Clown Finds Bankruptcy Rules No Laughing Matter As Americans watch two once-mighty companies — GM and Chrysler — submit to bankruptcy, there are many questions about how the process works. David Kestenbaum of NPR's Planet Money team set out to answer some of those questions, with help from a clown who is owed $200.
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Clown Finds Bankruptcy Rules No Laughing Matter

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Clown Finds Bankruptcy Rules No Laughing Matter

Clown Finds Bankruptcy Rules No Laughing Matter

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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.


And I'm Robert Siegel.

It's tough keeping up with all the big bankruptcies these days. Bankruptcy is complicated, even for Ray Young. He's the CFO of General Motors, and they're in bankruptcy.

Mr. RAY YOUNG (CFO, General Motors): Frankly, when I took on this job, I knew absolutely zero about bankruptcy.

SIEGEL: Well, if he didn't know much, what about the rest of us?

David Kestenbaum of NPR's Planet Money team has this explanation of bankruptcy from the vantage point of a clown who is owed $200.

DAVID KESTENBAUM: If you were listening to NPR last month, you may have already met our clown, Mandy Dalton.

Ms. MANDY DALTON: I make kids laugh. I fall on my butt for a living. It is great.

KESTENBAUM: Great except now, because Mandy is owed $200 in one of the largest bankruptcies of all time. She did a show at a mall in Maryland, juggled for some kids, but then the mall owner, General Growth Properties, one of the world's largest mall owners in the world, filed for bankruptcy. So, we followed up, got Mandy Dalton got on the phone…

Ms. DALTON: Hello.

KESTENBAUM: …with a lawyer, Jay Strock at Womble Carlyle Sandridge & Rice in Delaware.

Mr. JAY STROCK (Bankruptcy Attorney, Womble Carlyle Sandridge & Rice): Hi, Mandy. How are you?

Ms. DALTON: Very good.

KESTENBAUM: Mandy, really, she had one question.

Ms. DALTON: They owe me $200. Would there even be any hope of my seeing some or all of that?

Mr. STROCK: There's always hope.

KESTENBAUM: He did not sound so hopeful, and the reason is this. In bankruptcy court, like at the meat counter in the supermarket, everyone gets a number. Toward the front of the line are secured creditors. They have contracts that say if you can't pay me, I get to take over one of your shopping malls or something. At the back of the line are the shareholders, people who own stock. And somewhere in between are the unsecured creditors. In the giant mall bankruptcy, that is where Mandy sits.

Mr. STROCK: You know, generally, unsecured creditors get a small distribution on their claims.

KESTENBAUM: Meaning, like pennies on the dollar or something?

Mr. STROCK: Yeah, five to 10 percent isn't unheard of.

KESTENBAUM: So, why does Mandy sort of get the short end of the stick here? I mean, why do like electricity bills get paid before the clown? What's wrong with clowns?

Mr. STROCK: Well…

(Soundbite of laughter)

Mr. STROCK: Utility providers are afforded special protection under the bankruptcy code. And part of the rationale of that is you can't continue operating malls if the electricity and the water are shut down.

KESTENBAUM: The number one priority is to keep the malls open. That's because the mall bankruptcy and the auto bankruptcies are all Chapter 11 bankruptcies, where the hope is that the company can work out some deal with the people it owes money to and eventually come back to life, earn money again. The logic behind this is that in many cases, the company is worth more alive than dead, not just to Mandy Dalton but also to the economy as a whole.

Mr. STROCK: So, all of the clowns and the magicians and jugglers are going to take a short-term hit and maybe not get paid or maybe get paid a portion of what they're owed in the hopes that General Growth will continue in the future.

KESTENBAUM: 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, the unsecured creditors, gets a vote. And the rules, you'd think you'd walked into some strange democracy.

Jay Westbrook is a law professor at the University of Texas, Austin.

Professor JAY WESTBROOK (Law, University of Texas, Austin): And 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 to that group.

KESTENBAUM: How did we end up with all these elaborate rules?

(Soundbite of laughter)

Prof. WESTBROOK: Essentially, all this started way back in the 19th century when railroads began to go bankrupt. And gee, it wasn't very practical to sell off all that track, was it?

(Soundbite of laughter)

So they said, look, let's see if we can't save this railroad rather than trying to liquidate it for essentially pennies. Those rules started being elaborated and developed into this complicated system, which is, frankly, the model for the world.

KESTENBAUM: So, back to our clown. Jay Strock says she may get something in the mail asking her to vote with a bunch of heretofores and whereases in really small fund. And it's possible she may be offered stock in whatever new company emerges.

Mr. STROCK: So, there's a chance that once General Growth emerges from bankruptcy, a portion of it will be owned by the clowns and the magicians.

Ms. DALTON: Clown gets stock. Woo-hoo. Wow, the revenge of the clowns and the magicians on General Growth Properties.

(Soundbite of laughter)

KESTENBAUM: In the Chrysler and General Motors bankruptcies, the government is trying to push things along quickly. But it could be many, many months before Mandy the Clown gets anything from her case.

Jay Westbrook, the law professor, says that in huge bankruptcies like this, the existing contracts that need to be sorted through saying who is owed what can fill an entire room.

David Kestenbaum, NPR News.

SIEGEL: Our Planet Money team sorts through the economic fine print at

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