Court Frees On-ramp for Auto Bankruptcies

Federal bankruptcy judges in Michigan's Eastern District make procedural changes that could attract filings; but others think business-friendly New York and Delaware will get the business.

The federal bankruptcy court in Detroit has changed its rules to make it more palatable for the troubled U.S. carmakers to seek reorganization in that venue.

The U.S. Bankruptcy Court for the Eastern District of Michigan said in an administrative order on Dec. 10 that the court’s normal “blind draw system” for assigning cases would be replaced with a system of specific bench assignments made by the chief bankruptcy judge, according to a Bloomberg News report. The court said the order applies to the filing of a bankruptcy case “that the chief bankruptcy judge determines is a very large, complex case of national significance.”

The order continued: “It is further ordered that the bankruptcy judge to whom the case is assigned shall have the authority to assign adversary proceedings and contested matters to other bankruptcy judges as necessary and appropriate to carry out the purposes of this order.”

Bloomberg theorizes that Detroit judges might try to make their jurisdiction more business-friendly. However, Colleen Medill, an employee-benefits law professor at the University of Nebraska, told the wire service that the Sixth U.S. Judicial circuit, which includes Detroit, is “the backyard” of the United Auto Workers union, and is the circuit most protective of health care benefits promised to retirees. That makes it less likely to attract a bankrupt auto company that likely would seek to terminate those benefits.

Bloomberg pointed out that the district’s federal judges have also handled a number of auto-parts bankruptcies, such as those filed by Collins & Aikman Corp., Intermet Corp., and Plastech Engineered Products Inc.

Bloomberg noted that Michigan-based companies such as auto parts makers Delphi Corp. and Tower Automotive Inc. preferred U.S. Bankruptcy Courts in New York City, or the District of Delaware in Wilmington, which are considered to be business-friendly. The wire service stressed those courts have demonstrated a willingness to alter or discard union agreements.

Donald Workman, a bankruptcy partner at the law firm Baker Hostetler, told Bloomberg that “sophistication and efficiency” are what attract troubled companies seeking a restructuing. It’s the “ability to efficiently handle mega, or even mega-mega, cases.”

The wire service pointed out that bankruptcy judges in New York have allowed companies to reject union contracts and impose wage cuts while blocking unionized workers from striking. In fact, in October a New York bankruptcy judge allowed Frontier Airlines to reject a contract with unionized machinists. And last year, another judge there would not permit pilots at Delta’s Comair unit to strike over pay reductions.

How do companies without headquarters in New York file for bankruptcy in that city’s court? Lynn LoPucki, who teaches bankruptcy law at Harvard University, explained to Bloomberg that they would typically put a New York-based unit into Chapter 11 and then file bankruptcy there, saying its other businesses are related cases. He pointed out that GM’s only New York-based subsidiary is a bank that isn’t eligible for Chapter 11 protection. So, it would need to set up a New York unit before filing for bankruptcy.

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