According to the NY Times, the U.S. Treasury Department (translation: Tim Geithner) is preparing the paperwork for filing Chapter 11 next week when the April 30th deadline arrives and Chrysler hasn’t found a buyer.
Geither’s folks have been talking about surgical bankruptcies for both GM and Chrysler – splitting up the “good” and “bad” parts of the company, taking the good and giving them to the UAW and current workers – and leaving the bad parts with the creditors – but that’s not the way bankruptcy works.
One creditor cannot dictate the terms of the bankruptcy settlement for the others, segregate assets for themselves and cut up the pie the way it wants (putting the UAW’s claims in front of bondholders – for instance). Neither can the “Debtor in Posession” do that (DIP is the entity runnning the company while it works through the bankruptcy).
Those decisions are the role of the bankruptcy judge – and following the law and legal precedents of similar cases in the past. The more creditors that agree on a single plan, the more likely the judge will accept that version of the plan.
Section $1114 of the US bankruptcy code already has rules about how to deal with retiree health insurance when their former employer goes bankrupt. In addition, special COBRA provisions have been added in the past few years allowing retirees to buy COBRA for the rest of their life, and a 65% tax credit to pay for most of it (if they are working for a company whose pension plan was taken over by the Pension Benefit Guaranty Corporation).
[I am not a lawyer]
Update: Daniel Howes writing for the Detroit News makes the same point. He quotes Larry Denton, the former CEO of an auto parts supplier that has been through the process:
“If GM thinks they can package this in a 90-day period, that’s pretty naive. The judge can’t say, ‘I’m going to give this company a good deal here because of its size,'” Denton says. “He has to follow the law.”
Then again, the Rule of Law doesn’t seem to apply lately to the Obama administration’s actions. Perhaps this is a dry run to see if Geithner can force through the GM bankruptcy in June on his terms.