Bankruptcy Court Approves GM's Section 363 Sale of Assets

On July 5, 2009, the U.S. Bankruptcy Court for the Southern District of New York issued its decision in the General Motors Corporation chapter 11 case and approved the motion for approval of sale of the bulk of its assets in a 363 sale pursuant to the "Master Sale and Purchase Agreement" to the Vehicle Acquisitions Holdings, LLC, which is a purchaser sponsored by the U.S. Department of Treasury.

GM's motion was supported by the U.S. Government which is GM's largest pre-and post-petition creditor as well as by the Government of Canada and Ontario, the UAW, and other bond holders. The objectors argued that GM's assets can only be sold under a chapter 11 plan and that the proposed 363 sale amounts to an impermissible "sub rosa" plan. Other issues included the limitations on successor liability and well as retiree claims.

The Court agreed with GM's assertion that "this is exactly the kind of case where a section 363 sale is appropriate and indeed essential..." and that "GM cannot survive with its continuing losses and associated loss of liquidity, and without the governmental funding that will expire in a matter of days." The Court added "there are no options to this sale...." and that "the only alternative to an immediate sale is liquidation." The Court stated that the Bankruptcy Code and caselaw do not require waiting for a plan confirmation process when the inevitable consquence would be liquidation.

The Court also rejected the various objectors' arguments that this is amounts to a sub rosa plan as the proceeds of the sale GM's assets will be distributed according to statutory priorities under a subsequent plan. The Court stated that the arrangements that will be made by the purchaser "do not affect the distribution of the Debtor's property."

The Court stated that the issues regarding successor liability were the only truly debatable issues in this case and that while the caselaw on a nationwide basis is not uniform, the Court will follow the caselaw in the Second Circuit and the Southern District of New York in holding that "to the extent the Purchaser has not voluntarily agreed to accept successor liability, GM's property - like that of Chrysler, just a few weeks ago - may be sold free and clear of claims."

The Court found that "section 363 has no carveouts from its grant of authority when applied in cases under chapter 11" and that it does not provide a limitation from its use "for dispositions of property exceeding any particular size..." The Court added the "neither section 363 nor section 1123(b)(4) 4 provides that resort to 1123(b)(4) is the only way by which all or substantially all of the assets can be sold in a chapter 11 case." In short, the Court stated that the plain meaning of section 363 "permits what GM proposes here to do."

The Court also stated that Second Circuit and Southern District of New York case law supports its decision, including those in Chrysler, Lionel, LTV, Financial News Network, Gucci, and Iridium. The Court noted the standards for pre-confirmation section 363 sales were set by the Second Circuit's decision in In re Lionel Corp., 722 F.2d 1063 (2d Cir. 1983). In Lionel, the Court rejected "the requirement that only an emergency permits use of section 363(b)" but it also rejected "the view that seciton 363 grants the bankruptcy judge carte blanche." The Court in Lionel established a balancing test for lower courts, including factors of an "articulated business justification" and a "good business reason" with a consideration of the "salient factors of the proceeding" and to "act to further the diverse interests of the debtor, creditor and equity holders."

The Court stated that caselaw "recognizes the impropriety of sub rosa plans in instances where they genuinely exist." The Court noted the idea underlying the prohibition against sub rosa plan appears in Braniff where the Fifth Circuit Court of appeals held that "the debtor and the Bankruptcy Court should not be able to short circuit the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with a sale of assets." The Court stated that a 363 sale may be objectionable when it "dictate[s] the terms of the ensuing plan or contrains parties in exercising their confirmational rights" or "if the sale itself seeks to allocate or dictate the distribution of sale proceeds among the different classes of creditors." The Court held that none of these factors were present in this case. The GM sale brings in value that the creditor will share in pursuant to a chapter 11 plan that is subject to confirmation by the Court.