Was the Chrysler Reorganization Different?

Abstract:     
Chrysler, a failing auto manufacturer, reorganized in chapter 11 in 2009,with significant government aid. In the reorganization, financial creditors were paid a quarter of the amounts owed them, while other creditors were promised payment in full. The media reported widespread financial market distress that Chrysler’s secured financial creditors were not fully paid while favored unsecured nonfinancial creditors were protected in ways that many market players saw as violating basic bankruptcy priority rules. Defenders of the reorganization, in and out of court, including government defenders, indicated that the Chrysler reorganization was just one in a long-standing pattern of bankruptcy sales under § 363 of the Bankruptcy Code, in which a bankrupt firm’s assets are sold and the buyer decides whether it shall assume preexisting obligations of the original debtor to the extent doing so provides the buyer with value. In this article, we examine all available data for large § 363 sales and compare the key financial ratios in such § 363 sales to Chrysler’s, to see if the Chrysler reorganization fit a preexisting pattern. These key ratios can indicate whether a priority distortion is very unlikely to occur. The principal ratios examined are the size of the prereorganization debt assumed by the purchasing entity as a fraction of the purchase price, the liabilities assumed as a fraction of the cash paid, and the assumed liabilities as a fraction of the total liabilities of the emerging entity. In a straight sale of the firm to a third party for cash, or a cash equivalent, with the buyer assuming no debt of the bankrupt debtor, the sale itself cannot ordinarily implicate any priority controversy. But for all of these ratios, the Chrysler reorganization differs sharply from the usual pre-Chrysler practice and was far from being a straight sale for cash. The Wilcoxon signed-rank test indicates that the Chrysler results significantly differed from prior results, with the p-value of the statistically significant differences at less than .01 for each investigated ratio. This evidence does not support the claim that the Chrysler reorganization fit the preexisting pattern of § 363 sales. Rather, it supports the view that the Chrysler reorganization differed from much of what had been done before.

Number of Pages in PDF File: 35

Keywords: corporate reorganization, bankruptcy, chapter 11, 363 sales

JEL Classification: G18, G30, G34, G38, J52, K11, K12, K22, L21

Accepted Paper Series