An excerpt of this article originally appeared in The Columbia Regional Business Report, Sept. 7-20, 2009

As you are doubtlessly aware, General Motors Corp. and Chrysler, LLC recently filed two of the largest bankruptcies in American history and ultimately sold substantially all of their assets in government supported bankruptcy sales. 

Say what you will about the federal government's entree into the car business, the GM and Chrysler bankruptcy cases are remarkable for various reasons. And they show how one silver lining in today's economic climate is the opportunity to use the U.S. Bankruptcy Code to buy assets under favorable conditions.

Both GM and Chrysler filed bankruptcy under Chapter 11 the United States Bankruptcy Code where the goal, in most cases, is to try to reorganize the business and deal with debts in a way that is fair to all pursuant to a "plan" that must be confirmed by the bankruptcy court. 

Right after filing their bankruptcy petitions, Chrysler and GM each filed requests to sell substantially all of its operating assets to new entities, referred to as "New Chrysler" and "New GM," in exchange for the assumption of certain debt and cash.  "New Chrysler" is owned by the U.S. and Canadian governments, a voluntary employee benefits association created to fund Chrysler's legacy health care obligations, and a subsidiary of the Italian automaker Fiat S.p.A, who had entered into a strategic alliance with Chrysler.

Similarly, the U.S. and Canadian governments owns approximately 60% and 12% of New GM, respectively, while the remaining shares are owned by a voluntary employee benefits association and, if certain conditions are met, the "Old" GM will keep a portion of the new company.

The presiding bankruptcy judges ultimately approved the sales over numerous objections (there were over 800 objections to the sale filed by parties in the GM case alone).  Following the sales, what's left of the "Old" GM and Chrysler (now known as Motors Liquidation Company and Old Carco LLC, respectively, since the names were sold), remain in bankruptcy as they work toward filing plans of reorganization for their remaining assets, while the "New" GM and Chrysler have emerged and are operating outside of bankruptcy.

Both GM and Chrysler sold their assets pursuant to Section 363 of the Bankruptcy Code, which affords significant potential advantages to buyers (and sellers) of assets - thus, the title of this Article.  Why should buyers at bankruptcy sales be happy?  For one, bankruptcy sales offer tremendous speed.  Chrysler and GM both accomplished their sales in less than 45 days, less time than many residential home sales and a dizzying pace that shocked even bankruptcy experts given the tremendous size of the companies and the number of parties involved.   Similar time frames have been achieved in the United States Bankruptcy Court for the District of South Carolina, though obviously the companies are a tiny fraction of the size of GM and Chrysler.  For example, Pulliam Motor Co. sold most of its assets in 2007 in a matter of weeks.  More typically, Georgetown Steel Company, LLC sold substantially all of its assets in 2004 after being in bankruptcy for approximately eight months. 

Under the Bankruptcy Code and rules, a sale outside the ordinary course of the debtor's business generally only requires 20 days notice of the sale, an opportunity for objections, and a hearing if objections are made.  For creditors, who are allowed to purchase their collateral in bankruptcy sales and use their loan amount as "credit" against the purchase price under the Bankruptcy Code, this speed of this process compares very favorably to a state court foreclosure proceeding, which in South Carolina can take 180-240 days even if the case is not contested.  Even though many more Chapter 11 cases fail than are successful and finding financing for the cases and the sales is increasingly difficult, but the GM and Chrysler sales show how sales under Bankruptcy Code Section 363 can be accomplished much faster than any other option.

A second, potent advantage of sales under Bankruptcy Code Section 363 is the ability to sell property "free and clear" of liens and interests if any one of various conditions are met; thus, the buyer obtains these assets stripped of liens such as mortgages, mechanic's liens, and judgments and other "interests" that third parties may assert in the property. In addition to the statutory conditions for selling assets free and clear, most courts will only allow sales of substantially all of a debtor's assets under this Bankruptcy Code provision if there is a "sound business purpose" for selling the assets.  One of the most controversial aspects of the GM and Chrysler bankruptcy sales was their use of the Bankruptcy Code to sell the assets free and clear of product liability claims - the claims of those injured while using their vehicles. 

The Chrysler sale approved by the bankruptcy court provides that the assets are sold free and clear of current product liability claims (i.e., the claims of people injured by a Chrysler vehicle they already own) and claims for future product liability claims (i.e., any claims of people who may be injury by a Chrysler vehicle in the future).  In this way, the New Chrysler is protected from being sued by former and future users of Chrysler products, and parties seeking to recover from their injuries allegedly caused by Chrysler products would have to assert their claim against Old Chrysler in the bankruptcy proceeding (where they would likely receive nothing).  Courts around the country have long debated and reach differing conclusions on this issue of whether Section 363 of the Bankruptcy Code should be interpreted so broadly as to exonerate purchaser from these types of claims, including injuries that have not even happened yet.

The Chrysler bankruptcy court's decision to approve the sale under these terms has been applauded by groups representing business interests while being heavily criticized by some lawyers and public interest groups representing people who were allegedly injured by these products.  Though one such public interest group has petition the Supreme Court to overrule the bankruptcy court's decision, this petition did not ultimately delay the closing of the sale.  Similarly, GM's bankruptcy sale provided that the New GM purchased the assets free and clear of existing product liability claims, but in a somewhat surprising concession and difference from Chrysler, ultimately agreed not to sell the assets free and clear of future product liability claims - the claims of people alleged injured in the future by cars made by the Old GM.

Though the outer limits of the Bankruptcy Code Section 363's ability to wash assets of claims and interests, including product liability claims, remains a topic of further decisions from the courts, it is clear that the Bankruptcy Code does afford significant protection and other advantages to buyers of assets at bankruptcy sales.  While they are truly extraordinary cases, GM and Chrysler show us how one silver lining in today's economic climate is the opportunity for buyers to utilize the Bankruptcy Code to buy assets under favorable conditions.  

 Jody A. Bedenbaugh is an associate in the Columbia office of Nelson Mullins Riley & Scarborough LLP where he practices in the areas of banking, creditor's rights, and bankruptcy. Contact him via http://www.nelsonmullins.com/attorney/Columbia/jody-bedenbaugh.  The comments of the author do not reflect any position of Nelson Mullins Riley & Scarborough LLP or any of its clients.

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