Zywicki in WSJ: Government Behavior in Chrysler Bankruptcy Challenges Rule of Law
The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law, says Professor Todd Zywicki in a Wall Street Journal op-ed that became the most emailed article of the day for the publication.
While Chrysler's unionized workers may be helped in the short run by the Obama administration's allowance of a greater payoff to junior creditor the United Auto Workers Union than to secured creditors entitled to first priority payment under the absolute priority rule, future lenders may be wary of offering credit for fear the value of their investments could be diminished or destroyed by government actions.
The absolute priority rule is a lynch pin of bankruptcy law, says Zywicki, and it ensures that bankruptcy is used primarily as a procedural mechanism for the efficient resolution of financial distress. It also provides a protection against arbitrary government actions, ensuring fair treatment of creditors without governmental interference.
Zywicki appeared as a guest to discuss the Chrysler bankruptcy on Lou Dobb's radio show and on Neil Cavuto's television show on Fox Business on May 14.
Chrysler and the Rule of Law, The Wall Street Journal, May 13, 2009. By Todd J. Zywicki.
"By stepping over the bright line between the rule of law and the arbitrary behavior of men, President Obama may have created a thousand new failing businesses. That is, businesses that might have received financing before but that now will not, since lenders face the potential of future government confiscation. In other words, Mr. Obama may have helped save the jobs of thousands of union workers whose dues, in part, engineered his election. But what about the untold number of job losses in the future caused by trampling the sanctity of contracts today?
"The value of the rule of law is not merely a matter of economic efficiency. It also provides a bulwark against arbitrary governmental action taken at the behest of politically influential interests at the expense of the politically unpopular. The government's threats and bare-knuckle tactics set an ominous precedent for the treatment of those considered insufficiently responsive to its desires. Certainly, holdout Chrysler creditors report that they felt little confidence that the White House would stop at informal strong-arming."