By now you have probably heard that the United States Supreme Court lifted the stay Ordered by Justice Ginsberg late on Monday and the bankruptcy deal that will give Chrysler to Fiat, UAW workers and the US and Canadian governments is now clear to go through, most likely on Wednesday, June 10, 2009. I will not call this deal a sale of Chrysler to Fiat, as many are, because a sale presupposes that a buyer will pay for an acquisition. As ridiculous as it sounds, Fiat will not actually buy Chrysler, but rather they will be given a 20% stake in Chrysler without paying a dime. They merely need to share their small automobile technology with the newly reformed Chrysler when it exists bankruptcy, all in exchange for a 20% initial ownership stake, which could grow to 50% or more eventually. This is a very sad day because today marks the day that the US Supreme Court ignored the US Constitution, ignored bankruptcy laws and made it all but certain that it will be impossible for most businesses to afford to borrow money, and extremely difficult for even the most healthy businesses to borrow money. This will cripple much of the US economy, and in particular will disproportionately harm independent inventors, entrepreneurs and start-up businesses who absolutely require funding from investors to successfully launch and succeed. This is a very sad day indeed.
In relevant part, the Supreme Court ruling stated the following:
In determining whether to grant a stay, we consider instead whether the applicant has demonstrated (1) a reasonable probability that four Jus-tices will consider the issue sufficiently meritorious to grant certiorari or to note probable jurisdiction; (2) a fair prospect that a majority of the Court will conclude that the decision below was erroneous; and (3) a likelihood that irreparable harm will result from the denial of a stay.
A stay is not a matter of right, even if irreparable injury might otherwise result. It is instead an exercise of judicial discretion, and the party requesting a stay bears the burden of show-ing that the circumstances justify an exercise of that discretion. The applicants have not carried that burden.
I don’t doubt that the Supreme Court properly characterized the law relating to whether the Court should grant a stay, but it is indeed odd that the law says that a stay is not a matter of right even when might result. In this situation, it is not a question of “might,” but rather a question of “will” result in irreparable harm. The issue of overriding importance is a practical one. The US government per President Obama forced this deal on secured creditors, and elevated unsecured creditors over secured creditors. In a bankruptcy proceeding secured creditors, typically those who have lent money and received “secured” status are at the front of the line, with unsecured creditors at the back of the line. In the typical situation secured creditors receive a certain number of pennies on the dollar, and unsecured creditors receive nothing. That was at least until now.
This is tragic news because it will mean that lenders can never again believe with certitude that they will be able to lend money and have assets secured as collateral. This is why many lenders give loans — because if you don’t pay they at least have rights to certain property that they can sell or obtain in order to pay them back for money provided that has been lost and will not be repaid. This is how the mortgage industry works, and why banks lend money for us to build and buy houses. It is also why banks and other lenders provide money to companies, because if the company fails they at least can look to the assets of the company to recoup something.
Starting today, secured lenders will never again be secure in the knowledge that they are first in line. If the government wants to favor unsecured creditors, unions and employees at the expense of secured creditors then what we will see from now own is far more cautious lenders, and you can for the most part say goodbye to lenders providing large money, which could just evaporate at the whim of the government. For those lenders who are still willing to provide loans, the cost of obtaining those loans will skyrocket, likely to near usurious rates, which means that even if you do get lucky enough to get a loan you are going to be paying so much in interest there will be little profit remaining, which means less expansion, fewer jobs created and a whole host of other terrible and negative consequences.
What the Obama Administration is doing to secured creditors is clearly illegal and unconstitutional, and the fact that the Supreme Court was not willing to take the case and rule that way has to make one wonder what role the Supreme Court plays. The most pressing economic and social issue of our time and the Supreme Court passes. Perhaps Justice Scalia thinks bankruptcy and the US economy are as much gobbledygook as patents are. Truly sad.
The reason this Chrysler deal is unconstitutional is because the US Constitution provides Congress the power “[t]o establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States.” Uniform bankruptcy law means that the same rule of law applies to everyone, and unless Congress is now going to retroactively pass legislation that says secured creditors in all situations must go to the back of the line, what the Obama Administration has done cannot be considered to fit within any uniform set of laws or rules. Treating people differently is not uniform. On top of that, as far as I know it was not Congress who did anything in this situation, but rather the White House and the Department of Treasury that did the deal making. It is truly maddening that all of the Judges who participated in this case decided to abdicate their Constitutional role to check and balance the Executive Branch. It would have also been nice for the Judges to follow the law enacted by Congress and to consider following the Constitution as well.
I try not to be a doomsayer, but this is bad news of epic proportions. Anyone who owns a business or works for a business or has an invention might consider contacting your Representatives and Senators and letting them know you have grave concerns. I am not suggesting anything radical, but we all deserve answers and explanations. We deserve to know what is going to happen to lending and whether the promise of an American dream will continue to exist moving forward.
The reality is that business as we know it, and the ability to innovate, form a business and grow it to become successful, has fundamentally changed today. Is this change you can believe in, or change you just can’t believe?
This is a mess of epic proportions, and I am certainly not heartless with respect to the employees of Chrysler and the parts providers and dealers, many of whom got their own bad and unfair news today. I grew up in a family where my father was a union worker, as are many in my family still. My dad worked in a factory and lost his job when NAFTA passed because the parent company was a Mexican conglomerate that moved factories south of the border as soon as NAFTA passed. Back when I first became a lawyer I even represented several unions, police unions, in New Hampshire. Having said all of this, standing the Constitution on its head and ignoring well established bankruptcy laws does no one any good now or in the future.
If the Chrysler bankruptcy were to follow anything that even remotely resembles a typical bankruptcy the company would be able to borrow money to keep operations open as downsizing occurs. You don’t hear about this much in the papers or on the TV, but companies do successfully borrow money when they are in bankruptcy all the time because the lender who provides financing to the bankrupt company moves to the head of the line. So don’t be fooled. This bankruptcy didn’t have to go this way, and it shouldn’t go this way. The public is being sold more hype and hyperbole again, just like we were when we were told the last stimulus package had to be passed and there wasn’t even time for the bill to be read. Now we find ourselves three months removed and 95% of the money still hasn’t been spent, so how much of an emergency could it have been?
Regardless of whether you agree with me, I implore you to get involved and ask questions. We must participate in a respectful way and let our leaders know what we think. This is not the America I want to live in, and not the America I want to leave for generations to come. Innovation and the American dream must remain more than fairy tale ideals.