Interpreting the Supreme Court’s Treatment of the Chrysler Bankruptcy and its Impact on Future Business Reorganizations

Fred N. David, University of Virginia - Main Campus

Abstract

On June 9, 2009, the Supreme Court terminated its stay of Chrysler’s sale of substantially all of the company’s assets to a new entity, dubbed “New Chrysler” with the backing of European automaker Fiat. The effect of that ruling was to permit the sale to close the next day and bring to an end a chaotic period that determined Chrysler’s future. However, critics of the sale to Fiat argued that the Supreme Court’s ruling would also have a detrimental effect on secured credit and undermined the creditor protections normally afforded by Chapter 11 going forward.

But the Supreme Court was not finished with the Chrysler case. In December 2009, the Court issued a brief and somewhat cryptic ruling vacating the Second Circuit’s opinion upholding the bankruptcy court’s approval of the sale and ordering the Court of Appeals to dismiss the dissenting secured creditor’s appeal as moot. What did the Court’s December decision mean? What are its ramifications going forward? And why did the court wait six months to issue its decision instead of addressing the case before Chrysler’s sale took effect? These are the questions this paper will answer. Ultimately, I conclude that the Court’s December decision was an expression of its disagreement with the Second Circuit’s interpretation of the requirements of §363(b), the section of the Bankruptcy Code that permits debtors to sell assets outside of the ordinary course of business, and that the effect of the decision is to prevent the Second Circuit’s opinion from having any value as a controlling precedent in future bankruptcies. Determining why the Court waited until six months after the Chrysler sale (as well as General Motors restructuring) is a more difficult question.