090204: Expert: Put Automakers in "Chapter 10" Bankruptcy

(Detroit Free Press) -- It's not what executives have in mind in terms of a new chapter in the history of General Motors Corp. and Chrysler LLC, but two bankruptcy experts unveiled a plan for a "Chapter 10'' bankruptcy tailor-made for automakers.

"Chapter 11 for a 'too big to fail' company, such as a Big Three automaker, could be disastrous for the country,'' said George Kuney, a law professor at the University of Tennessee College of Law, and San Francisco bankruptcy attorney Michael St. James, in a paper for the American Bankruptcy Institute Journal.

Their so-called Chapter 10 plan would allow bankrupt automakers to keep paying suppliers for a regular flow of parts. Under current law, an automaker that filed for Chapter 11 would stop paying many bills for months or years, and suppliers have to compete with other creditors for repayment.

"By arbitrarily and unnecessarily putting all accounts payable on hold for months or years — a mandatory aspect of existing Chapter 11 law — the bankruptcy filing of one large company would likely result in cascading business failures among its vendors, and the vendors of its vendors,'' Kuney and St. James wrote.

Their proposal would keep regular payments to employees out of court while leaving other parts of the bankruptcy code unchanged, allowing the automakers to force new contracts with bondholders, dealers, suppliers and unions.

Automakers and several experts have warned that if GM or Chrysler declares bankruptcy, it could trigger a domino effect that would threaten much of the domestic industry, including foreign-owned plants in the United States.

GM and Chrysler told the Obama administration that bankruptcy could cost up to $100 billion for GM and $24 billion for Chrysler, money that only the federal government could provide. Without it, each said they would have to liquidate.

That has not stopped many outside analysts from suggesting bankruptcy as the right choice, even with drawbacks including up to 3 million lost jobs. The debate prompted Rep. Barney Frank, the Massachusetts Democrat and chairman of the House Financial Services Committee, to tell a witness during last year's hearings on the auto industry that the problems posed by bankruptcy were not cast in stone.

"You are now before the body that wrote Chapter 11,'' he said, "and it can rewrite Chapter 11.''

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