(Submitted to the Post-Gazette in response to a recent article)
First the disclaimer: I am a bankruptcy and creditors’ rights lawyer. I generally represent vendors, lenders and creditors. I have also helped a few companies reorganize in Chapter 11 bankruptcy.
People (media and otherwise) are wailing about how bankruptcy equates to shutting down. Recently, the P-G had some consultants concluding that bankruptcy won’t do for automakers what it did for the steel industry. Notably, there were no bankruptcy lawyers quoted in the article. There is fear-mongering that bankruptcy will mean millions of jobs lost and thousands of businesses closed. With respect to the Big Three, this couldn’t be farther from the truth. It is extremely rare for a bankruptcy of a business this size to result in a total shutdown and liquidation. Typically, if a company enters into a Chapter 11, it will be able to reorganize its business or become acquired by someone else who will run the business. In both scenarios many employees keep their jobs and suppliers continue to sell product to the company. Under a Chapter 11, there are some powerful tools which allow a Judge to terminate or change contractual relationships. In particular, the bankruptcy judge can order the restructuring of labor contracts. I suspect that this, in conjunction with the potential loss of shareholder value, is the driving force behind Congress’s desire to “bail out” the Big Three. There are very powerful lobbyists on the side of the unions and major shareholders that are joining forces. The problem as I see it, however, is that the American public is being misled about the effects of Chapter 11 bankruptcy.
Chapter 11 reorganization will not create investment and borrowing ability for the Big Three, but it can create an atmosphere to allow that investment or credit on terms that might interest investors and lenders. Lenders are more willing to lend to a bankrupt company when they know the company’s “old” debt will be discharged and they see the company bringing costs under control. This gives the lender confidence that its “new” loans will be repaid. At the very least, it can allow public (government) money to be loaned, directly or through bank guarantees, on a priority basis and only after a change in the business model has been proposed and vetted. Congress has recently asked the Big Three to provide it with a plan as to how they will restructure their business model in order to be profitable in the future. The irony of this demand is that proposing a workable business plan is exactly what Chapter 11 requires. The difference, however, is that in Chapter 11, the creditors, employees and shareholders get to vote on whether the plan is viable. In Congress, it is only the politicians who get to vote.
With or without reorganization in Chapter 11 bankruptcy, fixing the Big Three will not be easy. Jobs will be lost and some supplier businesses will fail. Those businesses will fail because they became dependent on an industrial model that was ill-conceived and is past its prime. All else being equal, would we expect the government to bail out the buggy-whip maker when the horse-drawn carriage maker went out of business? Would we have kept the carriage maker alive just to save the whip maker? No, we would not. Bankruptcy reorganization will allow the Big Three automotive companies to have a breathing spell to restructure their business models and create more competitive products. For a better analogy than the article’s comparison to the steel industry bankruptcies, take a look at the airline bankruptcies of the past two decades. The airlines operated on an outdated and unprofitable hub and spoke business model. Bankruptcy afforded many of the larger airlines the opportunity to restructure labor agreements and reorganize more along the lines of low cost carriers such as Southwest. Just as would happen in Detroit, the airlines kept operating in Chapter 11, suppliers kept selling goods and services, and most people kept their jobs. Yes, there was pain, but the airlines are still operation, many of them profitable, and the American economy did not collapse. Despite fear mongering that consumers won’t by cars produced by a company in bankruptcy, people kept flying on planes and racking up miles on airlines in bankruptcy. NONE of the Big Three will file for Chapter 7 liquidation. If you hear any politician, lobbyist or Detroit executive say that’s a likely result, tune them out because they are either ill-informed or not telling the truth. Even if one of the Big Three did file for Chapter 7, some creditor would surely ask the Court to force it into a Chapter 11 and for the appointment of a Trustee to preserve the business operations as a going concern. Actually, I am surprised securities litigation has not already been initiated against GM executives for making such reckless comments over the past days.
Bankruptcy is much more complex than Congress, the media and Big Three executives are telling the public, but on some level, it comes down to whether or not we can and should save a sick business (or 3 sick businesses). Regardless of who is to blame for Detroit’s problems, not one person has said how giving them taxpayer money will solve any of their problems. Bankruptcy is an option to facilitate a responsible and workable business plan. It may not be the most ideal situation, but it is the best option we have.
Bankruptcy is not the ideal solution. While the discharge of debt and the termination of contracts are powerful tools, they aren’t the “cure” for the sick business model. That cure will have to occur through thoughtful change. Closing the business is a change. Figuring out how to build a product that people want, at a price people will pay, would also be a change. Bankruptcy can facilitate that kind of change, but bankruptcy is a means, not an end.