July 19, 2009
GM Bankruptcy Changes Business Rules?By Beth Eiseman Grey
If I were teaching the GM and Chrysler bankruptcy cases at a law school in Chicago, I'd start off with something unexpected -- the famous case of Shlensky v. Wrigley. I'd hook the legal eagles with the story of William Shlensky, who decided to take on the Cubs when he was a 27-year-old Chicago attorney who had owned two shares of Cubs stock since age 14.
Over four decades ago, Shlensky sued the Wrigleys and the other Cubs corporation board members to force them to install lights at Wrigley Field. He argued that the Cubs needed night games at home to stem years of operating losses. Wrigley allegedly resisted lighting the ballpark because he considered baseball to be a "'daytime sport'" and received a petition signed by 3,000 Wrigley Field neighbors who felt the lights would lead to community deterioration.
The Illinois Appellate Court considered the question of whether judges should step in when personal or societal concerns drive business decisions. The Court ruled in favor of Wrigley, but did point out that there were no allegations as to the profitability of the other teams' night games. The Court also explained that concern for neighborhood Cubs fans could have had a positive financial impact on revenues. Presumably, the Court might have ruled differently if Wrigley's decision had no financial merit, or was tainted by a lack of integrity or by bad faith.
A couple of recent articles in Harvard and University of Michigan publications detail the legal issues concerning the social and political motives for business decisions. I would have students look at those issues in the GM and Chrysler cases, with particular focus on the GM opinion.
U.S. Bankruptcy Judge Robert E. Gerber approved GM's restructuring plan and a generous UAW benefits package, veering little from the path blazed a month earlier by Judge Arthur J. Gonzalez in the Chrysler case. In a 95-page opinion, the Judge remarked that the "only truly debatable issues" involved successor liability claims for pending tort cases. He used the exigencies of the Detroit meltdown to join the Chrysler Court in transforming the Obama Administration's politically-motivated social decisions into judicially-protected business judgments.
As Judge Gerber acknowledged, "there must be some articulated business justification, other than appeasement of major creditors'" for fast-tracking a multi-billion dollar section 363(b) bankruptcy deal in which thousands of investors, retirees, suppliers, tort victims, and others face near-wipeouts. The unofficial bondholders' committee argued that the U.S. Treasury's political decisions did not amount to sound business judgment. They pointed out that especially with the alleged lack of enabling legislation for the funding in the case, Treasury was not driven and constrained by financial, investor, and regulatory boundaries.
The taxpayer-funded bailout of the two companies and the UAW was no ordinary commercial investment, but a very generous gift from taxpayers, for which no private lender could find business justification. According to Barron's, there is little prospect for taxpayers "to come out whole" because "GM's equity value would have to approach $70 billion -- a very unlikely outcome" considering that "Ford . . . and BMW . . . each have market values of $20 billion."
Judge Gerber agreed that the decision to rescue the automakers was hardly motivated by the "economic merit" of the investment, "but rather to address the underlying societal interests in preserving "jobs", the "auto industry," "suppliers," "and the health of the communities." Yet, like Judge Gonzalez, he still concluded that the fast-tracked restructuring plan was a good business decision because GM continued to deteriorate during the bankruptcy, without the TARP funds GM would have had to liquidate, and the bondholders and other creditors would have been worse off with liquidation. This analysis may go to the short-term prospects for GM and the creditors, but ignores questions about GM's continued viability, which is undermined by the plan's commercial weaknesses and political priorities.
The Wall Street Journal reported that UAW President Ron Gettelfinger actually "boasted" that the UAW "'put pressure on" the Obama Administration and GM to "bar small-car imports from overseas." The Journal also pointed out that that decision will undermine GM because it will have to "retool its domestic plants" to make the green cars favored by the Obama Administration and Congress, for which demand is uncertain.
As the Wall Street Journal also explained, the Obama Administration's agreement to preserve the lion's share of the UAW's health, retirement, and legacy pension benefits package was no "hard-nosed business decision," but a shrewd political calculation that will continue to threaten GM's long-term viability which "depends on making its cost structure competitive."
Judge Gerber agreed with Judge Gonzalez that the UAW provided "unprecedented modifications" to its collective bargaining agreement. Judge Gonzalez pointed to changes in the UAW's previous deal, including a six-year no-strike clause. A no-strike clause, however, is an empty concession. As a new part-owner of the automakers, it would be against UAW's interest to strike.
The UAW's other modifications were comparatively minor, including the loss of cost-of-living raises for the term of the agreement, performance bonuses for two years, one paid holiday for two years, tuition assistance, and a reduction in retiree prescription drug coverage and elimination of dental coverage.
As the Washington Post explained, the bankruptcy plan was "not quite the radical change that a neutral bankruptcy judge might have allowed." The Post went on to point out that "[o]ther union concessions were ‘painful' only by the peculiar standards of Big Three labor relations." The Post noted that "[c]umbersome UAW work rules have only been tweaked" and the union retained health benefits and hourly wages "that are far better than those received by many American families upon whose tax money GM jobs now depend" although "according to the task force, GM's labor costs are now within ‘shooting distance' of those at nonunion plants . . . ."
Even without many of the fringe benefits, Barron's emphasized that the UAW "pulled off a coup . . . with 60 cents to 70 cents on the dollar for its $20 billion claim for post-retirement health care for its members" and it will receive "$9 billion of new debt and preferred stock, plus a 17.5% equity stake."
Especially in the current job market, the UAW should expect nothing more than market parity. As the Wall Street Journal reasoned, arguments that the UAW "won't show up for work on Monday" without their loaded benefits package and the legacy deals are "bluster" because "the UAW needs GM as much as GM needs workers."
Treasury's failure to drive a harder bargain with the UAW raised questions as to the Administration's integrity. Judge Gerber found "no proof" of bad faith, and found evidence of "arms'-length" transactions with the UAW and others. Also, he rejected the remedy of equitable subordination because he found that the government did not act inequitably and that it derived no "special benefit" from its transactions with any of the parties.
The break-neck pace at which the Administration pushed through its deal and the lack of transparency required under normal chapter 11 proceedings made it unreasonably difficult for objectors to prove their cases. After its original GM exchange offers expired on Tuesday, May 26th, the Treasury reported its revised deal to the SEC Thursday, May 28th. Treasury gave investors until 5:00pm on Saturday, May 30th to indicate their decision to support the plan. GM then filed for bankruptcy on Monday, June 1st. Objections to the plan were due eighteen days later. The three-day hearing for the 850 objectors started eleven days after that. Late Sunday night, July 5th, Judge Gerber entered his decision, only thirty-six days after the case was filed.
As if that wasn't enough pressure, the Obama Administration threatened to withdraw further funding for GM without a court order validating the plan by July 10th. The bondholders argued that the July 10th deadline was "wholly fabricated" and "contrived." They cited public statements by the White House and GM CEO Fritz Henderson on the day the case was filed, that a 60-90 day timeline was expected.
Judge Gerber refused to call the Administration's bluff, agreeing with GM's counsel that the Judge should not "play Russian Roulette" because he "would have to gamble on the notion that the U.S. Government didn't mean it when it said that it would not keep funding GM."
Apparently, it's the Obama Administration that gets to play the "Russian" part of the game.
Beth Eiseman Grey is an attorney and a GM bondholder.