A Giant Game Of Chicken
 

The article from today's Wall Street Journal describes the temporary stay issued by the SCOTUS, which essentially blocks the sale of most of the Chrysler assets to Fiat and potentially overturns the plan of reorganization that was strong-armed by the Fed prior to the bankruptcy filing. Three Inidana pension funds are seeking a SCOTUS decision on the government's involvement in "arranging" the pre-packaged bankruptcy and the way the plan was structured among the creditors.

Essentially, the claimants argue that the government doesn't have the legal authority to force the creditors to agree to a plan prior to a bankruptcy filing as well as the argument that certain creditors who had only junior standing were treated more favorably than senior creditors. The stakeholders who are alleged to have been treated more generously than their position in the capital structure would justify include the UAW and the government itself.

The game of "chicken" occurs because there is no funding available--unless the government decided to continue to pump money into Chrysler to keep it afloat--to keep Chrysler operating until SCOTUS hears and rules on the case. If SCOTUS agrees to hear the case, unless it is on some sort of highly accelerated pace, it looks like Chrysler will have to cease doing business and be liquidated. The whole GM bankruptcy would likely be similarly threatened.

Here's a situation where SCOTUS has a huge influence on an event that would effect the U.S. economy in a massive and negative way. This case is every bit as important as the litigation surrounding the Florida vote in the 2004 presidential election.

An article describing the situation can be read at...

http://online.wsj.com/article/SB1244...ml#mod=testMod

I've thought all along that the UAW was treated too generously at the expense of senior lenders. But if SCOTUS agrees to hear this case, both the Chryler and GM bankruptcies would have to occur without the "pre-packaging" and more importantly without any debtor-in-possession financing that would permit both companies to continue to operate while the creditors went back to the table and re-opened negotiations on a Plan of Reorganization. Almost certainly, both companies would have to go out of business. If that happens, the U.S. economy and the financial markets are going to enter a tailspin the likes of which we haven't seen since 1929.

If SCOTUS decides to take the case for adjudication, it would likely have a disastrous economic result. If they choose not to hear the case, it will be a fairly significant avoidance of exercising their responsibilities to uphold the rule of law. Wow! Talk about making law from the bench...without even hearing a case. The precedents set by not hearing the complaint will be tough to overcome in future bankruptcy cases. The legal rights of various classes of creditors might be changed without a court case.

There is no "game of chicken" here. It's simply our laws in action. We tout that the US is a "nation of laws," and then seem surprised when the citizenry employs the legal system from keeping "the government" from trampling the citizenry.

SCOTUS will discharge its responsibilities with the independence it has, and Thank God and the Founding Fathers that it can. When the courts lose their independence, and the citizenry can no longer seek redress there from autocratic government action, a lot more than the economy is in danger.

Not So Sure
 

Steve, I'm not at all convinced that Justice Ginsburg can gather another five Justices to decide to hear the case. The question on the table then might be: by refusing to even hear the case, will SCOTUS have done all that it should to defend the Constitution and our rule of law?

SCOTUS can't (and doesn't) choose to hear every case that is appealed to them. They aren't often criticized for failing to exercise their Constitutional responsibilities in the cases they decline to hear--why would they be in this one? Just because it's high profile?

Indiana Teachers Retirement Fund Statement
 

Below is what is posted on the Indianan Teachers Retirement Fund website.

http://www.in.gov/trf/2448.htm

In situations not involving conflicts between the states, SCOTUS normally only takes cases where there is conflict between/among Circuit Courts of Appeal on similar cases, or there is no SCOTUS-level precedent case on the matter where the issue is unique.

If SCOTUS does not take this case, it effectively affirms the 2nd Circuit Court of Appeal decision, and from then on, that 2nd Circuit Court of Appeal case is "good law." That basically means, the arguments in the affirmed briefs become guidance for similar subsequent actions. If SCOTUS does not take the case, the justices (no9t all) have to be satisfied that the 2nd Circuit COA's ruling (or any reliance on lower court ruling) was indeed rational under the law. So, the question is really, is SCOTUS satisfied that the ruling in this case acceptable for future cases of similar fact pattern?

