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Second Circuit Expands Scope Of Permissible Sales Of Assets In Chapter 11 Pursuant To Section 363 Of The Bankruptcy Code.

Article Excerpt
Article by John J. Rapisardi , Peter M. Friedman and Thomas Donigan 1

Originally published August 19, 2009

As is now well known, General Motors, Inc. and Chrysler LLC financially restructured themselves with the help of the United States Treasury. These restructurings occurred very quickly - Chrysler and GM each filed for bankruptcy and sold substantially all of their automobile-producing assets to newly created companies2 within approximately forty days. Each company used the bankruptcy process to massively deleverage and free itself from personal injury liability claims. New Chrysler and New GM will now attempt to become viable and profitable entities unencumbered by these burdens, while creditors of "old" Chrysler and "old" GM go through a traditional chapter 11 process. These sales occurred so rapidly because each company demonstrated after substantial litigation that they were appropriate, pursuant to section 363 of the Bankruptcy Code.3

In a recent opinion affirming the Bankruptcy Court's decision in Chrysler, the United States Court of Appeals for the Second Circuit detailed the broad scope of section 363.4 The Second Circuit's opinion makes clear that while the facts in Chrysler were remarkable, the use of section 363 to achieve the sale fell within the mainstream of prior applicable precedent.5 However, by adopting the holding of the Third Circuit's T.W.A. decision permitting the sale of assets free and clear of personal-injury claims, the Second Circuit made its law even more appealing to debtors and purchasers.

Chrysler is notable both because the case was of substantial national importance and because of the increasing prominence of section 363(b) sales. As the Second Circuit observed: "in the current economic crisis of 2008-2009, s. 363(b) sales have become even more useful and customary . . . the "side door" of s. 363(b) may well 'replace the main route of Chapter 11 reorganization plans.'"6 Thus, Chrysler confirms that the Second Circuit is a very attractive forum for a debtor needing to immediately sell substantially all of its assets to avoid destruction of value and jobs.7

Factual Background Of Chrysler8 In November 2008, facing a dire liquidity situation, Chrysler received billions of dollars in "rescue financing" from the United States Treasury, and additional assistance in 2009. This funding was conditioned upon Chrysler proposing a financial and operational restructuring that would enable it to achieve long-term viability. While Chrysler could not achieve an out-of-court restructuring, it entered chapter 11 with agreements from key stakeholders: including a strategic alliance with Italian automaker Fiat S.p.A., a new collective-bargaining agreement with the UAW establishing a more rational wage structure, and creating a new voluntary employees' benefit association (the "VEBA") structure to fund legacy UAW retiree health-care obligations. In April 2009, these parties agreed on a sale transaction pursuant to which Chrysler would transfer substantially all of its operating assets to New Chrysler,9 a newly-created company that would be owned by Fiat, the UAW, and the governments of the United States and Canada. In exchange for Chrysler's assets, New Chrysler would assume certain of Chrysler's liabilities and pay it $2 billion in cash to be distributed in accordance with appropriate bankruptcy priorities. The sale transaction (referred to as the "Sale") was to be effectuated via section 363 of the Bankruptcy Code. Section 363 was the chosen mechanism because it permits debtors to sell property outside the ordinary course of business free and clear of all liens and other obligations.

Upon filing for bankruptcy...

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