NOTE :: Of the twenty largest public company bankruptcy filings from 1980 to the present, seventeen have taken place since 2001, and ten of those seventeen were filed between March of 2007 and August of 2009. One such example is In re Chrysler LLC, in which Chrysler, on April 30, 2009, filed for protection under Title 11 of the United States Code. For the twelve-month period ending on December 31, 2008, the Chrysler companies suffered a staggering $16.8 billion loss. The failure of such large companies and the distribution of their enormous wealth of assets have and will continue to have major repercussions. The Bankruptcy Code provides these massive businesses with different options for filing bankruptcy, and these options have reverberating economic and societal effects well beyond any one company’s interests. It is thus essential to understand the options provided by the Bankruptcy Code and to ensure they provide for the most advantageous possible outcomes when America’s foundational businesses collapse.
While Chapter 11 of the Bankruptcy Code is the traditional guide for corporate reorganization and the payment of creditors over time, Chrysler—following the current corporate trend—chose to proceed pursuant to § 363. Section 363(b) of the Bankruptcy Code authorizes a Chapter 11 debtor-in-possession, such as Chrysler, to “use, sell, or lease” estate property outside the ordinary course of business. Section 363 sales tend to be cheaper and more time efficient than reorganization alternatives. Accordingly, in the last twenty-five years, § 363(b) asset sales have become standard practice in large corporate bankruptcies. “Proponents of the Chapter 11 liquidation method into which § 363 has evolved extol the speed, efficiency, and competition involved in the sales as indications of its superiority over a more traditional reorganization.” This trend toward use of § 363(b) is likely to grow as poor economic conditions continue to increase creditor control over reorganization and because of the lack of available financing to debtors, both of which tend to fuel § 363(b) sales. Thus, the “side door” of § 363(b) may soon “replace the main route of Chapter 11 reorganizations.”
Considering current declining economic conditions, the massive amounts of wealth at stake, and the modern prevalence of § 363 sales in large-scale corporate bankruptcy proceedings, it is prudent to ensure that § 363(b) provides a competent and just medium to protect the diverse interests of all relevant parties and society as a whole. While § 363 sales, on paper, appear to be the ideal way to maximize value for secured creditors, preserve the going concerns of businesses, and keep workers on the job, there is a well-founded fear that quick asset sales run the risk of circumventing the Chapter 11 process. In re Chrysler LLC highlights the concerns of courts and academics that § 363 fails to adequately protect the interests of companies’ smaller debt and equity holders and ignores some of the fundamental bankruptcy principles and protections.
Part II of this Note provides the basic framework of the Chrysler bankruptcy agreement for the purposes of analyzing § 363 and the business justification standard. Part III details the development of § 363(b) and three of the primary dangers that exist with § 363(b) asset sales under business justification analysis. Part III then uses the In re Chrysler LLC case to highlight the issues in practice. The first issue is § 363(b) sales’ vulnerability to construction as “sub rosa” sales, which serve the same purpose of reorganizations but avoid Chapter 11 protection requirements. The second issue is § 363(b) sales’ potential to allow powerful creditors too much influence and control, thereby subordinating and possibly defeating the protected interests of smaller creditors. The third issue is § 363 sales’exceedingly low return values for the assets sold off in spite of their intended purpose of maximizing decreasing values. Part IV addresses the current standard for approving § 363(b) sales, the business justification rule, and how the rule wrongly facilitates the approval of dubious asset sales. Part V discusses academic theories for reform of the current business judgment standard as well as its implementation in other areas of the law. Lastly, Part VI synthesizes the differing approaches to the business justification standard and offers a refined framework for assessing § 363 asset sales.
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