Paper Abstract
734. Mark J. Roe & Joo-Hee Chung, Was the Chrysler Reorganization Different?, 10/2012.
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 pre-reorganization
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.