December 11, 2008
LETTER TO CONGRESS
The Association of Insolvency and Restructuring Advisors is a nationwide not-for-profit organization serving the needs of business turnaround, restructuring and bankruptcy practitioners. With over 1,800 members, we are one of the leading bankruptcy and reorganization associations for accounting and financial advisors and offer members the most comprehensive bankruptcy certification program in the country. Our board of directors remains steadfastly committed to providing our members with relevant education programs and to taking a leadership role on legislative issues affecting the insolvency practice field. As practitioners and specialists in the field of distressed business, we appreciate the opportunity to provide our perspective on the crisis facing the U.S. automobile industry.
As Congress grapples with the immense and historic difficulties faced by the U.S. automobile industry, we urge our lawmakers not to exclude a time-tested and exemplary process for restructuring troubled companies – Chapter 11 of the U.S. Bankruptcy Code (the “Code”).
A Chapter 11 filing would provide the following benefits:
1) The Code already has a well-known structure and process in place intended for situations precisely like this. A bailout or loan scenario would require reinventing a framework for restructuring through rules specially designed for the auto industry, requiring (literally) reinventing the wheel.
2) A Chapter 11 filing puts the restructuring process under the scrutiny of unbiased and highly qualified judges of the United States Bankruptcy Court (the “Court”) and the Office of the U.S. Trustee, a division of the U.S. Department of Justice.
3) Chapter 11 provides an appropriately high level of transparency by requiring regular financial reporting, open Court hearings and a restructuring plan that is vetted in an adversarial context, with all relevant constituents having the opportunity to negotiate the final outcome and the results posted to the Court’s publicly available web sites.
4) Should Congress decide that making funds available to the automobile manufacturers (whether as a credit guarantor or through direct lending) is in the best interest of the nation and its taxpayers, doing so within the context of a Chapter 11 filing protects this interest within an existing set of laws and would not require new legislation to deal with any possible inability to repay. If Congress authorizes direct funds to support the filing(s), the public funds advanced will have a position ahead of many pre-bankruptcy creditors.
We understand there is much opposition and fear regarding the stigma of a Chapter 11 filing by one or more of our largest and most important manufacturers. One concern most often expressed is that consumers may be reluctant to purchase a car from a manufacturer in Chapter 11. However, this fear can be mitigated. Courts routinely sign orders providing continuation and even enforcement of warranty claims. Many companies in Chapter 11 have successfully touted these types of orders in their advertising after their Chapter 11 filing.
We further recognize the immense complexity of the issues facing the U.S. automobile manufacturers and that no restructuring can be effective without significant pre-bankruptcy planning. In cases of this size, a coordinated effort between debtors and their key stakeholders (including vendors, unions, etc), accompanied by a well thought-out strategic public relations effort to allay fears and misunderstandings of consumers and vendors, would be essential for any successful reorganization. With this in mind, far from being a “death knell,” Chapter 11 gives the filing company financial breathing room as it continues to operate and keep its employees on the payroll. Indeed, in some respects, employees have added protection since any unpaid payroll is treated as a priority claim, requiring payment as a precondition to paying other unsecured creditors. In addition, Court orders at the commencement of a Chapter 11 case often provide for continuation of wage and benefit programs. Labor contracts, consumer issues such as warranty claims and vendor issues have all been dealt with at length by the bankruptcy system.
As with any other possible solution to the current crisis, there are well documented risks and pitfalls related to a Chapter 11 filing. However, Congress has many examples of Chapter 11 as a viable tool for restructuring complex troubled businesses. The bankruptcy system has provided a framework for ensuring payment of hundreds of millions of dollars to victims of asbestos exposure, while maintaining the viability and integrity of many manufacturers and protecting thousands of jobs. The airline, telecommunications, steel and construction industries, and nearly every other industry in the United States, have all had their share of companies both large and small going through the Chapter 11 process and emerging stronger, healthier and more focused.
We recognize that the restructuring of the U.S. automobile manufacturers will be a financially painful process. Chapter 11 would help assure that no single issue or party bears a disproportionate share of that pain by allowing the parties to address in an equitable manner the financial crisis and strain that will certainly result. Chapter 11 has proved to be an adaptive and flexible system that brings with it financial integrity, transparency and judicial oversight. Without the structure and order imposed by the U.S. Bankruptcy Code and without a Bankruptcy Judge to be the final decision maker when compromise or consensus cannot be achieved, the auto manufacturers, like other companies before them, may be forced into a restructuring process much more complex and costly than the
Chapter 11 alternative and one less likely to be successful.
In closing, we once again urge Congress not to reject the many benefits of its own remedy for dealing with companies in severe financial distress, the U.S. Bankruptcy Code, as an efficient, fair and transparent method for protecting the interests of the affected companies, all of their constituents and the taxpayers.
Grant W. Newton, CIRA, CPA
AIRA Executive Director
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