by Shawn P. McClure

Now that I have my inbox somewhat under control, I would like to write about my recent experience attending the Commercial Law League of America’s (”CLLA”) 79th Chicago meeting.  While last weekend, April 16-19, was the CLLA’s 115th Convention and its 79th Chicago Meeting, it was my first experience at a CLLA function.

For those of you who are not familiar with the CLLA, the CLLA is a worldwide organization of attorneys and other credit professionals who are committed to excellence in the fields of commercial law, bankruptcy and insolvency.  One of the main thrusts of this organization is to protect and represent the interests of creditors in a multitude of commercial and legal settings.  The CLLA’s Chicago Meeting is a prime example of how the CLLA effectively achieves this purpose.

The Chicago Meeting was an abundant display of the legal, educational and professional services that the CLLA has to offer those not only in the credit industry, but the general business community.  From the informative educational programs to the interactive ask an expert sessions, the Chicago Meeting is a great way for an attorney or other credit professional to quickly become knowledgeable on a number of topics within the general business and credit communities.  Moreover, I found the Chicago Meeting to be an invaluable source for networking and meeting both prospective and current clients, as well as fellow attorneys. 

Lastly, I must comment on the camaraderie among current members and their willingness to go out the way to make new members/first time attendees such as myself feel more than welcome at this event.  It was refreshing to witness such free flowing discussion not only about business matters, but also about each others social and personal affairs.  As a first time attendee, I can only hope that there will be many more trips to Chicago, which will inevitably lead to new friendships among colleagues and peers.

Who’s responsible for this mess?

The facts of a recent bankruptcy case perfectly illustrate one aspect of the recent economic collapse - loan defaults. In the case, a 51 year old, disabled and unemployed debtor making approximately $5,000 per year from social security disability took a $20,000 cash advance from his credit card. The cash advance represented approximately three times his yearly income from social security disability. The debtor used most of the money to pay other bills, such as his mortgage and utilities. He spent the remainder of the money on miscellaneous items, such as clothing, food, and gasoline. One week after taking the cash advance, he filed bankruptcy and sought to discharge the credit card loan.

The creditor challenged the debtor and sought to have the loan declared “nondischargeable.” The creditor argued that the debtor committed fraud because it was clear that the debtor could not possibly repay the debt. The debtor’s response was that the credit card company never should have loaned an unemployed and disabled person living on extremely fixed income $20,000.

So who’s responsible? Was it the debtor for taking out a loan that he couldn’t possibly afford to repay? He was desperate to pay his bills and the credit was readily available.

Was the lender at fault for extending $20,000 in credit to someone making less than $5,000 per year? The lender argued that the credit card was opened when the debtor had significantly higher income and that the lender had no idea of the debtor’s disability.

Both sides have compelling arguments but, in my opinion, THEY’RE BOTH RESPONSIBLE. Borrowers should take responsibility for their actions and so should lenders. Pointing the finger at each other is the easy way out and does not solve the underlying problem. Similar incidents are playing themselves out across the county, only, in many instances, the “debtor” is a large bank, the “creditor” lending the money is an even larger bank, and the loans are more than $20,000; they’re more like $20 million. Everyone’s pointing the finger at the banks, but let’s not forget about the debtors that borrowed more than they could afford.

Unfortunately, the credit lending standards of the last few years were so loose and so easy that such a scenario was possible. The economy was healthy enough that the financial institutions were able to conduct little or no due diligence before lending large sums of money. Debtors (individuals, small and large corporations, and even federal, state and local governments) slowly began to rely on this “easy credit” access, resulting in deficit spending across the board.

As debtors began to get in over their heads and defaults began to occur on a large scale, the economy suffered. As the economy failed, everyone suffered, including those that acted responsibly. Responsible debtors that only borrowed what they could afford to pay back were hurt by the economy when their retirement assets lost value. Similarly, responsible lenders that conducted proper due diligence before extending credit suffered as investor confidence dropped and stock prices plummeted. Hopefully, individuals, corporations, lenders and government leaders alike will learn from these mistakes.

