Legal experts warn quick GM bankruptcy could hurt some

— -- GM, with a strong push from President Obama's auto task force and $30 billion in bankruptcy financing from the U.S. Treasury, is following rival carmaker Chrysler in using Section 363 of the Bankruptcy Code's Chapter 11 procedures.

That section would allow the best and most profitable parts of the company — the Chevrolet, Buick, GMC and Cadillac brands and plants, plus other select assets — to be sold within 60 to 90 days to a newly created company.

This "New GM" would be majority-owned by the U.S. government, with the United Auto Workers, creditors and the governments of Canada and the province of Ontario owning the rest.

The current company would become the "Bad GM," owning unwanted, unprofitable assets, such as the Pontiac, Hummer and Saturn brands and outmoded plants. It would be left in bankruptcy courts, perhaps for years, in a quasi-liquidation.

"The 363 procedure is quick, and when it's over, (the New) GM will be out of bankruptcy, and none of their creditors will be able to touch them," says Lynn LoPucki, a University of California-Los Angeles, bankruptcy law professor.

LoPucki argues, however, that the way it's being used with the two automakers distorts Section 363 significantly beyond its original intent.

"It's a form of railroading. The creditors will get their token day in court before the sale is approved, but they won't get a meaningful day in court," says LoPucki, co-author of an upcoming book critical of abuses of the bankruptcy system.

University of Michigan bankruptcy law professor John Pottow says that those who argue that this use of Section 363 cynically "bypasses both the spirit and intent of the bankruptcy code do have a good point." A 363 sale was intended to let a company in reorganization quickly sell units not central to its core business, he says. Creditors would get the top value for that asset while dealing more deliberately with the core bankruptcy issues.