled Companies and Assets (Part 1) from the American Law Institute / American Bar Association site for Continuing Legal Education and page 1651 [15th page in the pdf file] of AN EFFICIENCY MODEL OF SECTION 363(b) SALES from the Virginia Law Review). That Lionel case was decided in 1983.

Lionel has been discussed on many of the blogs discussing the appropriateness of using Section 363(b) for both Chrysler and GM. I mentioned it in this blog. Steve Jakubowski (who is representing five accident victims in GM) wrote in great detail on all the legal issues on his Bankruptcy Litigation Blog, including Lionel, in a series of posts here, here, and here (the second post discusses Lionel).

The case cited by the NY Times (I am pasting a copy of the original article at the bottom of this post) was from 2008.

I notified Michael de la Merced (whose Twitter commentary on the hearings was great reading) about the mistake after I read the article online at approximately 12:00 AM on Tuesday morning. Mr. de la Merced was listed as a contributor to the article. He wrote back (around 9:00 AM Tuesday morning) "Yikes! Apologies for that, Larry. Thanks for the link to your post." Unfortunately, he apparently was unable to correct the error (by the way, I strongly recommend reading his pieces in the paper and on DealBook).

When I saw that there was no update to the story, I wrote a comment on the DealBook blog. That comment, which I submitted at 11:58 AM, is still "awaiting moderation" at 11:08 PM (I think 11 plus hours to moderate a comment on the blog of a major publication is a bit long - at least five of those hours were during the business day). Here is what I wrote:

YOUR COMMMENT IS AWAITING MODERATION.

This post refers to the wrong Lionel case (as does the article in today’s paper).

The Lionel case that Judge Gerber referred to in his decision is In re Lionel Corporation, 722 F.2d 1063 (2d Cir.1983), (you can see the case at: http://bulk.resource.org/courts.gov/c/F2/722/722.F2d.1063.83-5060.517.html).

The analysis in this case has defined almost all 363(b) sales (of substantially all of a business) since it was published.

I discussed much of this in relation to the Chrysler case on my blog (blog.lawrencedloeb.com).

— Lawrence D. Loeb

Here is the article from the July 7th edition of The New York Times, with the reference to Lionel in bold:

July 7, 2009
Automakers’ Swift Cases in Bankruptcy Shock Experts
By MICHELINE MAYNARD
DETROIT — That didn’t take long.

In fewer than 45 days each, General Motors and Chrysler swept through government-sponsored sales in bankruptcy court — quick tours that most people in the legal community thought impossible not long ago.

The swift action has riveted bankruptcy lawyers and law professors, who say the cases will be widely studied this fall when law students return.

“It is remarkable,” said James J. White, a professor at the University of Michigan Law School in Ann Arbor, who is planning a three-day seminar on the cases in his bankruptcy class.

Judge Robert E. Gerber of United States Bankruptcy Court in New York approved the G.M. sale late Sunday, although he issued a four-day stay that blocks final action until Thursday.

The sales, handled under Section 363 of the federal bankruptcy code, raised the profile of a tactic once used primarily to shed failing plants or unneeded equipment, and was not considered until a few years ago as a substitute for a complete restructuring.

“Twenty years ago, you would not have been able to do a 363 sale of an entire company,” said Mary Joanne Dowd, a partner in the financial and bankruptcy restructuring practice at Arent Fox in Washington.

While the cases are not likely to bring about the end of old-style restructurings, the sheer scope of G.M. and Chrysler show a Section 363 sale can apply to companies of any size, lawyers say.

For businesses that follow similar legal strategies, the G.M. and Chrysler cases could pave the way for a faster trip through court. For creditors, it could mean less time to reach a deal, especially in situations where companies face strict deadlines from lenders, as the two carmakers did with the government.

In such cases where the government plays a major role, lawyers are likely to feel they have less control than in traditional bankruptcies.

“I don’t think the government pressures judges as much as it pressures everybody,” said Professor White.

In fact, a government-imposed deadline for concluding the G.M. case by the end of this week helped the court work through 850 objections in three days of hearings last week. Normally, such issues could take weeks.

The haste drew skepticism from Michael P. Richman, a lawyer who represents three dissident G.M. bondholders.

At last week’s hearings, he urged Judge Gerber to “call the bluff” of the government deadline and take a more deliberate pace. (On Monday, Mr. Richman said his clients would likely not challenge the sale approval, citing the “enormous costs” that an appeal would incur.)

Obama administration officials say the legal community need not expect a wholesale shift in bankruptcy law. The G.M. and Chrysler cases were unique situations, they note, in which the president wanted to make sure that a crucial American industry survived.

Under the terms of the deal, G.M. would sell its most desirable assets, including the Chevrolet and Cadillac brands, to a new company owned largely by the American and Canadian governments and a health care trust for the United Automobile Workers union.

Over the last decade, Professor White said, companies already have been shifting toward a broader use of Section 363 sales as a quicker approach for restructuring than the usual Chapter 11 process.

In his order approving the G.M. sale late Sunday night, Judge Gerber cited instances involving Lionel, the maker of toy trains, which emerged from bankruptcy last year; Trans World Airlines, which was absorbed by American Airlines in 2001, and other similar cases as justification for his decision.

But none involved government financing, and thus moved far less quickly. The most recent Lionel case took three and half years; a case involving United Airlines took just over three years, and the case of the Delphi Corporation, G.M.’s former parts supplier, has been in court since 2005.

By contrast, G.M. and Chrysler sales beat even the government’s aggressive timetable.

The Treasury Department initially said it expected the Chrysler sale, which required 42 days, including an appeal to the Supreme Court, to be approved in 60 days. It said the G.M. sale would require 60 to 90 days of deliberations; as of Monday, the case has been in court for 36 days.

The speed is even more remarkable given that as recently as mid-March, when the Treasury’s auto task force retained bankruptcy counsel, it was not clear the cases would wind up in bankruptcy court, a senior administration official said Monday.

At that time, G.M. was still resisting a bankruptcy filing and a case did not seem likely at Chrysler, which had Fiat standing by, prepared to assume management control. Fiat officials eventually signed on to the need for a quick bankruptcy filing, which helped Chrysler shed plants, dealers and suppliers.

By mid-April, G.M. came around to the idea of a conventional prepackaged bankruptcy case, which still could have taken months, the official said.

Treasury officials pointedly told G.M. executives that the government, which was financing the company’s stay in bankruptcy, did not have the patience or resources for a long case, and would only provide financing under a Section 363 sale.

The administration official also said that G.M.’s case moved so quickly in part because it had the benefit of an “icebreaker” from Chrysler’s quick tour through bankruptcy.

In his 95-page opinion Sunday, for example, Judge Gerber repeatedly cited the discussion of issues from the opinion by Judge Arthur J. Gonzalez, who approved the Chrysler sale last month.

Professor White said the Supreme Court’s ruling against pensioners from Indiana, who sought to block the Chrysler sale, also was likely to deter similar actions in the G.M. case.

In fact, so far only one lawyer has challenged Judge Gerber’s approval of the sale: Steve Jakubowski, who represents five accident victims. And even he will not ask to delay the closing of the G.M. sale, unlike the Indiana state funds that objected to Chrysler’s turnaround plan.

“I personally didn’t have any problem with the speed of it,” he said of the two cases. “The fact is, the companies were dead.”

Michael J. de la Merced contributed reporting from New York.

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