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The Chrysler Briefs

posted by Stephen Lubben

Tomorrow at 2pm a panel of the 2d Circuit (09-2311) will hear arguments in the expedited appeal of the Chrysler sale order.  I hope to attend the hearing.

In preparation, I've been slogging through as many of the briefs as possible, and my initial take-away is that there is not much new here. There are essentially two core issues on appeal:

First:  Did the bankruptcy court err in approving the sale?  Subsumed within this issue are the claims that the Chrysler sale was a sub rosa, that the plan violated the absolute priority rule, and that the debtors' assets can't be sold "free and clear" of tort claims under §363(f).

If you've been reading my posts, you know that I believe the sub rosa plan and absolute priority rule issues to be based on either a misunderstanding of the deal structure, and or intentional attempt to confuse the issue. The sale order does not dictate how the the post-sale debtor should proceed with its case, and unless these appellants are attempting to upend typical 363 practice in the SDNY and Delaware, this deal is unremarkable.

For the last ten years chapter 11 cases, particularly in New York and Delaware, have increasingly turned on quick 363 sales, at the demand of senior lenders, with the remainder of the case devoted to handing out the proceeds.  Congress could decide that this is bad bankruptcy policy, but it would be quite a shock to the bankruptcy bar if the 2d Circuit chose this case to suddenly change all that, especially given the predictably dire results of doing so.

The absolute priority rule is also not violated because the value going to the unions is not coming from the debtor.  A purchaser of assets can do whatever it wants post sale, and just because the senior lenders are jealous does not make it a violation of the Bankruptcy Code.  
On the "free and clear" issue, I tend to think that the 2d Circuit will follow the 3d Circuit's reasoning in TWA.

Second:  The other big issue is the Pension Funds' claims that the Treasury is misusing TARP funds in this case and using the bankruptcy case to effectuate a taking without compensation, in violation of the 5th Amendment. The bankruptcy court lanced these arguments by holding that the Indiana funds lacked standing to make them, based on the lack of any specific harm to the Funds from any misuse of the TARP funds.  I wonder if this argument might not also be avoided by the appellate court as a "political question."

The bankruptcy court also found a lack of standing on the takings issue because the Indiana Funds actually hold no direct secured interest in the debtor's property.  Rather, the lead bank on the loan holds the liens for the benefit of all lenders.  Moreover, by contract individual holders of this debt have bound themselves to act as a single unit in bankruptcy cases.  As previously discussed, the vast majority of the lenders had voted to support the 363 sale.

I think the takings argument also suffers from the Funds' failure to introduce any contrary (or any) valuation evidence. They challenge the debtors' valuation opinion as being conflicted, since the professional who provided the opinion will get a $10 million bonus if the sale closes, but that really goes to the credibility of the opinion.  It provides no evidence of any actual valuation of the debtors' assets that would support the argument that a taking has occurred.  If the assets were worth no more than $2 billion, it is not a taking since the lenders are getting $2 billion and don't have a constitutional entitlement to more.

In general this part of the Funds' argument suffers from the untethered speculation that abounded in their argument before the bankruptcy court.  Claiming that the Treasury department was "out to get" the senior lenders, without any proof, is really not a legal theory and it should not stop the sale.


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This has been interesting to read, especially since
I'm one of the affected dealers. I'm curious...what
argument would you have made if you were an effected

A good question. I suggested earlier that I thought the dealers who filed objections were likely just incurring a legal bill. The powers to reject contracts under the Bankruptcy Code are rather strong, and in this case arguments that increase the size of the dealer's claim for breach of contract don't accomplish much, since there may not be any distribution to unsecured creditors. I can think of arguments I would have made against the sale, but for a dealer that does not accomplish much, unless you just want to crater the deal out of spite.

Stephen, any idea how one can access the joint appendix in the appellate case (09-2311). there are no actual document links from pacer. any ideas would be appreciated.

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