Wednesday, May 27, 2009

Will Chrysler Prevail, or Will First Lienholders Get a Last Second Reprieve?

There have been a number of documents added to the publicly available docket this morning.

These include:

The Manzo declaration provides a table disclosing the parties that have made inquiries about bidding in the 363(b) sale. Apparently there were some parties willing to provide bids on parts of Chrysler, however, no specific bids were reported as received.

The other declarations are interesting, but I did not (in my quick scan) notice anything particularly noteworthy in them.

The Opinion by Judge Griesa is quite interesting, however. Apparently there were voluminous briefs filed with the District Court and the hearing was lengthy (both reflect comments from the Opinion). The Judge's conclusion to reject the motion to withdraw the reference and to reject a stay of the 363(b) proceedings rely on interesting logic.

The withdrawal motion seems to be based on the issue that there are federal laws, other than the Bankruptcy Code (Title 11), at issue and, therefore, under 28USC§157(d):

The district court shall, on timely motion of a party, ... withdraw a proceeding if the court determines that resolution of the proceeding requires consideration of both title 11 and other laws of the United States regulating organizations or activities affecting interstate commerce.

The Judge comments that:

the Second Circuit has expressly held that this language must be "construed narrowly." Shugrue v. Air Line Pilots Ass'n Int'l (in re Ionosphere Clubs, Inc.), 922 F.2d 984, 995 (2nd Cir. 1990). This narrow construction means that a District Court should not withdraw the reference where bankruptcy issues to be resolved depend on the interpretations of a non-bankruptcy statute but that this interpretation is closely intertwined with standard bankruptcy considerations.

The Judge then goes on to opine that the non-bankruptcy issues ARE, in fact, closely intertwined with the bankruptcy issues and, therefore, they should be decided by the Bankruptcy Court, subject to the right of appeal. He further states that at "this late stage, when the Bankruptcy Court is nearing the completion of its work, it would be disruptive to remove the issues from a bankruptcy judge who has the background and is ready to complete his work." The withdrawal and stay motions were, therefore, denied.

Not to dispute Judge Griesa, but it is strange to hear someone refer to the Chrysler bankruptcy as being at a "late stage" given that the initial filing was only 27 days ago!

The Judge did opine on another important issue. He states that "the Indiana Funds have standing to make their motion to withdraw the reference and to make the related motions."

The Debtor was challenging whether the Indiana Pensioners had standing given their relatively small participation in the first lien debt - and given that over 90 percent of the holders of that debt have agreed to the 363(b) process. Presumably the Debtor intended this argument to preempt any future action, or appeal, by the Indiana Pensioners. Judge Griesa appears to have left the door open for future appeals by the Indiana Pensioners.

The end result is that Judge Gonzalez will, after what appears to be a marathon hearing today, decide on whether to allow the 363(b) sale.

The opening statement of the Indiana Pensioners, by Glenn Kurtz of White & Case, provides an interesting argument as to why the 363(b) sale should not be approved. His statement opens by stating "If this is not an illegal sub rosa plan, there is no such thing." I think that's a fairly bold statement (also amusing).

It appears, given the rulings to date, that Judge Gonzalez will decide for the Debtor today, but he could surprise us.

I wonder if anyone will bring up the lack of impact that the bankruptcy appears to have had on Chrysler's sales (my two posts on that are here and here). There was an article about a significant drop in sales in Canada, but that article also mentions the shut down of the plants as a contributing factor (it's hard to sell cars that you don't manufacture!).

Given that one of the key arguments in favor of an expedited 363(b) sale was that failure to emerge from bankruptcy would cause permanent damage to Chrysler's assets, the reality that sales have not fallen materially (and actually are better than expected) would seem to expose that argument as misguided.

As I've been writing this post, the public docket has added 53 documents!

Maybe I'll have more to say later.

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