I finally saw one article in the news lately that questioned some of the legality of these bailout measures that are mushrooming literally overnight it seems on a weekly basis for the last couple of months. I have been concerned about some of them before and the latest car bailout only heightens my fears and concerns for our rights as citizens under the Constitution. I have already written several weeks ago about the AIG takeover by the government and the apparent trampling of the rights of shareholders in that company. To refresh I questioned what right the government had to simply confiscate the stock of the shareholders when the government took that 80% stake in AIG. I have no access to the corporate records of that company but in almost every case of a sell of that much stock in a company the shareholders have the right to vote on that issue. Here the government just marched in and said “here is the deal” and you have to accept it. I suppose the board approved the action but they could be subject to a suit by the shareholders for not filing a Chapter 11 to perserve the value of the company and thus protect whatever value existed for the shareholders. Allegedly that company did have a positive balance sheet and value of some sort for them. Under the Constitution a sharholder has property rights that are protected by the 5th amendment and they can’t be taken without just compensation. I am still very puzzled and concerned about the thuggish manner in which the government took control of a private enterprise.
Just yesterday I was reading about the terms of the proposed auto bailout and I saw that the government in the proposed legislation was taking a priority position over every creditor for the bailout money. I do appreciate any effort to protect taxpayers by the Congress. It is such a rare event that it is to be applauded. Such a naked grab is amazing even for Congress. However, debtor/creditor relations and rights is something I know a little about having spent over 40 years in that specialty and being a so called Chapter 11 expert. Not only the Bankruptcy Code but the various state laws all have priority rankings in place among creditors and equity holders in companies. Here the government was planning on toppling over that table and elbowing its way to the front of the line. You must remember that creditors have rights that are protected under the Constitution. Not only the 5th amendment is applicable but also the due process clause. You do remember that one too don’t you. Even the government is suppose to comply with due process, in fact it is the government that is specifically required to comply with that provision.
When a bank loans money to the auto company and takes a first lien on its plant and equipment, say, then that is a valuable right it bargained for when making the loan. That lien is first as a legal right and can’t be demoted to a lower level behind other lenders unless the bank agrees. Common sense sometimes does match up with the law believe it or not! Most states and the Feds have a permenant blanket lien for taxes due. But that is only for current or past due taxes and thus any taxes would have to have been owed before the bank took its first lien position to trump the bank’s lien. In other words if no taxes were due when the bank took its first lien position then later taxes would behind the rights of the bank to foreclose on the plant and equipment in the event of a default. If a debtor runs into trouble later on and has taxes owed after the loan and lien were made then the governmental entity that is owed the taxes are behind that bank’s first lien. A claim or lien are both property rights; they have value. That is why they are bargained for in the first place. Even in bankruptcy the judge can only force a bank to be behind a brand new lender on the plant and equipment if the judge first finds as a matter of fact that the bank has sufficient collateral, or new collateral is pledged, to cover its first lien position. The bank can’t be forced to take a loss in other words and its rights in the collateral or substitute collateral must be protected.
I have ignored many, many legal details in this example but I am trying to make it plain that these rights of creditors and the shareholders of the auto companies have rights; property rights that the government was planning on simply ignoring or worse merely taking without any compensation. I am trying to keep this post within some degree of reasonable length. I refer the more interested to check the Uniform Commercial Code or the Bankruptcy Code. The various state laws also detail the rights and priorites for creditors with claims against real estate. The ranking and rights of creditors and shareholders is a well established area of the law, both state and Federal. The propsed bailout should have been rejected on these unconstitutional grounds alone. There is no way such an action could pass a Constitutional challenge. I saw one argument advanced that suggested the government could use eminent domain as a method to take these rights. My lord, what have we come to. I am not so concerned about the banks as such. I have no particular love or hate for them. It is the much bigger principles at stake here that really worry me. Since when did an alleged “emergency” justify acting like a bunch of Nazis? No I am NOT suggesting that members of Congress are Nazis, but make no mistake this is exactly the kind of thing that the Bundesstag would have passed in 1935. Whatever the merits are for or against a bailout, it must be done in a Constituional manner. If the government thinks it is that critical that the auto makers get money then make them a loan and the creditor rights of the government should be those that follow the law, not ones that usurp the law. Likewise the government could buy stock but again it must do so in a manner that respects the rights of existing shareholders. We can’t afford to allow the government to simply do whatever it thinks is expedient at the cost our Constituional rights. The Constitution is there to protect our individual rights and those include the rights to our property. The bailout as planned would have trampled those rights. I know everyone wants to save the auto industry but it is not worth that price. Where next would that fickled finger of fate fall? What good would be served to save an industry but set the precedent for a government run wild with unchecked pretended powers. The power that they wished to claim is not theirs to take. We have a various times chafed at the restrictions of our Contstitution but I can think of no instance when following its dictates have resulted in lasting harm.
“The price of greatness is responsibility”–Winston Churchill.