Rush to Auto Bankruptcy Criticized

A House Judiciary Committee holds hearings on how Chrysler and GM were handled by the government.
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A House Judiciary Committee hearing Thursday on automaker bankruptcies became a gripe session, focused on complaints about their rapid pace, bankruptcy court practices and the proposed shutdown of some minority-owned dealerships.

Both Democratic and Republican legislators disapproved of the Obama administration's effort to move quickly to force

Chrysler

and

General Motors

(GM) - Get Report

to restructure or seek bankruptcy court protection.

Chrysler filed on April 30, and GM faces a June 1 deadline, with a filing widely anticipated.

Seeking to ease the concerns, committee chairman John Conyers (D., Mich.), suggested, "Why don't we rush into 1600 Pennsylvania Avenue and get this thing worked out, and bring a bipartisan delegation?" He said a meeting with administration officials could occur as early as Friday.

Every manner of objection to the bankruptcies was raised by a panel that included minority dealers, bankruptcy experts and leaders of interest groups, including consumer advocate Ralph Nader, who pointed out that many jobs would be lost if GM downsizes. He told members of Congress that their authority was being usurped.

The pleas of minority dealers, who said they were being unfairly targeted, garnered the strongest congressional reaction. "I am here for one reason, the lack of appreciation, the negative impact, the seemingly pointed impact, on automobile dealers and particularly minority automobile dealers," said Rep. Shelia Jackson Lee (D., Texas). Added Rep. Maxine Waters (D., Calif.): "We may have a role to play in all of this, negotiating with this administration about what they're going to do to ease the pain on these dealers."

Panelists also voiced concerns over the bankruptcy process. Andrew Grossman, legal policy analyst for the Heritage Foundation, said the cases "are not real bankruptcies -- instead, they grease the wheels of the auto bailout." One focus, he said, is "to reward a labor union at the expense of the senior lenders."

Lynn LoPucki, professor at UCLA Law School, said the bankruptcies reflect the widespread practice of "forum shopping," in which companies seek out favorable bankruptcy courts in New York and Delaware. "Chapter 11 is evolving a bias, and it is a bias in favor of the people who control the choice of a court," he said.

He said section 363 of the bankruptcy code is being misused, because it is intended to stimulate the sale of a company to a third-party buyer, not solely to allow for reorganization.

David Skeel, law professor at the University of Pennsylvania, said senior lenders in the Chrysler bankruptcy are being forced to take haircuts, when normally they would be paid in full, and may become less willing to lend to companies like auto suppliers who face government involvement in their businesses.

Additionally, Jill Claybrook, president emeritus of Public Citizen, said the government should seize the opportunity to use its influence to enhance design practices that improve automotive safety, just as it has enhanced fuel-efficiency standards in order to improve the environment.

"If we're going to give all this money to the auto industry, we ought to at least get improved safety on the highway," she said, noting that consumer concerns are overlooked when a process moves too rapidly.

Clarence Ditlow, director of the Center for Auto Safety, said that in bankruptcy, Chrysler will step away from liability for plaintiffs in personal injury suits and consumers who bought lemons.