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Once More, with Feeling

posted by Stephen Lubben

I've said before that I don't see how the absolute priority argument in Chrysler has legs, unless the senior creditors can show that Chrysler's assets are currently worth more than $2 billion.  There is no indication that the consideration going to the union -- which, notably, is not cash -- would be otherwise available to the seniors, so complaining about that seems like a waste of time.

But along comes several Indiana pension funds with a motion to appoint a trustee or examiner, and an objection to the sale, and a motion to withdraw the reference (arguing, among other things, that the proposed § 363 sales constitutes a "taking" in violation of the 5th Amendment), and a motion to stay the proceedings until the withdrawal motion is heard.

The papers are an interesting amusing read -- although a bit over the top and unexpected for an old line law firm like White & Case.  The court denied the request for an emergency stay this afternoon.


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I had a longer comment, but it was rejected as too long. I have posted the full comment on my blog at http://blog.lawrencedloeb.com/2009/05/is-district-court-better-venue-for.html.

I think the White & Case strategy is a risky, but interesting attempt to change the terrain of the conflict.

It would appear to me that there is some doubt that the Indiana Pensioners’ position would be given much weight in the Bankruptcy Court because they have a very small percentage (0.62 percent) of the overall loan. I believe their hope is that, by changing venue to the District Court, they will receive a full hearing.

The argument to the District Court appears to be that these pensioners were holders of the first lien loans and that their rights have been violated because the other holders of the loan have been coerced by the Treasury department to accept a deal that provides less value that they would have otherwise been entitled to. Now they are being forced to accept less than their claim is worth.

The problem I see with this argument is that, as I interpret it, they are saying Chrysler abdicated their fiduciary responsibility to their lenders by having Treasury negotiate on their behalf. One obvious issue there is whether the debtor has a fiduciary responsibility to creditors. The argument in favor is that creditors are stakeholders, but even if there was a zone of insolvency issue, it isn't clear that debtors are obligated to make sure that all claims holders are treated properly in a negotiation (that would seem to fall to the courts and the creditors themselves).

It seems to me that if the argument is that Treasury overstepped their authority by taking over the negotiation, the actionable party would be Treasury. Then you have to ask the Government’s permission to sue them, and that’s probably not a winnable case.

Perhaps they could argue that Treasury was acting as an agent AND as an enforcement agent of the Government so there was a lack of “good faith” in the negotiation? This would allow them to unwind the transaction under 363(m), right?

What do you think?

This is all smoke and mirrors. Essential New Chrysler is simply Old Chrysler with equity and debt holders surgically removed - basically a Sub Rosa reorganization, by sleight of hand, if ever there was one. The key to Indiana's case which, I agree is drafted so badly that it is indeed likely that it lacks standing and/or has 'failed to state a claim', is that Indiana has stated that it would settle at 50%. As the banks have stated that they will settle for less, it therefore implicitly follows that there is indeed an implicit offer on the table valuing New Chrysler at above $2bln - basically an offer of $3.45 billion (50% of the value of the outstanding secured senior debt): that is assuming that New Chrysler were to have no UAW contracts or debt at time of purchase as would legitimately be the case in a normal arms length transaction. As the senior secured holders are owed $6.9 billion the obvious solution, then, is that Indiana proposes just such an exchange where the senior secured holders acquire all of the assets of New Chrysler for $3.45 billion by taking 100% of the equity of New Chrysler and in return canceling their loans to old Chrysler: a straight debt/equity swap whereby the senior secured takes 100% of new Chrysler. The Senior Secured's could then theoretically immediately obtain a market listing for new Chrysler and allow the market to set the price. If the government and Fiat want New Chrysler they would have to bid for it in the normal way. The legacy retirees as with the government and unsecured debt holders would receive nothing as is indeed proper. To pretend otherwise that Treasury's proposal is a legitimate 363 for the purpose of maintaining the enterprise is frankly criminally fraudulent and corrupt. No other country would wear it.

Re Loeb's comment: "have to ask the Government’s permission to sue them, and that’s probably not a winnable case." This seems incorrect as §106 of Title 11 waives (or abrogates) sovereign immunity in this respect. The issue however is the clear conflict of interest in these roles with the government as beneficiary of a UAW deal which in the absence of such a labor deal would lead to substantial claims on the government, as beneficiary of New Chrysler maintaining US jobs rather than sending the jobs to China, as beneficiary as third lien debt holder AND as quasi appointee of the Chrysler board AND as main financier of New Chrysler AND acting supposedly as independent US Trustee in the case. Thus clearly there are multitudinous conflicts of interest which call into question whether there can be a 'good faith' transfer. (See http://tinyurl.com/oo2yqf and in particular see http://tinyurl.com/l2kwd4 on Section 363)

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