Friday
Sep262008
Businesses right to reorganize is questioned
Friday, September 26, 2008 at 5:05PM
The House Judiciary Subcomittee on Commercial and Administrative Law held a hearing on Chapter 11 of the Bankruptcy Code, and whether the 2005 amendments have pertinence in the face of today's impending business distress. Chairwoman Linda Sanchez (D-Calif.) opened the hearing with a comparison between the retail industry's recent increase in 'reorganizational' bankruptcy claims and the debate over the $700 billion bailout for Wall Street that President Bush has proposed.
The question Sanchez wanted answered is whether Chapter 11 works the way Congress intended it to, or if the Bankruptcy Abuse Prevention and Consumer Privacy Act is making it harder for businesses to reorganize, thus reverting to the straight liquidation in Chapter 7 of the Bankruptcy Code. Witness Lawrence Gottlieb of Cooley Godward Kronish LLP said that Chapter 11 has become, "nothing more than a vehicle through which secured lenders, whether they be banks, hedge funds, or private equity, sell the assets of a company through a quick sale process that provides very little, if any, opportunity for retailers to restructure their debt and rehabilitate their business".
Professor Barry Adler of the New York University School of Law said that "it is better to have failed firms be liquidated, because if they're dead economically, they're going to liquidate anyway. The assets can be redeployed to better uses, if the liquidation is quick, and creditors can receive a higher return than they would originally receive". The question remains of whether a failing business will better serve the economy if bailed out at the expense of taxpayers, or left to the hands of Adam Smith.
The question Sanchez wanted answered is whether Chapter 11 works the way Congress intended it to, or if the Bankruptcy Abuse Prevention and Consumer Privacy Act is making it harder for businesses to reorganize, thus reverting to the straight liquidation in Chapter 7 of the Bankruptcy Code. Witness Lawrence Gottlieb of Cooley Godward Kronish LLP said that Chapter 11 has become, "nothing more than a vehicle through which secured lenders, whether they be banks, hedge funds, or private equity, sell the assets of a company through a quick sale process that provides very little, if any, opportunity for retailers to restructure their debt and rehabilitate their business".
Professor Barry Adler of the New York University School of Law said that "it is better to have failed firms be liquidated, because if they're dead economically, they're going to liquidate anyway. The assets can be redeployed to better uses, if the liquidation is quick, and creditors can receive a higher return than they would originally receive". The question remains of whether a failing business will better serve the economy if bailed out at the expense of taxpayers, or left to the hands of Adam Smith.
Obama: With Bankruptcy, General Motors Will Emerge Stronger
Two months after laying his plan with his Auto Task Force to keep struggling U.S. auto giants from collapsing, President Barack Obama announced today that General Motors has filed for Chapter 11 bankruptcy.
“Working with my Auto Task Force, GM and its stakeholders have produced a viable, achievable plan that will give this iconic American company a chance to rise again. It’s a plan tailored to the realties of today’s auto market - a plan that positions GM to move toward profitability, even if it takes longer for our economy to fully recover; and it’s a plan that builds on GM’s recent progress in making better cars,” Obama said.
Also today, Fritz Henderson, GM President and CEO, said that: "The economic crisis has caused enormous disruption in the auto industry, but with it has come the opportunity for us to reinvent our business. We are going to do it once and do it right. The court-supervised process we are pursuing provides us with powerful tools to accelerate and complete our reinvention, as well as strong safeguards for our customers and our business. We are focused on the job at hand, for the benefit of our customers, employees, dealers, suppliers, retirees, taxpayers, investors and other stakeholders."
Obama said that GM will build a larger share of its cars in the U.S. and will be more committed to building more fuel-efficient cars.
In addition to the $19 billion already given to the company with federal loans, Obama said that the federal government is investing about $30 billion in GM which will “entitle American taxpayers to ownership of about 60 percent” in the auto company. Obama said his administration was doing this to protect jobs and “that is the only way to help GM succeed.”
The Obama Administration has no interest in running GM or making decisions for the auto company in the future, Obama said.
“GM will be run by a private board of directors and management team (that) will call the shots and make the decisions about how to turn this company around,” said Obama. “The federal government will refrain from exercising its rights as a shareholder in all but the most fundamental corporate decisions.”
But “building a leaner GM will come at a cost. It will take a painful toll on many Americans who have relied on General Motors throughout the generations... More jobs will be lost. More plants will be close. More dealerships will shut their doors, and so will many parts suppliers,” said President Obama.