Section 363 of the U.S. Bankruptcy Code could be crucial to Chrysler LLCs attempt to reorganize under Chapter 11 protection. Chrysler filed for bankruptcy in New York today.
Section 363 allows asset sales that are generally quicker and easier than sales of assets by troubled companies outside of bankruptcy. Also, in Section 363 sales, buyers usually receive assets free of liens and claims. That could shorten Chryslers time in bankruptcy.
Those advantages have made Section 363 asset sales popular, says Douglas Bernstein, a lawyer at Plunkett Cooney in suburban Detroit.
Very few Chapter 11s dont contain a 363 at some point, Bernstein says
The fastest way out of Chapter 11 is through a prepackaged bankruptcy filing, in which all creditors agree to a reorganization plan before the filing. In that case, it is possible for the troubled company to present the plan to the bankruptcy judge, get it approved, and be out of bankruptcy sometimes within days.
But the odds of a giant automaker, with assets around the globe, getting all of its thousands of creditors to agree in advance to a reorganization plan are slim to none, bankruptcy experts say. That increases the value of Section 363 sales as a way to speed the process.
Section 363 could come into play as Fiat picks and chooses from Chryslers assets to form an alliance, discarding the parts it doesnt want.
Quick, but anarchic
Daniel Glosband, partner in the Boston law firm Goodwin Proctor, says Section 363 deals can be done in two to three months.
But they can be tricky, he says.
Usually, the court solicits a bid from an interested buyer called a stalking horse. Using that bid as a base price, the court then seeks other bids, after laying out clear ground rules for the auction. The highest bidder wins, without requiring another vote by the creditors. Creditor motions and disagreements can drag out a Chapter 11 process but generally cant tie up a Section 363 sale.
Despite this seemingly straightforward bidding process, Section 363 sales can become anarchic, Glosband says. The court can accept late bids or bids for different assets than described in bidding rules. And the quick pace makes it hard for a buyer to perform due diligence.
Also, Chapter 363 buyers may not be able to shed all claims against assets they purchase. Glosband says court rulings have been split about whether a new owner is responsible for product liability claims, for instance.
In GMs case, sales before a Chapter 11 filing, and outside of the Section 363 process, could become a legal thicket.
Bernstein says Section 363 sales can be negotiated in advance and included in an initial Chapter 11 filing. But asset sales before a filing can be subject to review by a bankruptcy judge.
Opel sale review?
For example, if GM sells all or part of Opel, its European unit, creditors could claim that their investments helped to build Opel and they should have received some of the proceeds from the sale, he says. A judge could revisit that sale.
Glosband says dissenting creditors could object if a sale occurs without open bidding.
Its a very rare case that doesnt include exposure to further bidding, he says. The goal of the process is to maximize the value that creditors receive from any asset sales.