Creditors can Force GM and Chrysler into Bankruptcy

By Steve Priestap

Given the unprecendented interference by the Obama administration in the pending bankruptcies of General Motors and Chrysler, the creditors of those companies may want to seriously consider a little-used collection strategy: filing an involuntary bankruptcy petition against the automakers.

According to the New York Times, the Treasury Department is allegedly “preparing” Chrysler’s bankruptcy petition, which could be filed as soon as next week. The details are a little murky, but the general idea seems to be that the government is trying to convince Chrysler’s creditors to take 22 cents on the dollar plus a 5 percent equity stake in exchange for their existing debt (the creditors are seeking 65 cents, plus 40 percent equity). I am speculating, but I have a strong hunch that the creditors could do better than 22 percent if Chrysler were to file a real Chapter 7 or 11, without Administration interference. And if that’s true, the creditors should take matters into their own hands and immediately file an involuntary petition against Chrysler and force the company into bankruptcy court. In one stroke they could take Obama out of the game and put the whole tangled mess in the hands of a bankruptcy judge, where it belongs.

Legally, there are no impediments: under Title 11 of the United States Code, only three creditors who are owed at least $10,000 apiece are needed in order to file an involuntary petition. From a creditor’s standpoint, there are several advantages. First, the creditors could choose their own venue rather than allowing Chrysler to choose it. Second, they could prevent Chrysler from transferring assets and paying other creditors preferentially. Third, they could prevent Chrysler from incurring more debt, squandering assets, and taking other detrimental actions (such as allowing the company to be taken over by the Obama administration).

I suspect one reason the creditors haven’t taken this action up to now is that they were hoping the government would give them a better deal than 22 percent, and there’s probably a good chance that they’ll hold out, still hoping to get a better deal than they’ll get in bankruptcy court. It would be rather interesting, however, to see a few creditors get together on their own and file an involuntary petition. I’d like to see the look on the President’s face when he got the news that the rug had just been pulled out from under him, and that there wasn’t a damned thing he could do about it.

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