Monday, May 04, 2009

The Practical Implications as Chrysler Goes to Court

By MICHELINE MAYNARD

Chrysler is the first major automaker since Studebaker in 1933 to try to reorganize in bankruptcy and emerge as a viable company. The process can be complicated. Here is a quick look at how it is likely to play out.

Q. Is Chrysler going out of business?

A. No. Chrysler is reorganizing under Chapter 11 of the United States Bankruptcy Code. The law allows companies to shed assets, restructure debt, cancel contracts and close operations that normally would have to continue running. Once they secure financing to emerge from bankruptcy, these companies are reconstituted as new legal entities.

Should Chrysler fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean a liquidation.

Q. How long will this take?

A. The Obama administration spoke of a “surgical bankruptcy” that it said could be completed in 30 to 60 days. It plans to use Section 363 of the bankruptcy code to sell assets, rid the company of liabilities and restructure its debt, creating a new Chrysler.

In reality, most bankruptcies take much longer. United Airlines spent more than three years under bankruptcy protection. Delphi, the auto parts supplier, has been in Chapter 11 since 2005. The bankruptcy by LTV, a steel maker, took seven years to resolve.

Bankruptcy law changed in 2005 to give management of a company the exclusive right to draft a plan of reorganization. A judge can extend that period exclusivity for 18 months, but creditors or potential buyers for a company can present a competing plan once that period expires.

Q. What happens to Chrysler dealers?

A. Chrysler is able under bankruptcy to cancel franchise agreements with its dealers, and the government said that would happen. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, Chrysler will continue to provide dealers with vehicles to sell.

Chrysler Financial will cease making consumer loans for Chrysler vehicles; GMAC, with support from the government, will provide financing through Chrysler dealers.

Q. What happens to Chrysler employees?

A. The White House said it did not expect any reductions in white- or blue-collar jobs as a result of the bankruptcy. However, Chrysler employees who are not union members do not have any job security. The company can ask a judge for an immediate pay cut for its salaried employees, and can announce job eliminations and close offices, just as it can outside bankruptcy,

Contracts covering members of the United Automobile Workers union and other unions will remain in force, until the company asks a judge to void them. U.A.W. members approved changes to their contract on Wednesday that presumably would mean the contract would stay in place.

But if the company asked for contracts to be terminated and replaced with terms it can more readily afford, the union would have a chance to respond in court. Negotiations would take place before any cuts were imposed. This process could take months.

Q. Are pensions and retiree health care benefits protected?

A. Companies have the right under bankruptcy law to ask to terminate their pension plans. If such a request was made, a judge would convene a brief trial on the subject and hear both sides. If pensions were terminated, employees would still receive about one-third of their benefits through financing from the federal pension agency.

A company also can eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare. The U.A.W. and Chrysler agreed in 2007 to transfer responsibility for union retiree health care to a special fund, and the fund would administer those retiree benefits.

Q. What happens to Chrysler suppliers?

A. In its bankruptcy filing, Chrysler listed its 50 biggest creditors holding unsecured claims, meaning those that would have to get in line behind creditors whose debt is secured by collateral, like the company’s plants, brands and other assets. The unsecured creditors include its advertising agency, BBDO, and parts suppliers, like Johnson Controls, Magna International and Cummins Engine.

The White House said supplier contracts would remain in force, and it has created a program to provide federal help to parts makers. But in bankruptcy, supplier contracts can be canceled.

Chrysler is likely to tell the court which suppliers it wants to keep doing business with, and which contracts it wants to reject. Suppliers could challenge the rejection of their contract, but most likely they would have to reach a settlement with Chrysler.

Q. What happens next in the bankruptcy case?

A. Chrysler filed its initial paperwork with the federal bankruptcy court in New York on Thursday. On Friday, it will ask a judge to issue a series of rulings called the first day orders, which allow the company to keep operating. They may include authorizing the payment of routine expenses, like salaries and payments to vendors, including its lawyers, and whatever else Chrysler needs to run its business. Chrysler said it would halt production while it completes a deal with Fiat.

Once the case begins, Chrysler can ask a judge to issue an emergency order to temporarily reduce salaries, which is meant to conserve its cash. A committee will also be formed that represents Chrysler’s creditors.

Q. Should owners of Chrysler cars and trucks be concerned?

A. The federal government said it would back the warranties on vehicles bought from Chrysler while it is operating in bankruptcy. So, effective Thursday, warranties are underwritten by the government.

Owners of Chrysler vehicles bought before Thursday should expect their warranties to be honored until they expire. But the work may not be performed by a Chrysler dealer. Companies operating in bankruptcy sometimes ask a judge to let them assign warranty repairs to outside vendors, who charge the company less for their work than a dealer would expect to be reimbursed.

Owners whose vehicle warranties have run out are liable for any problems with their cars and trucks, as they are now.

Copyright 2009 The New York Times Company. All rights reserved.

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