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Legal Q&A: Fremont’s NUMMI Likely Isolated From GM Bankruptcy

24 November 2008 One Comment

By Karen Weise  —

As Congress passed for now on giving a federal bailout to General Motors and other American automakers, local workers and residents are concerned about what a potential GM bankruptcy might mean for automobile production in the East Bay.

NUMMI plan in southern Fremont. Photo by Tyler Sipe

NUMMI plan in southern Fremont. Photo by Tyler Sipe

On 380 acres in the southern tip of Fremont, the West Coast’s only automotive manufacturing plant churns out about 1,000 cars and 425 trucks a day. New United Motor Manufacturing, Inc. (NUMMI), is an award-winning, 50-50 split joint-venture operation between GM and Toyota established in 1984. [For the 510Report’s interactive timeline of NUMMI in Fremont, click here.] As Fremont’s largest employer, NUMMI employs over 5,000 staff, with 4,400 working under a union contract with United Auto Workers.

This Q&A is based on email correspondence with Frederick Lambert, professor at U.C. Hastings College of Law, and an interview with Gary Klausner, a Los Angeles-based bankruptcy attorney and former Chair of the American Bar Association’s Subcommittee on Bankruptcy Fraud, Crimes and Abuse of the Bankruptcy Process. Both Klausner and Lambert are bankruptcy law experts, though neither has first-hand knowledge of the joint-venture agreement between GM and Toyota.

What happens if GM files for bankruptcy?
GM would likely file for bankruptcy under Chapter 11 of the federal Bankruptcy Code. Under the supervision and approval of bankruptcy court, businesses use Chapter 11 to reorganize operations and obligations to become financially viable.

A Chapter 11 filing would allow GM some breathing room so that it does not have to wage battles with creditors while it stabilizes the business. During Chapter 11 filings, the court puts a stay, or hold, on all creditor actions, meaning creditors cannot pursue foreclosing on the debtor, cannot file lawsuits against the debtor, and cannot terminate contracts with the debtor.

During this time, GM would meet with its lawyers, financial advisors, and creditors to develop what’s called a plan of reorganization, which is a proposal to restructure so they can continue operations and still pay something to their creditors. In some cases, debts are restructured and paid over time, in other cases, debts could be discounted or reduced. Typically the court does not approve these reorganization plans unless the debtors vote on and approve the plan.

GM would likely evaluate all of its deals — all relationships, joint ventures, partnerships, and contracts — to determine which ones are profitable for the company, and which are not. For those that are not beneficial to the company, GM would try to use the benefits of bankruptcy to get out of those arrangements.

So does that mean NUMMI will be bankrupt if GM files for bankruptcy?
Since NUMMI is a separate corporation, with Toyota and GM owning equal shares of the company’s stock, it will not automatically be part of a GM bankruptcy. Only the board of directors of NUMMI can decide if NUMMI should file for bankruptcy. Since the NUMMI board is split 50/50 between executives from GM and Toyota, GM does not automatically control the board and therefore cannot force NUMMI into bankruptcy. Toyota potentially could try to use GM’s bankruptcy as an opportunity to buy out GM’s stock and gain full control of NUMMI, however it is unlikely that Toyota could force this to happen.

What will happen to the NUMMI plant if GM files for bankruptcy?
Since NUMMI, and not GM, owns the plant, it is unlike that GM could shut down the plant on its own. In bankruptcy, it’s much harder to alter property rights than it is to alter contract rights because property rights are protected by the constitution. In essence, GM could not take away the property from NUMMI since NUMMI is a separate entity, even though GM is a co-owner of NUMMI.

What potentially could change at NUMMI?
If GM decided that they wanted out of NUMMI, either because they needed money or felt the operations were not sufficiently profitable, GM potentially could sell its shares (ie. ownership stake) in NUMMI. Or, if GM needed extra money, they could use their NUMMI shares as collateral in a loan agreement. Both these options assume that the original agreement between GM and Toyota does not restrict GM from doing so. If there were restrictions, the question would be whether those limitations could be avoided thru bankruptcy.

Also, if Toyota had wanted to gain greater control of NUMMI, they could potentially use GM’s bankruptcy filing as an opportunity to purchase shares from GM. Toyota, however, could not force GM into this situation.

Will the United Auto Workers contract at NUMMI be vulnerable to renegotiation?
Since the UAW’s contract is with directly NUMMI, and not GM, NUMMI cannot automatically use a GM bankruptcy to get out of the current collective bargaining agreement. If NUMMI itself filed for bankruptcy, however, it could then ask bankruptcy court to allow a contract renegotiation. This would require court approval as part of a restructuring plan and only after UAW would have a chance to be heard by the court.

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