Wednesday, June 10, 2009

Stay No More

It's not news now but just to close the loop, the Supreme Court lifted the stay on the Chrysler-Fiat sale Tuesday. In a two page opinion, the Court per curiam held that the parties requesting the stay did not carry the burden of showing: 1) reasonable probability that four Justices will consider the issue sufficiently meritorious to grant certiorari or to note probable jurisdiction; 2) a fair prospect that the majority of the Court will conclude that the decision below was erroneous; and 3) a likelihood that irreparable harm will result from denial of the stay." My inner contracts professor notes that the petitioners can be compensated for their losses, if any, with damages-- hardly a strong case for irreparable harm.

The sentence that lingers in this perfunctory opinion is the last: "Our assessment of the stay factors here is based on the record and proceedings in this case alone."

And not in response to political pressure, or based on concern about how the outcome of this case might influence the bankruptcy proceeding now pending in In re GM.

The spin on SCOTUS blog is that the Court wrote this opinion with particular care. "By the time the full Court’s order emerged shortly after 7 p.m. Tuesday, it immediately was apparent that the Court had taken its time primarily to craft a legally precise order of four paragraphs. It very likely was composed largely in Justice Ginsburg’s chambers. She is noted for the highly refined, technical care with which she composed legal papers." (what a lovely thing to say about a person).

The Chrysler-Fiat deal closed today. Fiat Chief Executive Sergio Marchionne become CEO of Chrysler. Former Chrysler CEO, Bob Nardelli, packed up his desk and returned to Cerberus Capital Management, the former majority equity holder of Chrysler. Marchionne wrote to Chrysler employees: "There is no doubt in my mind that we will get the job done."

That may depend on how Americans (who are not obese or taller than 5'2") like the Fiat 500. You be the judge.

Monday, June 8, 2009

In re Chrysler Stayed

In a one sentence opinion, Justice Ginsberg stayed the order approving the sale of Chrysler assets brokered by the U.S. Treasury Department. The 2d Circuit affirmed the bankruptcy court order approving the sale Friday. It gave objecting creditors until 4:00 PM Monday to obtain a stay of the order from the Supreme Court. Justice Ginsburg, who is responsible for emergency matters from the 2d Circuit, entered the stay just before the last tick of the clock.

The objecting parties, Indiana State Pension Trusts holding Chrysler secured debt, have advanced two arguments for reversal of the bankruptcy court order approving the sale: 1) the sale to the Fiat SpA group is an improper and unfair sub rosa reorganization plan and the bankruptcy court exceeded its authority under 11 U.S.C. section 363 to order the sale; 2) the U.S. Treasury had no constitutional authority to use TARP funds allocated for the bailout of financial institutions to finance Chrysler-Fiat. On Sunday, a consumer group filed a brief in support of the pension trust investors. The consumers' group wants to stop the sale because its terms relieve Chrysler-Fiat of successor liability for old Chrysler consumers' product liability claims.

The U.S. government filed its brief with Justice Ginsburg today, arguing that the pension trust parties have no standing to complain about the sale. Chrysler is worth next to nothing without the Fiat deal and that the proposed sale yields a better return than the only other option, liquidation. As for the TARP money, the Solicitor General argues that the pension trust investors don't have standing to object to the government’s $8 billion injection of TARP money into the new Chrysler-Fiat. Whether Chrysler-Fiat is a "financial institution" eligible to receive TARP funds is not a question worthy of Supreme Court review. ("The relevant EESA [Emergency Economic Stabilization Act of 2008] provision was enacted only eight months ago and has not yet been construed by any federal court . . . .")

This could be one of those OK Corral moments in constitutional law. The pension trusts represented by Thomas Lauria of White & Case, are the last creditors standing alone against a barrage of pressure on senior lenders to get with the Chrysler-Fiat deal, or else. The Supreme Court may be the only law in town tough enough to stand up to President Obama, Treasury and auto industry czar Steven Rattner.

The gunfight at the OK Corral is said to have lasted about 30 seconds. The trial afterward took weeks. Whether the Earp brothers and Doc Holliday's actions were in self defense or murderous is still a good game for law students more than a century later. In the end, Judge Spicer ruled that "the tragic results accomplished in manner and form as they were, with all surrounding influences bearing upon resgestae of the affair, I cannot resist the conclusion that the defendants were fully justified in committing these homicides-that it is a necessary act, done in the discharge of an official duty."

