Friday, May 1, 2009

Judge Maintains the Suspense in the Chrysler Case

It isn't surprising that today's hearing on Chrysler was not terribly exciting, although it was eventful. Judge Gonzalez had numerous motions, notices, and applications to deal with. Most were technical, but he did provide relief on some issues that were not terribly controversial.

The really exciting part comes on Monday when arguments are scheduled on the motions for the DIP facility and the proposed 363(b) process.

Okay. It's not Lost, but this case is fairly complicated. Luckily there are no issues with time travel (although that might have been a problem if DeLorean was involved).

The motion for the DIP was not filed until late today, and it includes the proposed DIP Agreement. Previously, we had only seen the DIP Term Sheet.

At 6:45 PM Friday, the motion for the 363(b) process has not been filed.

On Monday, Judge Gonzalez is going to have to sort through the various interests and determine if he's willing to allow, what might be considered, a coercive DIP Agreement from the US and Canadian Governments to be accepted. While it is fairly clear that there is no other potential DIP provider, I am not sure that there is precedent for the accelerated sale timetable included in the DIP Agreement.

Arguably, acceptance of the DIP would provide a substantive business reason to accelerate the 363(b) process under existing case law. This would mean, however, that the court was participating in the creation of the crisis that requires the accelerated 363(b).

The judge must weigh the rights of the creditors and consider whether their interests might be better served with a liquidation, regardless of the social impact.

It would not surprise me if the Judge ordered the parties to renegotiate the DIP to exclude or loosen the provisions relating to the 363(b) sale. If that were not achievable, he could order the Debtor in Possession to provide a different plan for proceeding (probably liquidation). After all, the Wall Street Journal Law Blog reported today:

Dewey & Leboeuf’s Martin Bienenstock, who represented Enron in its bankruptcy, told the WSJ’s David McLaughlin that Gonzalez isn’t afraid of taking novel approaches to move complex cases along. In the Enron case, for instance, Gonzalez set 15-minute trials to determine the fate of thousands of claims. As a result, most creditors ended up settling. “I think he’s a judge you can count on to do the right thing and not be pressured by anyone,” Bienenstock says.

Given that the only bidder is, and is likely to stay for the moment, NewChrysler; and given that the Voluntary Employee Beneficiary Association, a pre-petition creditor, is receiving 55% of NewChrysler in settlement of their claim in the bankruptcy - without contributing any funds, many would find the proposed transaction - and the hurried nature of the consideration of that transaction, troubling.

There are issues of fairness to the secured creditors and whether the bidders should be considered to be acting in "good faith" as required under Section 363(m).

On the other hand, Bloomberg reported that:

Gonzalez is known as a pro-debtor judge, meaning he favors bankrupt companies over their creditors. As a result, lenders may have a hard time blocking the sale of Chrysler assets or extracting more for their loans than the government is willing to pay, lawyers said.

The hearings on Monday should be exciting (if you like that sort of thing) and I look forward to learning the results Monday evening (and reading the orders and, eventually, the transcript).

I, however, will be at the American Bankruptcy Institute's 11th Annual New York City Bankruptcy Conference and I expect to hear a lot of discussion and speculation about what will be transpiring downtown at the hearing.

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