How the Chrysler Reorganization Differed from Prior Practice

Abstract

Chrysler, a failing auto manufacturer, was reorganized in a controversial chapter 11 in 2009. Financial creditors were paid a quarter of the amount owed them, while other creditors were paid more. The reorganization’s defenders asserted, among other things, that the proceeding and the sale structure was typical of prior practice. To see if this view fits the evidence, we examine all prior large section 363 sales for key financial ratios that can show whether a priority distortion is very unlikely. For example, in a cash sale with the buyer not assuming any debt of the bankrupt, the sale itself cannot ordinarily disrupt standard priorities. The Wilcoxon signed-rank test for these ratios indicates that Chrysler significantly differed from prior practice. It used less cash and the buyer assumed more debt than has been typical. Examining restricted samples, such as prior section 363 sales of firms with high unfunded pension obligations, yields similar results. The evidence here thus does not support the claim that the Chrysler reorganization fit the preexisting pattern of section 363 sales.

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

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