Friday, June 5, 2009

Cosmic Contract Language

(Originally posted on October 29, 2009)
In Thursday's Wall Street Journal is an article about the trend of drafting contracts with cosmic language like that which was presented to a Bulgarian folk-singing group at a tryout for the TV show America's Got Talent. A clause in the contract warned that their actions that day could be "edited, in all media, throughout the universe, in perpetuity."

This sort of language, relevant mainly in the context of the arts (but see the full article for an example, complete with an allusion to the Big Bang, of its use re: pickles), is apparently motivated by a desire to account for the unknown, and perhaps is reflective too of a very high confidence in the national space program. The Journal article notes that the members of the folk-singing group "briefly contemplated whether they should give away the rights of hurtling their images and voices across the galaxies forever." Then they signed the contract.

Of course professional opinions vary as to the desirability of using such cosmic (the use of 'global' doesn't seem to do justice) language in contracts. Attorney and law school lecturer Ken Adams thinks the use of such language is "silly", and suggests its use could be a way of drumming up business for lawyers. How so? "It [cosmic language] adds an aura of magic- you're dabbling in the occult and you of course need a lawyer to guide you through the mysteries."

But associate professor of law Eric Goldman has a different view. He thinks the cosmic language "could be 'a stroke of brilliant foresight.'" Goldman says in the future, folks looking at contracts drafted without cosmic language might say, "What were they thinking? Why didn't they get the Mars rights?" That would be embarrassing.

Whatever the case, this article comes a few years too late for me. I could have turned it into an entirely novel law review note: Cosmic Language in Contracts and its Ramifications, Toward a Theory of Inter-Galactic Unconscionability.

Wednesday, June 3, 2009

Post GM America

At a hearing before the Senate Commerce Committee today, Fritz Henderson, GM's CEO, said that GM has no choice but to dump nearly 1600 dealers (and about 100,000 jobs) over the next eighteen months.

Committee Chair John Rockefeller responded : "Let me be very clear: I don't believe that companies should be allowed to take taxpayer funds for a bailout and then leave local dealers and their customers to fend for themselves with no real notice and no real help. That is just plain wrong."

Senator Rockefeller missed the memo. Dumping losing contracts without real notice and without real help is exactly what bankruptcy will permit GM to do.

Rockefeller's frustration touches a nerve. If the government can't expect to see a return on its investment, what exactly is the public purpose of the bailout?

In an op ed for Financial Times, Richard Reich wrote: "The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain."

Reich says that industrial adjustment is just too hard to discuss, much less accomplish politically. One group wants to save jobs and communities that depend on US automakers' survival, without regard to the public cost. An opposing group wants to keep government out of industrial collapse, let the chips fall where they may, and let market vultures clean up the mess. The bailout of GM and Chrysler temporarily placates both groups. The first group gets hope that their jobs and communities have a chance of surviving. The second group gets to imagine that the bailout is a restructuring made necessary because of a mysterious short term liquidity problem, and that with $50 billion in governmental lubrication, that new car smell will be back.

The divide between the groups seems to be more political than real. People whose jobs and mortgages depend on the US auto industry don't like wasting tax revenue. And ardent free marketeers who oppose the bailout of a "company" like GM accept the role of government in easing the pain for actual people who fall on hard times.

GM and Chrysler are short timers. The bailout and the restructurings are life support that at best will give the grieving middle class time to prepare for the end. We are left to wonder: what will post-GM America be like?

Tuesday, June 2, 2009

Fries With that Chevy?

Yesterday, President Obama described the US government as a "reluctant shareholder" in GM. Indeed.

How lean and mean will new GM have to be to make taxpayers' $50 billion investment pay off? GM's market capitalization will have to surpass that of McDonald's (MCD)—rising to nearly $69 billion just for taxpayers to break even. (Yesterday, McDonalds's market capitalization was $66.6 billion.) And that's likely to take awhile. As of May 29, GM's market capitalization was in the neighborhood of $500 million.

Under the proposed reorganization plan, of the $50 billion total investment, the US's equity stake will be $41.2 billion or about 60% of the New GM pie; another $8.8 billion will be debt. For a 60% stake to be worth $41.2 billion, the market capitalization of the reorganized company will have to rise to $68.7 billion.

Here's the visionary plan on which the return on this super-sized investment depends. New GM is going to make cars people want to buy at a profit.