The $1.5 Billion General Motors Recalls at the Dangerous Intersection of Chapter 11, Article 9, and TARP

The standard practice in many mega-Chapter 11 cases is to repay secured lenders at the outset of the case with the caveat that, if the repayment was inappropriate, the secured lenders will disgorge the payments. In the General Motors Chapter 11 case, a syndicate of lenders, mostly CLOs and various funds, were paid $1.5 billion at the outset of the case, even though their key financing statement had been accidentally terminated and thus they had no right to be paid. For almost seven years, the General Motors bankruptcy estate has been attempting -- at great cost -- to recover the money, and it seems unlikely that a material amount of the money will be recovered. This article explains why certain of the Federal Rules of Bankruptcy Procedure need to be amended to prevent similar problems in the future.