Legal News

Motown or Gotham? GM, Chrysler Weighing the Pros and Cons

By Ashby Jones

Where will GM and Chrysler go? In the long run, it’s anybody’s guess. But in the short term, the answer seems to be narrowing to two cities: Detroit and New York. According to an article in the NYT Monday, courtrooms in those cities appear to be the frontrunners to land the bankruptcy filings of both car companies — if they choose that route.

The stakes are high for both cities, but perhaps higher for the Motor City. The influx of lawyers, bankers, journalists and others spurred by a Detroit filing would likely give a badly needed boost to the Michigan economy. (According to a WSJ story on Monday, car dealers could be the next group to be running to the courthouse doors, bankruptcy filings in hand, once GM or Chrysler file.)

Once upon a time, large corporate debtors would file in jurisdictions all over the country. But in recent years, most have chosen to file either in Delaware, where many business are incorporated, and New York. As a result, each has developed a reputation for having the resources — and the judicial expertise — to handle huge bankruptcies.

But according to the NYT article, Delaware could be pulling up third in the running, largely because of rulings that make it hard to restructure certain types of collective bargaining agreements.

So how does Detroit enter the picture? After all, according to the piece, Detroit's biggest bankruptcy case was by a 1994 filing by F&M Distributors, a retailer with $328 million in assets — a far cry from what G.M. or Chrysler would presumably have on their books at the time of a filing. By contrast, Lehman Brothers, the largest corporate debtor in history, had $6 billion in assets when it filed in New York last fall.

And Penn’s David Skeel says that a Detroit filing might be a bit risky for GM or Chrysler, given that the court has given few signals on how it would resolve complex issues.

That said, Detroit is making a serious play. The jurisdiction’s six bankruptcy judges have adopted a rule that could appeal to the automakers' management. They will allow the chief bankruptcy judge to pick who will oversee a giant corporate filing, rather than leaving the selection to chance.

Furthermore, last week, Michigan's attorney general sent G.M. a letter urging it not to go out of state. "I am gravely concerned about the impact of any bankruptcy filing in a jurisdiction outside Michigan," Mike Cox, the attorney general, wrote in a letter to G.M.'s chief executive. Because the company's headquarters, many of its plants and hundreds of thousands of current and former employees are in Michigan, Cox continued, "any potential bankruptcy filing outside the state of Michigan seems bizarre."

For now, G.M. isn’t saying what it has planned. If “GM is not able to complete the actions required, it will have no other alternative than to pursue an in-court restructuring, and we would be prepared to do so," said a company spokesman. "The filing location would be just one of many factors we would need to take into account."

Full post as published by Law Blog - WSJ.com on April 27, 2009 (boomark / email).