By Charles Moster

As a bankruptcy attorney and former lawyer for the Feds, I feel compelled to point out the drawbacks of the current bailout to GM and other entities which might seek Chapter 11 protection.  The bankruptcy laws afford no special protection to taxpayers in a bailout situation.  As such, the massive outlay advanced by the American people may never get fully repaid in a Chapter 11 proceeding which is highly problematic.

The purpose of Chapter 11 is to allow the honest debtor to reorganize its debts and thus restructure obligations to creditors.   The process necessarily involves the reduction of creditor claims so that available assets can be more equitably distributed.  In most contexts that makes perfect sense.

However, the Bankruptcy Code recognizes special protection for discrete groups like the American taxpayer when a situation so warrants.  For example, taxes owed to the IRS cannot be discharged (i.e., eliminated) in bankruptcy.  Like the chains of Jacob Marley (a popular allusion during Christmas - wait - this is Easter!) the obligation follows the debtor for all time, at least while in this mortal realm.  

No such protection is afforded the taxpayer with respect to these massive bailouts.  Consequently, the billions and billions paid to GM may never be repaid in full. 

I highly recommend that Congress amend the bankruptcy laws to provide special protection to the taxpayer within the context of bailout situations.  An easy argument can be made that it is essential to safeguard the public treasury when dollars are used in such manner.  Seems to me that the billions loaned to GM should receive a higher level of protection than the typical secured creditor.

As a young lawyer for the U.S. Department of Commerce back in the 80’s, I personally observed how taxpayers ended up on the short end of the lending stick in monies paid out to the steel industry.  Tens of millions were never recovered.    With a little planning at the legislative level, this problem can be averted.

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