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Interpreting the Supreme Court’s Treatment of the Chrysler Bankruptcy and its Impact on Future Business Reorganizations


Fred David


University of Virginia - School of Law, Alumnus or Degree Candidate Author

June 7, 2010

Emory Bankruptcy Development Journal, Vol. 27, 2010

Abstract:     
On June 9, 2009, the Supreme Court terminated its stay of Chrysler’s sale of substantially all of the company’s assets to a new entity, dubbed “New Chrysler” with the backing of European automaker Fiat. The effect of that ruling was to permit the sale to close the next day and bring to an end a chaotic period that determined Chrysler’s future. However, critics of the sale to Fiat argued that the Supreme Court’s ruling would also have a detrimental effect on secured credit and undermined the creditor protections normally afforded by Chapter 11 going forward. According to those critics, the structure of the sale that the Supreme Court had allowed to go forward - and which both the Bankruptcy Court for the Southern District of New York and the Second Circuit had expressly approved as permissible - permitted debtors to subvert the absolute priority rule of §1129 and threatened to swallow the entirety of Chapter 11. The Supreme Court’s refusal to halt the sale served as a tacit endorsement of the legality of this sale structure.

But the Supreme Court was not finished with the Chrysler case. In December 2009, the Court issued a brief and somewhat cryptic ruling vacating the Second Circuit’s opinion upholding the bankruptcy court’s approval of the sale and ordering the Court of Appeals to dismiss the dissenting secured creditor’s appeal as moot.

What did the Court’s December decision mean? What are its ramifications going forward? And why did the court wait six months to issue its decision instead of addressing the case before Chrysler’s sale took effect? These are the questions this paper will answer. Ultimately, I conclude that the Court’s December decision was an expression of its disagreement with the Second Circuit’s interpretation of the requirements of §363(b), the section of the Bankruptcy Code that permits debtors to sell assets outside of the ordinary course of business, and that the effect of the decision is to prevent the Second Circuit’s opinion from having any value as a controlling precedent in future bankruptcies. Determining why the Court waited until six months after the Chrysler sale (as well as General Motors restructuring) is a more difficult question.

Number of Pages in PDF File: 52

Keywords: Reorganization, 363, 363(b), Bankruptcy Sales, Chrysler, General Motors, Bankruptcy, Chapter 11

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Date posted: June 7, 2010 ; Last revised: September 27, 2010

Suggested Citation

David, Fred, Interpreting the Supreme Court’s Treatment of the Chrysler Bankruptcy and its Impact on Future Business Reorganizations (June 7, 2010). Emory Bankruptcy Development Journal, Vol. 27, 2010. Available at SSRN: http://ssrn.com/abstract=1621757 or http://dx.doi.org/10.2139/ssrn.1621757

Contact Information

Fred David (Contact Author)
University of Virginia - School of Law, Alumnus or Degree Candidate Author ( email )
580 Massie Road
Charlottesville, VA 22903
United States
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