by John Berlau
June 3, 2009

Washington, D.C., June 3, 2009—Kudos to the judges on the Second Circuit U.S. Court of Appeals for putting a stay on the Obama administration’s nationalization scheme for the bankruptcy sale of Chrysler LLC. Kudos also to Indiana state Treasurer Richard Mourdock for standing up for the middle-income teachers and police officers in the state pension funds and making sure that contracts affecting their retirement savings are respected.

When President Obama announced the Supreme Court nomination of Sonia Sotomayor, who coincidentally is an appeals court judge on the Second Circuit, he praised judicial qualities that are directly relevant to the courts overseeing the bankruptcies of Chrysler and General Motors. The president said that the qualities he most respected in judges were, “a commitment to impartial justice, a respect for precedent, and a determination to faithfully apply the law to the facts at hand,” as well as “an understanding of how the world works and how ordinary people live.”

As such, President Obama and his auto task force should respect the role of the bankruptcy courts and recognize that their role is not to rubber stamp the administration’s plan to take over Chrysler and GM, but to apply bankruptcy precedents and faithfully apply the law to the facts at hand, with an understanding of how contracts work in the real world and of the “ordinary people” who own the car companies’ debt securities as individual investors or through their IRAs and 401(k)s. 

The bankruptcy judges also need to look beyond the individual circumstances of Chrysler and GM to weigh how the treatment of creditor contracts in these cases will affect American credit markets in the future. If courts cave to politicians’ whims and give secured creditors and bondholders less than they would receive under traditional bankruptcy precedents, our credit markets will suffer further damage as lenders and investors will be less willing to put their capital at risk in companies whose contracts could be abrogated at politicians’ demand.

Bankruptcy is a not an executive but a judicial function, and judges in the car companies’ cases should take as much time as they need to weigh the competing interests and ensure an equitable outcome. The measure of success should not be how fast Chrysler and GM emerge from this bankruptcy, but the degree to which contracts are honored in an impartial process. 

CEI is a non-profit, non-partisan public policy group dedicated to the principles of free enterprise and limited government.  For more information about CEI, please visit our website at www.cei.org.