Big Three Bailout Drafters Stymied by 5th Amendment Taking Clause

Though the Big Three "Bailout" bill is apparently history, yesterday's Wall Street Journal ran a fascinating story on Capitol Hill's legislative drafting geniuses, who tried to move a bill that ignored the Fifth Amendment's "Taking" Clause. Here is the gist of the story.

Controversy erupted after a draft bill Monday stated plainly that the government loans would be "senior and prior to all obligations, liabilities, and debts of any such holding company or company that controls a majority stake in the eligible automobile manufacturer."

Loans backing Ford Motor Co. and General Motors Corp. slumped Wednesday amid concerns that the auto makers' existing senior secured loans could be subordinated to federal loans ....

"It really sounds like a clear violation of the taking clause of the Constitution, to put the government ahead of all the other lenders. To go this route is a treacherous path riddled with all sorts of constitutional issues," said Don Workman ....

The WSJ article correctly pointed out that the priority this language would have given the government "lender" was equal to the status of a DIP, or "debtor-in-possession" lender. In a Chapter 11 proceeding, the debtor submits itself to the oversight of the US Bankruptcy Court, establishes that its debts exceed its assets, and asks the Bankruptcy Judge to approve a DIP loan that will have super-priority status. By then, the debtor (failed company) has established, to the Court's satisfaction, the fact that the debtor's unsecured lenders, shareholders, bondholders, and to some extent the secured shareholders, have no chance of repayment -- unless the DIP can pull this business out of the ashes and turn it back into a profitable enterprise.

Then the DIP loan is approved and the debtor can buy raw materials, pay its workers, and ship product to its customers. Nobody would be a DIP lender unless their priority exceeded the debtor's former debt-holders' priority. What these Capitol Hill drafters were trying to do was to skip over the bankruptcy filing niceties, and establish the United States as the DIP loaner. According to the WSJ article, it is not clear that these drafters understood what they were doing. It is equally unclear why the car companies need Congress help to do what they should do: get rid of the non-working drones, shut down the non-functioning facilities, identify a niche where they can deal and make a profit.

The WSJ article notes that the drafting staff came up with some new language, but that nobody was ready to embrace their second effort. What is clear is that 40+ members of the Senate were not buying into this "prepackaged bankruptcy" deal, and would rather let the companies go through the usual bankruptcy process -- if that turns out to be necessary.