Nov. 21, 2008
Prepackaged Bankruptcy Wouldn't Help Big Three Automakers, Says Bankruptcy Expert
If the Big Three automakers can't come up with a plan for Congress by Dec. 2 on how they'll use $25 billion in federal funds, one proposed alternative is for the companies to undergo a so-called "prepackaged" bankruptcy. But bankruptcy expert Frederick Tung of Emory University School of Law says he finds it hard to see how a prepackaged bankruptcy could help.
"With a prepackaged bankruptcy, the management of the company has already worked out details of the restructuring with constituencies, which includes bondholders, banks, suppliers, unions and employees, and other interested parties" says Tung. "But it doesn’t look like automakers have worked out anything with anyone; all they've done is gone to Capitol Hill and asked for $25 billion."
Under a prepackaged bankruptcy, says Tung, the automakers would have two questions to work out before they file for bankruptcy: What operational fixes will they make, if any? How will they reduce their debts?
"The latter process is simply a negotiation among all the debt holders to try to get them to take less than full payment," Tung says. "On the operational side, it doesn't sound like the management of these companies think they need to make any changes to the path they're on. It doesn't seem like they've talked to any of their creditors to make any adjustments on their debt. So if they don't have a deal beforehand, they can't do a prepackaged bankruptcy."
The other major question, says Tung, is how are automakers going to get the cash to run the business going forward? "Without that piece, bankruptcy is not only not helpful, but in my opinion would likely put the company into a free fall."
Are they playing chicken?
“I would have thought that automakers would have taken a more constructive tone with Congress," says Tung. In his blog entry on theconglomerate.org, Tung says automakers "seem to be playing chicken with Congress, on the 'too-big-to-fail' theory." Congress apparently didn't buy it.
"Needless to say, that's a dangerous game," Tung writes. "Especially during the interregnum, the specter of political gridlock looms large."
Tung teaches and writes in the areas of corporate and securities law and bankruptcy, both domestic and international. Professor Tung has served as a lecturer in law at Peking University. He also practiced corporate and bankruptcy law with Gibson, Dunn & Crutcher in Los Angeles and San Francisco.