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GM files for bankruptcy protection

Posted Monday, Jun 1, 2009, 10:38 am in Employee News

General Motors Corp. filed for Chapter 11 bankruptcy protection this morning as part of the Obama administration’s plan to shrink the automaker to a sustainable size and give a majority ownership stake to the federal government, the Associated Press reported.

GM’s bankruptcy filing is the fourth-largest in U.S. history and the largest for an industrial company, the AP said. The company said it has $172.81 billion in debt and $82.29 billion in assets, the news service said.

As it reorganizes, the fallen icon of American industrial will rely on $30 billion of additional financial assistance from the Treasury Department and $9.5 billion from Canada, the story said. That’s on top of about $20 billion in taxpayer money GM already has received in the form of low-interest loans, the news service reported.

The plan is for the federal government to take a 60 percent ownership stake in the new GM, the Canadian government will take 12.5 percent, the UAW getting a 17.5 percent share and unsecured bondholders receiving 10 percent, the AP said. Existing GM shareholders are expected to be wiped out, the story said. (Associated Press/New York Times)
 

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Primer on the G.M. Bankruptcy

June 2, 2009
A Primer on the G.M. Bankruptcy

General Motors followed Chrysler into bankruptcy on Monday in a case that will be one of the largest and most complex in history. It hopes to follow the same path Chrysler has taken through court, but there will be some differences between the two cases. Here is a quick look at some basics of the G.M. bankruptcy.

QUESTION. Is G.M. going out of business?

ANSWER. No. G.M. 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 G.M. fail to successfully reorganize, it might turn to a Chapter 7 bankruptcy, which would mean liquidation, but that is not seen as likely given support from the Treasury and the Obama administration.

Q. Where will the case be heard?

A. As with Chrysler, the case will be heard in the United States Bankruptcy Court for the Southern District of New York. Judge Robert E. Gerber will preside.

Q. How long will this take?

A. Senior White House officials say the essence of the case should take 60 to 90 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 version of G.M.

Late Sunday, the bankruptcy court approved the sale of Chrysler assets to Fiat, only a month after its case began. The remaining pieces of Chrysler will remain in bankruptcy for at least several more weeks. Such quick bankruptcies are unusual. 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.

Q. What happens to G.M. dealers?

A. G.M. is able under bankruptcy to cancel franchise agreements with its dealers. It has already announced plans to eliminate 1,100 dealers and may cut more. The company wants those dealers to close within 18 months. Dealers can sue to block the action, but a final decision would be up to the judge. In the meantime, G.M. will continue to provide dealers with vehicles.

GMAC, with support from the government, will provide financing for G.M. customers. It is also providing financing for Chrysler.

Q. What’s the biggest difference between the G.M. and Chrysler cases?

A. Chrysler had reached an agreement to sell assets to Fiat before its case began. G.M. is attempting to restructure on its own, with financing from the Treasury. It is providing G.M. with $30 billion in debtor-in-possession financing so it can operate while in bankruptcy, in addition to about $20 billion G.M. has already received. It is likely the Treasury will provide more scrutiny and guidance in the G.M. case, since such a large amount of taxpayer money is at stake.

Q. What happens to G.M. employees?

A. G.M. 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 cuts 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, unless the company asks a judge to void them. However, U.A.W. members approved changes last week, and the new G.M. is expected to honor that contract.

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

Q. Are pensions and retiree health care benefits protected?

A. The White House said Sunday that, assuming the sale goes forward, G.M. workers’ pensions and health care benefits would transfer to the new company, and remain in force.

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

A company can also eliminate retiree health care benefits for nonunion employees; they would subsequently be covered by Medicare.

The U.A.W. and G.M. 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 G.M.suppliers?

A. In its bankruptcy filing, G.M. 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 Wilmington Trust Company, a bondholder; the U.A.W., through its health care trust; and suppliers like Delphi, Robert Bosch and Lear.

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.

G.M. 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 G.M.

Q. What happens next in the bankruptcy case?

A. G.M. filed its initial paperwork with the federal bankruptcy court in New York on Monday. Next, 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 G.M. needs to run its business. G.M., unlike Chrysler, has not halted production.

Once the case begins, a committee will also be formed that represents G.M.’s creditors.

Q. Should owners of G.M. cars and trucks be concerned?

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

Owners of G.M. vehicles bought before Monday should expect their warranties to be honored until they expire. Owners whose vehicle warranties have run out are liable for any problems with their cars and trucks, as they are now.

LINK:http://www.nytimes.com/2009/06/02/business/02primer.html?ref=business
 
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