Is Chrysler's Chapter 11 Unconstitutional?
University of Pennsylvania's Wharton School professor David Zaring filed this guest blog post:
Would the government-pushed reorganization of Chrysler, in which bondholders could receive less than they would in a liquidation (or some other resolution), be unconstitutional?
We may get the answer in the first (semi) serious challenge to the constitutionality of the Troubled Assets Relief Program itself, made Monday in Chrysler’s bankruptcy court proceedings.
I suspect that Chrysler’s recalcitrant bondholders are unlikely to prevail in their TARP-as-applied constitutional claim, let alone do something damaging to the statute itself.
The self-styled “non-TARP lenders,” ( we’ll just call them “bondholders” who are mostly hedge funds) have filed a motion arguing that if they are forced to participate in the government plan to reorganize Chrysler, through a sale to “New Chrysler,” that force would be unconstitutional.
Most of Chrysler’s lenders have assented to the sale – but, then, most of them have received TARP funds from the government, meaning that their independence may have been compromised.
The protesting bondholders think that this new Chrysler scheme “was orchestrated entirely by the Treasury and foisted upon [Chrysler], without regard to corporate formalities.” So much so, they argue that, “well before the filing, [Chrysler] had ceased to function as an independent company and had become an instrumentality of the government.”
Those are code words for nationalization, and the constitutional claim is that this nationalization, if approved by the bankruptcy court, would be a taking of debtor property without compensation, and so be subject to the discipline of the Takings Clause.
To make this sort of claim work best, the bondholders need to identify a statute passed after they purchased Chrysler bonds that would interfere with those secured assets.
They think the TARP will do for this role: “even assuming that TARP provides the Treasury Department with authority to provide funding to [Chrysler]…, TARP was enacted long after the Senior Lenders contracted with [Chrysler] and received senior liens on the Debtors’ property.”
They need an inkling of retroactivity because, while it is true that the government’s bankruptcy powers to do in secured creditors are subject to the Takings Clause, it might not carry the day. The role of the Takings Clause in bankruptcy was made clear in one of the last gasps of the anti-New Deal version of the U.S. Supreme Court: Lousiville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935), which is the only case cited by the bondholders in their motion.
But that decision was mostly undone only two years later in Wright v. Vinton Branch of the Mountain Trust Bank, 300 U.S. 440 (1937). Since then, the Supreme Court has respected Congress' efforts to adjust the economic balances in times of financial difficulty, though secured creditors have always been treated somewhat gingerly, at least in my quick reading of the cases.
The problem for the bondholders is that they are not looking at a complete taking of their interest, but rather lower compensation for that interest than they had otherwise hoped. The Radford Court emphasized the “completeness” required for a taking, and courts since then have identify the limited damage done to secured creditors as reasons to uphold congressional legislation that adversely affects their interests.
At any rate, it isn’t clear that the government is playing the role of a retroactive rulemaker here or that of a lender of last resort -- one who is imposing conditions on its funds. The fact that this is a bailout, rather than an across-the-board rule applicable to all senior creditors, makes the analogy with Radford all the more difficult to make.
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