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Retooling General Motors: Defending an Innovative Use of the Bankruptcy Code to Save America's Auto Industry Joseph H

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Retooling General Motors: Defending an Innovative Use of the Bankruptcy Code to Save America's Auto Industry Joseph H View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Brooklyn Law School: BrooklynWorks Brooklyn Journal of Corporate, Financial & Commercial Law Volume 6 | Issue 1 Article 4 2011 Retooling General Motors: Defending an Innovative Use of the Bankruptcy Code to Save America's Auto Industry Joseph H. Smolinsky Follow this and additional works at: https://brooklynworks.brooklaw.edu/bjcfcl Recommended Citation Joseph H. Smolinsky, Retooling General Motors: Defending an Innovative Use of the Bankruptcy Code to Save America's Auto Industry, 6 Brook. J. Corp. Fin. & Com. L. (2011). Available at: https://brooklynworks.brooklaw.edu/bjcfcl/vol6/iss1/4 This Article is brought to you for free and open access by the Law Journals at BrooklynWorks. It has been accepted for inclusion in Brooklyn Journal of Corporate, Financial & Commercial Law by an authorized editor of BrooklynWorks. RETOOLING GENERAL MOTORS: DEFENDING AN INNOVATIVE USE OF THE BANKRUPTCY CODE TO SAVE AMERICA’S AUTO INDUSTRY Joseph H. Smolinsky* INTRODUCTION It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming[.] President Theodore Roosevelt 1 The “bailout” of General Motors Corporation (GM) has been criticized in many circles as the pursuit of a socialist agenda, the perpetuation of an ongoing problem of moral hazard, or simply an example of a bad business blunder that would never be replicated in the private sector. But, as this Article will point out, it was none of those things. The significance of GM to the U.S. economy cannot be overstated. Liquidation would have meant almost certain devastation to many segments of the economy. Economists, with the benefit of hindsight, have confirmed the obvious: the cost of the restructuring to taxpayers has been fairly modest when compared to the alternative of inaction. And with the help of more stable capital markets, the newly created General Motors Company is now back in public hands, beyond the need for taxpayer support. Aside from the direct economic ramifications at stake, the failure of GM—perhaps the most iconic representation of American manufacturing— could have destroyed the national psyche and consumer confidence at a critical time in the 2008–2009 financial crisis. A government takeover of GM in the traditional sense could have been equally damaging. Therefore, the manner in which the U.S. government stepped in was equally important to the decision to do so. The rescue of GM and Chrysler LLC (Chrysler) was most stunning in its use of traditional Chapter 11 procedures. There was no seizing of assets by the U.S. government under principles of nationalization or eminent * Joseph H. Smolinsky is a member of the law firm of Weil, Gotshal & Manges LLP. The firm served as general bankruptcy counsel for General Motors Corporation. The views expressed in this Article represent the views of the author and not Weil, Gotshal & Manges LLP. This Article would not be possible without the substantial assistance of Saima Majid, Conray C. Tseng, and Pablo Falabella. 1. President Theodore Roosevelt, Address at the Sorbonne in Paris, France, The Man in the Arena: Citizenship in a Republic (Apr. 23, 1910). 104 BROOK. J. CORP. FIN. & COM. L. [Vol. 6 domain. There was no bailout involving direct payments to creditors or financial grants typically associated with creating moral hazard. Despite the media frenzy and public outcry from parochial interests claiming cronyism and backroom politics, the auto restructurings were very much like the routine Chapter 11 cases that insolvency professionals handle on a daily basis. Ultimately, the parties involved conducted the sale transactions at the center of the restructurings with the utmost transparency and afforded all possible and available due process to affected parties. It is certainly true that GM’s bankruptcy led to limited recoveries for various constituencies. And the GM bankruptcy case, more than others, exposed the plight of thousands of retirees, stockholders, and product liability claimants that the bankruptcy hit particularly hard.2 But the GM bankruptcy achieved results vastly better than the alternatives and, despite assertions of favoritism, provided all creditors with distributions consistent with the priority scheme established by Congress under the U.S. Bankruptcy Code.3 This Article will explore some of the criticisms leveled against the GM Chapter 11 process. In the final analysis, the executive branch, acting through the U.S. Department