Chrysler's Bankruptcy Roils the National Hockey League?
Ever since the Obama administration sacrificed the rule of law protecting secured creditors to achieve a desired political outcome in the Chrysler bankruptcy, have you been wondering how long it would take before this precedent began transforming other sectors of our economy? Would you believe that this is already impacting hockey teams?
Recall the deal, now blessed by a Supreme Court asleep at the switch, that awarded the lion’s share of equity in the new Fiat-run Chrysler Corporation to politically connected unsecured creditors, namely the United Auto Workers Union. Meanwhile secured creditors, vilified by the President for their refusal to make sacrifices in order to “save or create jobs,” were given the bums rush.
Perhaps you believe that the “special circumstances” used to justify this historic taking will limit its impact. Only lenders to vital American companies deemed “too big to fail” need to be concerned, right? That was the argument when the administration’s Auto Task Force recently upped the anti in the ongoing Delphi bankruptcy. Did you notice that the president’s men are trying to throw Debtor-in-Possession (DIP) creditors under the bus in favor of a no-bid buyout offer from a well-connected Beverly Hills private equity firm?
Shafting DIP creditors! How can that be?
Easy. The auto bailout express needs Delphi. 80% of the money for the proposed buyout is coming from taxpayer-controlled GM. The Feds needed a front man to cosmetically price the offer, a discrete service that will no doubt fetch a handsome reward.
There is no higher claim on assets – period – than DIP financing in a bankruptcy. Once but no longer known as the T-bill of bankruptcy claims, DIP financiers are the paramedics of the bankruptcy industry. They arrive after the disaster, charged with picking up the pieces in an effort to get the company back on its feet. As a precondition to continued operation, all prior creditors, secured and unsecured, must agree in advance that the DIP financier is top dog.
Not any more. Can you imagine arriving at the scene of an accident to render aid only to have the accident victim’s political cronies impound your ambulance? Welcome to the new world of Hope and Change.
Fortunately, an astute judge ordered Delphi to hold an auction to solicit competing bids. But suppose the case happened to come before a judge who valued empathy over the law? Or another who’s reasoning was based not on statute but on desired social outcomes?
Extraordinary times require extraordinary solutions, you say? The Administration must take unprecedented steps if it hopes to save the critically essential Detroit-based auto industry. Of course the auto czar has to reach down into the supply chain and do whatever it takes to keep this increasingly expensive house of cards from collapsing. After all, there are more jobs to “save or create” amongst the top tier auto suppliers than there are in the big three themselves. Given the “special circumstances,” why is it improper to ask yet another set of creditors to sacrifice for the greater good? It’s the outcome that matters not the process, right? Even the Phoenix Coyotes agree.
The Phoenix Coyotes?
Yep. The bankruptcy lawyer representing the hapless Coyotes is invoking the Chrysler “363 sale” precedent insisting that an emergency offer to buy the National Hockey League franchise must be accepted right away because … because … the NHL draft is looming! The NHL, which holds the rights to the franchise, prefers to continue funding the company to conduct an orderly sales process. Will the law protect their rights? Who knows.
Extension by analogy is how our judicial system interprets the law. Precedents invariably ripple into the future. This is why using political muscle to achieve an outcome that feels good today despite trampling the rule of law has unintended consequences tomorrow.
Don’t think creditors aren’t taking notice. Especially “good” creditors, the kind the government desperately needs to start lending again in order to “save or create jobs.” Too bad for the “greedy” creditors, you know, folks who have already lent out money expecting to get it back. Those creditors get tongue lashings from the President.
Stephen Lerner, a lawyer for a committee of Chrysler dealers, said it best when he was quoted in the Wall Street Journal. “The concern is that you have thousands of lenders, hedge funds, insurance companies who model their investments on rules and laws. How do these folks make investment decisions when they’re faced with bankruptcy courts that appear to disregard the rules?”
I’ll answer that one. They start making campaign donations. That approach sure paid off for the United Auto Workers union.