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Tuesday, May 05, 2009

Chrysler Bankruptcy: Take III

by Calculated Risk on 5/05/2009 02:02:00 AM

For those interested in the legal issues surrounding the Chrysler bankruptcy, here is another post from attorney Steven Jakubowski.

Chrysler Bankruptcy Analysis - Part III: Will The "Absolute Priority Rule" Kill The Sale?

... Chrysler's (and soon GM's) court battles afford us a rare opportunity to witness one of bankruptcy law's most fundamental questions being litigated in the highest stakes battles of all time, that being:
When does the "absolute priority rule" (see FRB-Cleveland's strict construction of the rule back in 1996 here and compare it to the US Government's position today), which establishes a hierarchy of recovery rights among creditor classes, take a back seat to the "fresh start," rehabilitative policy of chapter 11?
Chrysler's opening memorandum touched upon this question by focusing on the US Supreme Court'd classic pronouncement in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984), where the Court stated that the "fundamental purpose of reorganization is to prevent the debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources." This principle, Chrysler argues, is paramount and (quoting NY's judicial patriarch, Bankruptcy Judge Lifland, in the old Eastern Airline case) "all other bankruptcy policies are subordinated" to it. (Mem. at 4).

Many, however, will surely disagree with Judge Lifland's statement from 20 years ago that all bankruptcy policies should be subordinated to the reorganization objectives of the Bankruptcy Code.
Fascinating stuff. And the clock is ticking ...