Wednesday, May 06, 2009
Fiduciary duty
After reading Megan McArdle's post today over at The Atlantic, I was wondering to myself what I would have done had I been standing in the shoes of one of the Chrysler senior creditors. Do I take the cram down that the White House is proposing, or do I say, "Let's see what a bankruptcy court says?"
Part of the answer is determined by how seriously I regard my duty as a fiduciary. I happen to take fiduciary duty reasonably seriously -- it is something you assume voluntarily, and should not do so unless you feel as though you are equipped to see it through and do the job. Sometimes that means not accepting deals that you might accept for yourself (for any number of personal or philosophical reasons), but realize that the same transaction is not good for those whom you represent.
Another part of the answer is obviously the specific numbers in the transaction alternatives that are in front of you. Michael Barone is reporting that
"the Obama deal ... would give the bondholders about 33 cents on the dollar for their secured debts while giving the United Auto Workers retirees about 50 cents on the dollar for their unsecured debts.Now, in my limited experience, there are other unusual types of distressed transactions in which unsecured creditors can kind of jump the line and get a pretty good deal, but pretty much everyone has to sign off on it (it could be a situation where there is a single large secured creditor who realizes that one key vendor or supplier, who is unsecured, could make or break the future success of the restructured company).
"This of course is a violation of one of the basic principles of bankruptcy law, which is that secured creditors — those who lended (sic) money only on the contractual promise that if the debt was unpaid they’d get specific property back — get paid off in full before unsecured creditors get anything."
Let's assume, hypothetically, that as a work-out professional, I voted for President Obama and even made a max contribution to him. Standing in the shoes of the senior secured creditors, I would probably take the deal the White House offered if I thought it was within 5%-10% or so of the deal I believed I could get through bankruptcy court (knowing the particular court, and perhaps the judge, and having a sense of the lay of that land). There is a degree of a haircut that I could reasonably justify in return for the certainty and the timing and the somewhat reduced friction in the transaction. However, accepting a buzz cut instead of a haircut in the Chrysler transaction would probably be a breach of my fiduciary duty, no matter how badly I wanted to be on the President's and the First Lady's Christmas Card list. The only thing I would have going for me at trial after my investors sued me would be the testimony of Rahm Emanuel, explaining to the judge how patriotic and accommodating I was.
This is admittedly speculation on my part, since we do not know all of the specific numbers with any degree of confidence, but for the senior secured creditors to have balked as they did, the proposed deal must have been pretty bad. Their door prize for turning it down was to get tongue-lashed by the POTUS.
I am starting to think that everyone who goes to law school (especially HLS) should do at least one tour of duty in a work-out or distressed business situation. It just provides good lessons for life -- sometimes, we learn more in failure than in success, and then again even more by figuring out how to turn it around.
MORE: The May 1 interview with Thomas Lauria, the White & Case attorney representing a number of the senior secured creditors, can be heard here. It is during this interview that he disclosed the pressure brought to bear by the White House against certain of Chrysler's secured creditors.
6 Comments:
By 
, at
Wed May 06, 06:17:00 PM:
What I wonder about is whether the pension liabilities should be secured in the context of this division of assets, or not. I hold GM bonds, and I thought that much of the funds were actually held in the control of the Unions, or somehow off the balance sheet. Naive of me, probably. Then again, if you look at the airlines, the pensionees there were completely wiped out.
In my view, the only reason the autoworkers are getting these deals is due to the fact that the Unions generally vote for the Democrat. If not for that, they would not be getting so much consideration, protecting a company that produces an uninspired product, that no one wants or can afford in this economy.
And, to me the lasting damage rests in the question of who the sucker is who EVER buys a corporate bond again.
By , at
Wed May 06, 06:44:00 PM:
I have to agree with the part about mandating that lawyers work in distressed business situations.
I was a young corporate/M&A lawyer in Chicago during an earlier business downturn and my firm tried its best to repurpose us. I spent most of that year doing deals in the "debtor/creditor" department and learned more about deals and business in general during that time than I did in the following five years of doing "regular" deals.
By , at
Wed May 06, 07:12:00 PM:
The moral of the story:
"There is no more rule of law".
The Federal Government and the Obama administration is above the law. The law has no meaning.
By , at
Thu May 07, 01:14:00 PM:
Absent the consent of the creditors, the Obama plan will fail. No bankruptcy judge has a basis for upholding it, and, if s/he did so, she'd/he'd get reversed on appeal (because of what the law says about the priorities creditors get). As for the President's statement that certain of the bondholders are vultures (or something to that effect), he's overlooking decades' worth of bankruptcies where the bondholders asserted their leverage to have a bigger share of the company that emerges from chapter 11. This type of investing happens all the time, and how many have squawked over the years about it? Not many. Somehow, the market ends up working out (and these investors are a part of it), and businesses that are meant to survive survive.
The White House can really blunder here, interfere with the marketplace, and end up preserving a corporation that won't have any quality of life in a corporate sense. President Obama means well, but he could end up ticking off everyone and having a massive failure -- the attempted saving of Chrysler through extraordinary measures -- on his hands.
The Centrist
By 
Georg Felis, at
Fri May 08, 12:12:00 AM:
Question: Since this is roughly equivalent to Visa getting in front of my mortgage-holding bank for my assets (i.e. my house) during a bankruptcy, is it possible that the secured-debtors are not putting up as much a fight because of behind-the-scenes promises of “insurance” they bought thru another Government-purchased entity, like AIG? So the bondholders would get X cents from the psedo-bankruptcy, and then Y cents from AIG, giving them a larger percentage than if Chrysler had just undergone a “normal” bankruptcy?
It's still taxpayer money, but at least it's not going to some campaign contributor in exchange for favors. Oh wait...
By Gary Rosen, at
Fri May 08, 02:51:00 AM:
"President Obama means well"
BULLSHIT. I had to type that in caps. This is a naked power grab worthy of Hugo Chavez.
