As readers may recall, the Second Circuit affirmed the sale of Chrysler's assets to Fiat last month "for the reasons stated in the opinions of Bankruptcy Judge Gonzalez," and promised that a detailed opinion would follow. That opinion is available here.
For the sake of brevity, I will focus today on two of the issues addressed by the panel. First, the panel concluded that the sale was not a "sub rosa plan" but a legitimate use of Section 363 of the Bankruptcy Code to sell assets promptly (so as to maximize their realized value):
With its revenues sinking, its factories dark, and its massive debts growing, Chrysler fit the paradigm of the melting ice cube. Going concern value was being reduced each passing day that it produced no cars, yet was obliged to pay rents, overhead, and salaries. Consistent with an underlying purpose of the Bankruptcy Code--maximizing the value of the bankrupt estate--it was no abuse of discretion to determine that the Sale prevented further, unnecessary losses.
With respect to the complaint that the structure of the deal effectively elevated unsecured creditors (particularly the union) above secured creditors, the panel relied on Judge Gonzalez's conclusion that "all the equity stakes in New Chrysler were entirely attributable to new value--including governmental loans, new technology, and new management--which were not assets of the debtor's estate." Put another way, all of the bankruptcy estate's interest in the assets sold are reflected in the price received for those assets, and all of that money is going to secured creditors. It could be argued that the sale price received is lower than it would have been but for the benefits to accrue to the union under the deal (i.e., if the new company was not saddled with those obligations, would the estate have been able to get more cash from the purchaser?), but that is a very difficult path to carve out effectively given the going-forward benefits from the deal (for example, the reworked union agreement with the no strike clause).
Second, the panel addressed the various arguments that the Chrysler assets could not be sold free and clear of successor liability for various personal injury type claims. Here, the panel adopted a fairly broad reading of the "interests" that can be cleansed in a Section 363 sale, reasoning that this interpretation is more consistent with the purpose of this section and the priority scheme of the Bankruptcy Code.
The panel refused to weigh in on the question of whether a Section 363 sale can cleanse future claims (such as those that might arise from asbestos exposure). This not only makes sense in the abstract; it is the right approach for future claimants. As we have seen in the 524(g) context (which requires setting aside funds to pay current and future asbestos claims, among other things), future claimants' interests are often sacrificed by those currently asserting asbestos claims against bankruptcy estates. Now that courts have started taking a harder line against these schemes, it is easy to see how the 363 sale approach might be viewed as a possible end-run around 524(g)'s limitations on front-loading recoveries. Until the "free and clear" sale's applicability to future claimants is clarified, however, such an end-run remains, at best, extremely risky for most asbestos defendants.