of the Treasury (the U.S. Treasury), bravely stepped out of its comfort zone to lead an effort to grant GM and Chrysler fresh starts by using traditional Chapter 11 tools. These transactions were unprecedented, and success was in no way assured. Yet the Bankruptcy Code provided a legislative framework and judicial oversight that was tangible and against which the U.S. government’s actions could be evaluated. I. THE GENERAL MOTORS STORY We’ve got to go back to making things. President Barack H. Obama4 A. THE FOUNDING AND IMPORTANCE OF GENERAL MOTORS TO THE NATION’S ECONOMY Founded in 1908 by William C. Durant, GM revolutionized the automotive market by adopting the groundbreaking strategy of “[a] car for every purse and purpose.”5 This strategy divided the automotive market into distinct price segments, from low-priced to luxury automobiles, and led GM to become one company growing through the creation and management of multiple brands. Throughout its history, GM produced some of the most 2. See, e.g., Mike Spector, Car Bailouts Left Behind Crash Victims, WALL ST. J., May 27, 2011, at A1. 3. 11 U.S.C. §§ 1101–1146 (2006). 4. President Barack H. Obama, Address at Solyndra, Inc. in Fremond, California (May 26, 2010), available at http://www.gpoaccess.gov/presdocs/2010/DCPD-201000420.pdf. 5. GEN. MOTORS CORP., SIXTEENTH ANNUAL REPORT 8 (1925). 2011] Retooling General Motors 105 striking and memorable automotive designs, including the Chevrolet Corvette, Buick Riviera, and Cadillac Eldorado. For many years, GM supplied one in five vehicles driven in the United States.6 Its “highly-skilled engineering and development personnel [even] designed and manufactured . the first lunar roving vehicle driven on the moon.”7 But it is neither the historical nor sentimental significance of GM that caused the U.S. and Canadian governments to jump to its aid in the tail end of 2008. At the time of the filing, GM was the largest U.S. automobile manufacturer and the second-largest automobile manufacturer in the world, with a reach across the U.S. and global economies. As of March 31, 2009, its consolidated global assets and liabilities totaled approximately $82.3 billion and $172.8 billion, respectively, and it reported global revenues of approximately $150 billion for the 2008 fiscal year.8 Also, as of March 31, 2009, GM employed approximately 235,000 employees worldwide, of whom approximately 91,000 were residents of the United States.9 GM relied not only upon its direct salaried and hourly employees but also upon the thousands of suppliers that, in turn, count on GM for their survival. These suppliers include a myriad of indirect suppliers (not Tier I part suppliers) such as advertising agencies and financial consulting and other service providers that supported GM’s operations. Each of these suppliers hired employees dedicated to the automotive industry. One quickly realizes the severe adverse impact that would occur to the U.S. economy if GM were to shut down operations. A contemporaneous liquidation of the even more financially precarious Chrysler could have exacerbated the effects on the U.S. work force in a worst case scenario. In fact, it is said that one in ten Americans, directly or indirectly, receives a paycheck from the automobile industry.10 GM and its suppliers existed in a symbiotic relationship: each depended on the other for survival. In North America, GM relied upon approximately 6. Affidavit of Fredrick A. Henderson Pursuant to Local Bankruptcy Rule 1007-2 ¶ 20, In re Motors Liquidation Co., 2011 WL 3805896 (Bankr. S.D.N.Y. Aug. 23, 2011) (ECF No. 21) [hereinafter Henderson Affidavit]. Unless otherwise specified, all court document docket numbers contained herein are in reference to In re Motors Liquidation Co. (f/k/a Gen. Motors Corp.), 2011 WL 3805896 (Bankr. S.D.N.Y. Aug. 23, 2011) (No. 09-50026), available at http://www.motorsliq uidationdocket.com/maincase.php3. 7. Henderson Affidavit, supra note 6, ¶ 20. 8. Gen. Motors Corp., Quarterly Report (Form 10-Q) 2 (May 8, 2009). 9. Motion of Debtors for Entry of Order Pursuant to 11 U.S.C. §§ 105(a), 363(b), and 507, (I) Authorizing Debtors to (a) Pay Certain Employee Compensation and Benefits and (b) Maintain and Continue Such Benefits and Other Employee-Related Programs and (II) Directing Banks to Honor Prepetition Checks for Payment of Prepetition Employee Obligations (ECF No. 33); Henderson Affidavit, supra note 6, ¶ 23. 10. Henderson Affidavit, supra note 6, ¶ 48; SEAN P. MCALINDEN, KIM HILL, BERNARD SWIECKI, ECONOMIC CONTRIBUTION OF THE AUTOMOTIVE INDUSTRY TO THE U.S. ECONOMY– AN UPDATE: A STUDY PREPARED FOR THE ALLIANCE OF AUTOMOBILE MANUFACTURERS, 34 (Economics and Business Group Center for Automotive Research, Fall 2003). 106
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