BTW - Only 4 justices must agree for a case like this to be heard by the Court. That gets decided behind closed doors.

Absolutely Correct
 

The explanation of the situation on the Indiana Teachers website was absolutely correct in both definition and explanation of the situation.

There are two problems that I see in the way the bankruptcies of Chrysler and GM were "pre-packaged". First, the creditors of both companies had made no progress in negotiating a Plan of Reorganization acceptable to all of them, even after trying for more than two months. Had the companies filed without the pre-agreement achieved with pressure from the government--and without any source of financing so they could continue to operate in bankruptcy--the creditors would almost certainly fail to reach agreement on a Plan, which would have lead to the companies having to shut down. At that point, liquidation would be the only alternative.

The second problem was the form of the Plan that was forced on the creditors by the government. As noted on the Teachers website, as a member of the class of secured creditors, they are getting far less than the unsecured creditors, principally the UAW, who are legally junior to them in the way a Plan of Reorganization is supposed to be structured. I've noted in other threads here that the UAW made out like bandits, moaning on how much they have been forced to give up, yet somehow elevating themselves far above other creditors with senior, secured positions in the way they were treated within the creditor group.

In addition, as Steve points out, however the ruling of the Second Court of Appeals is worded, that becomes the case law that will be used by generations of lawyers and judges adjudicating similar cases in the future. If that ruling failed to give proper recognition to the established contractual rights of lenders like the Indiana Teachers, there will likely be dozens or even hundreds of future creditors in other cases whose rights will be weakened by a SCOTUS "non- decision". As a retired banker, I can tell you with absolute certainty that such a development will constrain the willingness of banks and other lenders from making corporate loans. If lenders can't be assured that their contracts will be adjudicated properly, they will simply avoid that type of lending.

The need for the government to become involved was clear. The creditors simply were not going to reach agreement without the outside pressure of a third party. The Plan that was arrived at would probably have been criticized however it was finally structured. But the manner in which the UAW, with all its voter/workers and political contributions, was vaulted above other creditors who had substantially better contractual rights makes the Plan that was strongarmed by the government look like it was politically motivated. I find that offensive and I still do.

The problem now is that if SCOTUS agrees to hear the case, and if they rule in favor of the Indiana claimants, there's a possibility that the bankruptcy cases of both companies will fall apart, reverting to the re-opening of negotiations among the creditors themselves, with no government involvement to strongarm a solution. There is absolutely no indication that the creditors are any closer to agreeing on a Plan than they were when they began negotiations almost 90 days ago. The effect of two failed bankruptcies would have a devastating impact on the U.S. economy, deepening and lengthening the already dire economic circumstances. And in the end, the Indiana teachers would likely not get any more, maybe even less, from the liquidation proceeds from selling Chrysler's assets.

There is no answer that satisfies the rights of all parties under existing law. So, does SCOTUS avoid the application of written and deep and well-formed case law by simply refusing to hear the case and walking away? Or do they fulfill their Constitutional responsibility by hearing the case, even though the financial outcome on the country will almost certainly be devastating?

I guess we'll find out soon.

Again, there is no "walking away" here. SCOTUS either affirms the 2nd Circuit Court of Appeals decision, or decides the matter via summary judgment based on existing briefs, or decides to hear the matter with oral argument from both parties (including any special testimony and amicus briefs).

So far, these "bankruptcies" have already involved taxpayer bailouts, strong-arm tactics by the administration for debt settlement, and all of this has been under the guise of "haste is mandatory." At least SCOTUS will take the time to read the documents before it - which Congress simply found itself incapable of doing before hollering YEA from every corner.

UPDATE: SCOTUS took the first option - affirmation of thne 2nd Circuit COA decision.

For more info, see: http://www.scotusblog.com/wp/categor...-and-opinions/