Is the plan to reorganize Chrysler Corp. a true sale of its assets or a ‘sub rosa’ plan to recast the company? A bankruptcy judge is going to have to decide.
Secured lenders are owed $6.9 billion. The Treasury’s term sheet, which is here http://www.ustreas.gov/press/releases/tg115.htm. , offers these lenders $2.25 billion in cash, proposing to sell all Chrysler’s assets to a new company. Treasury, the Canadian government, the UAW and Fiat are to share ownership of stock in the new company.
In a ‘normal’ bankruptcy, whatever proceeds are received would go to the secured lenders, with their unsatisfied claims sharing in the remaining value. The $4.7 billion of unpaid principal and interest would have equal standing to the prepetition amounts due the unions and the Treasury. It is this claim and this leverage over the process that the Administration seeks to expunge.
Steel companies were able to shed the legacy costs of pension and healthcare liabilities to retired employees. New moneys came into the industry, and re-cast firms such as those controlled by financier Wilbur Ross became truly profitable.
The Administration’s proposal seeks to wipe out secured lenders’ claims, but not the union claims. Rather than being controlled by shareholders from new investments, Chrysler is to be controlled by the government and the unions.
Even Chrysler’s own law firm is not sure that the proposal will work. As The Bankruptcy Litigation Blog points out here http://www.bankruptcylitigationblog.com/archives/bankruptcy-in-the-news-chrysler-files-bankruptcy-part-ii-testing-the-limits-of-section-363-sales.html
So what's the risk for the proponents of the sale? As Chrysler's own counsel at Jones Day wrote in this 2002 publication:
U]nder certain circumstances a debtor may sell all or substantially all of its assets without making the sale part of a plan of reorganization. Where a chapter 11 debtor proposes to sell its assets or business "outside of a plan of reorganization," creditors are entitled to notice of the sale and an opportunity to voice any objections they may have with the court. However, the sale will not be subject to the same creditor disclosure and voting rights attendant to a sale as part of a plan of reorganization. Moreover, the proposed sale will be subject to the less exacting "business judgment" standard of review. For this reason, some courts refuse to approve a proposed sale outside of a plan of reorganization if it appears that the transaction is really a "sub rosa" or "de facto" plan because the terms of the sale will necessarily dictate the provisions of any future plan.
You don't have to be a bankruptcy maven to see from the face of the term sheet that the proposed sale dictates the provisions of a future plan of reorganization and sure has the feel of a "sub rosa" or "de facto" plan under which:
- Lenders with a first priority interest in Chrysler's assets will receive $2 billion, nothing more.
- The junior VEBA claimants will receive a $4.6 billion note payable over 13 years at a 9% rate of interest and additionally will receive 55% of the equity of New Chrysler.
- Unsecured trade payables of about $1.5 billion get paid in full.
- The US Treasury will receive 8% of the equity of New Chrysler as repayment of its $4 billion junior TARP loan while the Canadian government gets a 2% stake for its junior loans.
The blog concludes:
What's the governing law? Well, since the case was filed in New York, the law of the Second Circuit Court of Appeals applies. The latest pronouncement from the Second Circuit on whether 363 sales are disguised "sub rosa" plans came in Motorola, Inc. v. Official Comm. of Unsecured Creditors, 478 F.3d 452 (2007), where the Court wrote:
The trustee is prohibited from such use, sale or lease if it would amount to a "sub rosa" plan of reorganization. The reason "sub rosa" plans are prohibited is based on a fear that a debtor-in-possession will enter into transactions that will, in effect, “short circuit the requirements of [C]hapter 11 for confirmation of a reorganization plan.”
Therefore, it will take a judge of the Federal Bankruptcy Court to certify that Treasury’s proposal is not a “sub rosa” plan of reorganization.
A good discussion of the issue here is at The AmLaw Daily here http://amlawdaily.typepad.com/amlawdaily/2009/04/can-the-unwilling-bondholders-delay-chryslers-reemergence-.html. Editors there interviewed University of Chicago Law School Professor Douglas Baird about the case.
The plan for Chrysler is to have a 363 asset sale before the confirmation of the Chapter 11 plan. Chrysler will ask to hold an auction for their most desirable assets and the court will conduct a sale. The new Chrysler corporation will buy those assets for $2.25 billion, and what's left for the bondholders and the rest of the creditors is that pool of cash--$2.25 billion.
So by using the asset sale strategy under Section 363, Chrysler and the government are basically making objections under 1129(a)(7) moot? The bondholders can't even use that clause to argue they are not getting their fair share?
Yes, the sale moots [that argument]. They will not be able to use that argument to block the sale. And all that will be left for them is the proceeds from that sale. That's it. This is what they get.
So the process could go pretty quickly, considering Fiat is already on board. Is there anything the bondholders can do to upset this process?
Yes. The strategy they would have to use--and the one I think they will use--is to object to the 363 sale from the outset.
On what grounds can they do that?
They will have to argue that it's not actually a sale--that it's an end run around their rights under 1129(a)(7)--that this not a sale, but rather a reorganization plan disguised as a sale.
The Chrysler case has been sent to Judge Arthur Gonzalez. Bloomberg http://www.bloomberg.com/apps/news?pid=20601087&sid=ay.s.CCiTgSA&refer=home says the following about the jurist: “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.”
If the sale of Chrysler’s assets is a true sale, why does the Treasury plan provide for payment in full to Chrysler’s trade debt ? For a 9% note totaling $4.6 billion to be handed over to union plans?
Even if he wanted to, could a Hispanic judge stand up to the Obama Administration over the case’s legal issues? Then again, he may have been pre-selected because he wouldn’t want to.