Legal experts warn quick GM bankruptcy could hurt some

— -- While General MotorsGM and the government were promising a fast-track outcome, already some legal experts and analysts are warning about what they see as legal shortcuts being taken to expedite GM's government-orchestrated Chapter 11 reorganization filed Monday.

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.

"The intent of Chapter 11 overall is that you're supposed to get your plan (of reorganization) approved by all the stakeholders via an adequate hearings process," Pottow said. "But clever lawyers figured you could sell all the good assets in a quick 363 sale without having to go through all those nasty hearings. That's what we're seeing here."

Howard Seife, head of the bankruptcy practice group at New York-based law firm Chadbourne & Parke, says that a quick sale of good assets to a New GM via Section 363 is not necessarily a bad thing for the nation, though he has reservations about it.

"It'll be the same kind of arguments we heard in the Lehman Bros. and Chrysler cases," Seife says, "the 'melting ice cube' argument that if you don't get this done quickly, you'll be left with nothing but a puddle on the floor and thousands of jobs will be lost, all the creditors will be hurt worse, and you'll have missed a great opportunity."

Pottow says the government's $30 billion in bankruptcy financing for GM, and its ability to pressure all other parties, gives it huge power in the proceedings. But it also means bondholders are likely to get run over despite what would be their preferred creditor status in a normal Chapter 11.

"As a taxpayer with money in the game now, I want a strong negotiator on my behalf," Pottow says. "But is that good for the long-term practice of bankruptcy law? I'm not sure it is."

Pottow said he has "no more and no less sympathy for GM's creditors than for any other investors in other bankrupt companies."

But he adds: "It's important to remember that these aren't all hedge fund moguls sharpening their moustaches, either. There's a lot of GM creditors who are individual investors with their 401(k)s tied up in this mess, and employees with pension funds invested in GM. And it looks like their interests are being subjugated to the interests of the public, the national economy and the autoworkers union."