The 1.5 Billion General Motors Recalls at the Dangerous Intersection of Chapter 11, Article 9, and TARP

Abstract

This article, then, joins other articles' that have examined the power of secured creditors in mega-chapter 11 cases and proposes reforming long-standing practices. Rather than take a theoretical, big-picture approach to the role of secured creditors in chapter 11 cases, this article takes a close look at one extraordinarily successful case in which a $1.5 billion issue went terribly wrong. To understand what happened here, I have read thousands of pages of pleadings, exhibits, and hearing transcripts from the General Motors chapter 11 case relating to the Term Loan. What I conclude is that the typical provisions of mega-case debtor-in-possession financing, which evolved at a time when the law regarding security interests was dramatically different than it is now and when lending syndicates were oftentimes dramatically different than they are now, are antiquated, dangerous models that need to go back to the shop before more unfairness takes place in chapter 11 cases. In order for us to understand the need for change, Part II of the article will review the perfection and termination of security interests and the importance of perfected security interests in chapter 11 cases. Part III of this article will discuss the extraordinary "First Day" and debtor-in-possession financing orders entered in the GM case and the subsequent litigation to recover the money. Part III will also address the continuing controversies regarding the effect of the First-Day orders on the distributions to creditors. Part IV will set forth modest proposals to make it less likely that favored creditors will walk away with a windfall to which they are not entitled.