GM and Chrysler: The Chapter 11 Solution
by David H. Conaway
Shumaker, Loop & Kendrick, LLP; Charlotte, N.C.
After U.S. Government “bailout” loans, days of congressional hearings and months of speculation about “too big to fail” or the “cascading” effect throughout the supply chain, GM and Chrysler both filed for protection under chapter 11. Here’s why chapter 11 made sense.
Power to Reject Contracts
Perhaps the primary reason a chapter 11 filing made sense for GM and Chrysler is the power to reject executory contracts (including dealer agreements) and collective bargaining agreements (union contracts) under §§365 and 1113 of the Bankruptcy Code, respectively. These provisions make it relatively cheap and easy for a debtor to rid itself of “burdensome” contracts. Section 365 gives the debtor a virtually unfettered right to assume, or reject, an executory contract. It is simply a business decision by management exercised as part of management’s “business judgment,” approved by the bankruptcy court. Rarely does a bankruptcy court challenge the exercise of a debtor’s business judgment, particularly in absence of key creditor objections. Thus, rejecting a contract can be easy.