Academic

Government Self-Dealing and the GM Bankruptcy

By Gordon Smith, Christine, Hurt, Vic Fleischer, Fred Tung, Lisa Fairfax, David Zaring

Rick Hills asks if we can be so sure that what the United States is doing to the debtholders of the auto companies isn?t a taking.  I opined over at the Hearing that Chrysler?s debtholders did not have a great Takings Clause argument.  I pointed to cases suggesting that the government can alter debt contracts to the detriment of the debtholder in bankruptcy, provided it doesn?t destroy all value; the judge dismissed the argument of the debtholders too.   

But the Takings Clause has something to do with bankruptcy, see this case and this one.  It goes beyond con law and even into the real world (where con law does not always tread).  The government has a stake in Chrysler and GM even as it manages those companies through bankruptcy.  That raises the specter of self-dealing.  The distinction mattered to Joseph Sax in the 1960s, and Rick wonders if it matters today.  I tread cautiously here, because I?m an expert in neither bankruptcy nor constitutional law. 

I think this might be one of those cases where logic (self-dealing is a bad idea) and precedent point in different directions.  The government often has interests in bankruptcy proceedings it supervises, and it has written in the ultimate self-dealing default rule into the code ? it takes (bankrupts often owe taxes to the government), before even the senior debtholders.  We don?t live in East Germany or the 1970?s UK, but the government often has an interest in firms over which it exercises some degree of supervision, especially through contract.  And the US Trustees supervise bankruptcy trustees running estates with obligations to the US as well as other creditors. 

These conflicts of interest do not occasion much comment.  What the government is doing to GM?s stakeholders is bigger and perhaps in some ways badder, but I think the difference is one of degree, not of kind. 

You may disagree - give James Steven Rogers, The Impairment of Secured Creditors' Rights in Reorganization: A Study of the Relationship Between the Fifth Amendment and the Bankruptcy Clause, 96 Harv. L. Rev. 973, (1983), and Julia Patterson Forrester, Bankruptcy Takings, 51 Fla. L. Rev. 851 (1999), a look if you want to think about things more.

Full post as published by Conglomerate on June 01, 2009 (boomark / email).