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Monday, June 01, 2009

The Chrysler bankruptcy case & Indiana's "takings" lawsuit

Last night, Bankruptcy Judge Arthur Gonzales approved the section 363 sale of Chrysler to Fiat. This morning, Judge Gonzales refused to transfer Indiana's constitutional claim against the deal to federal district court. Here's a question for the prawfs interested in takings: Is there any merit to the Indiana pension funds' claim that, by ignoring the absolute priority of secured creditors, the bankruptcy court has "taken" those creditors' security interest without just compensation in violation of the Fifth Amendment?

The claim has inspired the usual outrage or applause from the usual suspects: George Will praises Indiana's lawsuit as plucky opposition to Obama's confiscatory Leviathan, and the Daily Kos praises the Chrysler deal as a bold move to save rust belt industry. But suppose that, just for the heck of it, one gave the ideological hand-waving a rest and instead analyzed the legal merits of Indiana's claim: is there anything to it?

For what it is worth (not much, as I am no bankruptcy scholar), my first instinct is to agree with David Zaring's analysis: Since 1937, takings-based objections to bankruptcy dispositions are generally doomed. And rightly so: After all, the essential assumption of bankruptcy is that creditors, secured or otherwise, are going to lose property. The question of how much, in what order of priority, is a matter of policy for the discretion of policy-makers, not judges.

But here is one reason to pause: In the usual post-1937 bankruptcy case in which creditors raise takings claims, the federal government itself is not one of the creditors, no? The bankruptcy disposition, therefore, is the result of an impartial referees' arbitrating between rival claimants. After TARP's investment in Chrysler, this is no longer the case (right?) Should the analysis, therefore, be different and more rigorous, when the feds themselves or their proxies budge ahead of other creditors?

The classic analysis of this distinction is Joseph Sax's old article, Takings and the Police Power, 74 Yale L. J. 36 (1964), in which Sax distinguishes between exercises of the police power that enhance the government's own entrepreneurial enterprises and exercise of the police power that impartially arbitrate between rival private parties. The former should be regarded with more skepticism than the latter, according to Sax.

I do not automatically endorse the analogy between regulatory takings of real property and claims that security interests have been taken: I have not given the question enough thought. Nor do I suggest that TARP automatically puts the feds in the position of an interested party or that the actual 363 disposition constitutes self-interested action by the feds (whatever that means). But I have an uneasy feeling that Zaring's analysis might be missing Sax's distinction. When the rest of the creditors are arguably bought off with TARP funds and when the feds themselves retain an equity interest in the firm that results from a section 363 sale, then there is a sense in which the takings claim becomes a bit more powerful to my mind. Given that the statutory merits of this section 363 seem a bit shaky, I'd be interested in hearing a more informed person explain to me whether and to what extent Indiana's taking claim is bunk.

Posted by Rick Hills on June 1, 2009 at 10:22 AM in Corporate | Permalink


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In response to my query, David Zaring offers a nice overview of the problem of bankruptcy, takings, and self-dealing at http://www.theconglomerate.org/2009/06/government-selfdealing-and-the-gm-bankruptcy.html.

Posted by: Rick Hills | Jun 1, 2009 3:54:06 PM

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