The fate of American icons Chrysler and General Motors has been playing out in bankruptcy court, and the rules of the game aren't simple.
"Frankly, when I took on this job, I knew absolutely zero about bankruptcy," says Ray Young, GM's chief financial officer.
Neither did Mandy Dalton.
As a clown, Dalton makes kids laugh and falls on her butt for a living. And she's owed $200 in one of the largest bankruptcies of all time.
Everybody Gets A Number
Dalton did a show juggling for some kids at a Maryland mall owned by General Growth Properties, one of the world's largest mall owners. When General Growth filed for Chapter 11 bankruptcy protection, Dalton got on the phone with Jay Strock, a bankruptcy attorney with Womble Carlyle Sandridge & Rice in Delaware.
Dalton had one question: "They owe me $200. Would there be some hope of my seeing some or all of that?"
Strock didn't sound so hopeful.
In bankruptcy court, like at the meat counter, everyone gets a number. Toward the front of the line are secured creditors with contracts that allow them to take over a shopping mall if they can't be paid. At the back of the line are the company's shareholders. Somewhere in between are the unsecured creditors.
In the Chrysler case, unsecured creditors included parts suppliers. In General Growth's bankruptcy, Dalton is somewhere in the middle of the line.
"Generally, unsecured creditors get a small distribution on their claims," Strock says. "Five to 10 percent."
Essentially, electricity bills get paid before clowns.
"Utility providers are afforded special protection under the bankruptcy code," Strock says. "Part of the rationale is that you can't continue operating malls if the electricity and the water are shut down."
Worth More Alive Than Dead
In Chapter 11 bankruptcy, the No. 1 priority is keeping the business afloat. The hope is that the company can work out some deal with the people it owes money to, eventually come back to life and earn money again.
The logic behind this is that, in many cases, the company is worth more alive than dead.
Not just to Dalton, but to the economy as a whole.
"So, all the clowns and magicians and jugglers are going to take a short-term hit," Strock says. "And maybe not going to get paid in the hopes that General Growth continues in the future and you'll be able to perform for them many years down the road."
One of the reasons Chrysler and GM wanted to avoid bankruptcy is that working out a deal with all the people you owe can take a long time. Any restructuring plan gets put to a vote. Everyone in each class — the secured and the unsecured creditors — gets a vote.
The Democratic Process
And the rules? You'd think you had walked into some strange democracy.
"In each class, a majority of the creditors, of the individuals holding claims of whatever size, have to vote in favor and those people who vote in favor have to represent at least two-thirds of the total amount owed in that group," says Jay Westbrook, a law professor at the University of Texas, Austin.
He says the rules began in the 19th century when the railroads went bankrupt. Instead of selling off the tracks for pennies, the railroad was saved.
"Those rules started being elaborated and developed into this complicated system, which is, frankly, the model for the world," Westbrook says. "All over the world people look at Chapter 11 as the model for reforming their bankruptcy laws."
Strock says Dalton may get something in the mail printed in a really small font that asks her to vote with a bunch of "heretofores. It's possible she may be offered stock in whatever new company emerges.
"There is a chance that once General Growth emerges from bankruptcy, a portion of it will be owned by the clowns and the magicians," he says.
In the Chrysler and GM bankruptcies, the government is trying to push things along quickly. But it could be many, many months before Dalton gets anything.
Westbrook says that in huge bankruptcies like this, the contracts that need to be sorted through could fill an entire room.