            If this week’s events are any indication, it may no longer be a question as to whether General Motors Corp. and Chrysler, LLC. will file bankruptcy, but rather when and how long that bankruptcy will last. 

            On Monday, the Obama Administration forced out General Motors Corp. Chief Executive, Rick Wagoner, with the threat of withholding additional bailout money from the automotive giant.  This can be viewed either as a reaction to recent public outcry against executive bonuses and their pay, or a sign that the government has decided to rethink its philosophy regarding the distribution of bailout funds, including whether or not further bailouts are merited.  I tend to view it as the latter.    

On a side note, I must first point out that French automotive company, Peugeot Citroen, ousted its Chief Executive, Christian Steiff, on Monday, citing a need for a change in leadership to realize the company’s potential.  Peugeot Citroen is Europe’s second biggest auto maker by volume.  This removal highlights the fact that the continuing decrease in consumer auto sales is much more than a domestic problem.   

            However, here in the United States, Wagoner’s removal was followed by a press conference in which the President showed exactly how far his administration is willing to delve into the U.S. automotive business.  The Administration’s auto task force criticized then rejected both GM and Chrysler’s plans for restructuring their businesses.  The Administration made it clear that it believes that Chrysler will not be able to survive on its own, which has prompted Chrysler to amp up talks of a possible partnership with Italy’s Fiat.  More importantly, the President openly discussed the possibility of bankruptcy for General Motors Corp., and the effects of such a bankruptcy.  The President’s willingness to openly discuss bankruptcy as an option suggests that the Administration may now begin to realize that an amicable resolution of the problems facing the automotive industry is not possible.

            In addition to taking an integral role in the restructuring of the American automotive industry, the Administration announced three government programs aimed at jumpstarting domestic auto sales.  First, the President stated that the government would honor any warranties from General Motors Corp. and Chrysler, LLC. in an effort to encourage Americans to purchase their cars.  The President also announced a proposed program that would provide cash rebates to individuals for the purchase of a new more efficient car upon the trade in of an eight year old vehicle, or a vehicle getting eighteen miles to the gallon or worse.  Finally, the President highlighted a program to provide tax deductions of sate and locals sales taxes paid on the purchase of a new vehicle.        

            From a political standpoint, the President may be better served forcing the auto companies to enter into Chapter 11 bankruptcy.  If the Administration continues to become more involved in the restructuring efforts of GM and Chrysler, one of the problems that it will undoubtedly encounter is the unmanageable cost of United Auto Workers union retiree benefits.  Given union retirees reliability as Democratic constituents, it may be unlikely that President Obama will take the hard line stance with the UAW to gain concessions, which are most likely necessary to allow these companies to survive.  Another component to these events and the likelihood of bankruptcy is the “forced” partnership between Chrysler, LLC. and Fiat.  Our President may face harsh criticism if the government provides future bailout funds, composed of the American taxpayers’ dollars, to a company with such a large foreign component.

            From a legal perspective, the argument is quite simple.  Business reorganization/restructuring is exactly why we have Chapter 11 bankruptcy.  Admittedly, a bankruptcy filing by an automotive figurehead such as GM would result in the largest bankruptcy proceeding in the history of American jurisprudence.  However, bankruptcy court is the designated arena for the shareholder, worker and creditor disputes that ultimately prevent an amicable restructuring of a company.  Furthermore, a problem of this size and complexity is better served via the clearly defined procedures of the bankruptcy court, as opposed to the political influences and whims of Washington.   

            Do the above referenced events mean that bankruptcy is certain for General Motors Corp. and Chrysler, LLC.?  I would say only time will tell, but time is precisely what these automakers may longer have, as Present Obama has given GM and Chrysler deadlines of sixty and thirty days respectively to provide a restructuring plan that would justify further government support.