Federal bankruptcy judge Arthur Gonzalez has pulled the trigger on Chrysler’s reorganization. Late last night, Arty cleared the way for the bankrupt automaker to review and accept bids on the company’s assets. Gonzalez said there’s an “urgent need for the sale to be consummated.” What’s more, the bidding process offers the prospect of “a fair and orderly sale.” The ruling extends the bidding deadline by five days, to May 20. One week later, the judge will hold the hearing to approve the sale of assets. Not-so-coincidentally, that’s just three days before GM’s drop deadline for its [theoretical] pre-C11 reorganization.
Toxicroach puts it this way: “The fat lady hasn’t sung quite yet, though she is warmed up and ready to go.” And while we wait, keep in mind that the word “bidding” is more than slightly misleading. Fiat—I mean the U.S. Treasury Department (that’s you) is the only serious customer for Chrysler’s carcass. They’re looking at scarfing Chrysler’s good bits for $2 billion.
In all, the feds are fully committed to spending $8 billion—on top of [say goodbye to] $4 billion dollars in previous “loans”—to keep the zombie automaker vertical.
ChyrCo’s lead counsel, Corinne Ball, was positively giddy on this point, demanding (suggesting?) a cash deposit of at least $200 million (10 percent) of the Treasury Department’s proposed payment for “good” Chrysler. “We hope people do bring in a wallet,” Ball said. Meanwhile 10,000 Chrysler creditors have formed a committee to see if they can wrest $50 million from the deal.
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I think she meant to say, “I hope THE people bring a wallet”.
I am so sick of the word “HOPE.” The President “hopes” his plan works, Chrysler “hopes” people come with money. Everybody hopes, but nobody knows, nobody has a plan, nobody is being proactive and going out to get it done.
For Christ’s sake, America, stop hoping and start doing!!!!
I am sick of the word “smart” also. Grrrr
So the remaining creditors get what?
Is anyone else bothered by the direction taken by Chrysler? Nearly 15 years ago, they bought AMC. Now, FIAT, the UAW, and us are buying a company whose only assets are, well, Jeep (AMC) and the dealer network.
Would we not be better off today if Chrysler’s dealer network had bought Jeep 15 years ago?
You know if there wasn’t 8 billion or more taxpayer dollars in subsidies on the table, Fiat would walk from this deal.
Chrysler is a dead brand. Dodge may eek out enough sales while the subsidies continue. Jeep is an iconic brand, but seriously needs to be trimmed back to two platforms, the Cherokee and the Wrangler.
What Arthur Gonzalez is really saying:
“If I obey my political Master, maybe I will be his next Supreme Court nominee”
The nine lives of Chrysler… Amazing…
” oy vey” !
They went judge shopping. This guy ain’t going to go against the government of the United States of Zimbabwe.
Yesterday we found out that Viper was part of “bad Chrysler”. So, what to the documents say Fiatsco is buying with our 2 billion dollars as part of “good Chrysler”?
“What Arthur Gonzalez is really saying:
“If I obey my political Master, maybe I will be his next Supreme Court nominee”
“They went judge shopping. This guy ain’t going to go against the government of the United States of Zimbabwe.”
Interesting, people said the exact same thing about Judge Gonzalez re: the Enron filing.
Judge Gonzalez was chosen at random, through a process known as “the wheel.” It is literally that: a wheel with the judges names on it. The clerk spins the wheel and Lady Luck chooses the “winner.”
If the Obama administration cheated—say, by loading only Gonzalez name—there would be hell to pay. Of course, there’s going to be hell to pay anyway.
So however are suppliers staying in business to provide parts?
@kristjan
Not likely.
That was before the US dove headlong into the same sort of inflationary money printing that destroyed the Zimbabwe money.
Fiat—I mean the U.S. Treasury Department (that’s you) is the only serious customer for Chrysler’s carcass.
The bondholders are likely toast. Their bluff just got called.
When nobody else shows up to buy stuff, a lot of their arguments will have been neutered. As surprising as it may be, there is no hot market for used automotive factories or the IP value of the Sebring, which makes it tough to defend most of their case.
“@kristjan
Not likely.
That was before the US dove headlong into the same sort of inflationary money printing that destroyed the Zimbabwe money.”
Hardly.
If I were the non-Tarp debt holders, I would get into a bidding war with the gov for good Chrysler. If they win, bailouts forever, if they lose, they at least push up the price and get more bailout money.
If I were the non-Tarp debt holders, I would get into a bidding war with the gov for good Chrysler.
The bondholders don’t want to own the assets. They surely don’t want to write checks to purchase their own (worthless) collateral from the other bondholders.
Strip away the surrounding drama, and the whole ploy is ultimately just a haggle over the price. It isn’t a moral crusade, their issue is money. They are trying to erect enough obstacles so that the price goes up, and the new company lawyers are trying to knock them down.
An interesting idea to ponder, that I have not seen any discussion of is this: We know that there is only going to be one bidder for the bulk of Chrysler assets out of which Fiat thinks it can run a car company. We don’t know if there is anyone else out there who would entertain an offer to pick off a specific asset or group of them (I’m thinking Jeep and some of its current products). Neither Daimler or Chrysler LLC ever shopped Jeep around, so it is not surprising that there has been no rumors of interest out there in blogland. But what about it – is there any likelihood of an offer for Jeep that might come from some other source than the Treasury/Fiat deal? Just wondering out loud.
RF:
Judge Gonzalez was chosen at random, through a process known as “the wheel.”
This is true. Once you get to a court, you have no choice as to the judge. But the choice is in which forum to choose to file. I am guessing that Chrysler had many choices of Federal Districts in which to file. Michigan and Delaware (presuming a Delaware LLC) are two, and they would probably have grounds to file in locations where they have a major presence, such as a plant. But, they chose the district that probably gave them the most favorable array of judges from which the random choice would be made.
I’m visualizing the executive lunchroom at Daimler’s offices in Germany. I bet that every day, those guys sit down for lunch and have HUGE German laughs over this Chrysler situation.
Or at least I hope they do. After plough $37 billion into this dead bird, somebody needs to get some laughs.
The way the DIP is structured, the only alternative bid can be on the same terms as Fiat’s deal.
IOW, no bidding for specific assets, or bidding a higher amount if the VEBA is not included.
That’s the reason the holdouts are miffed–the parts are clearly worth more than the whole given the way the government has structured the deal.
Where’s Toxicroach?
The also could have chosen SDNY because it is the most convenient, which is important when time is essential. Cerberus has NY headquarters and NY lawyers, the Treasury officials involved are generally based out of NY or DC, the SEC is largely in NY, the Italians probably wanted New York instead of something inland, and the cooperating bondholders were mainly NY banks.
Question I should research: Why did Enron end up in SDNY instead of SDTX?
I am sick of the word “smart” also.
Smart = “there’s no way in hell this would work in the real world, so let’s bring in a bunch of pointy-headed Ivy League academics and *they’ll* make it work with their super-sized brains.”
I also nominate “synergy” to the list of words I’m sick of…
@motownr
Excellent brief summary.
the parts are clearly worth more than the whole given the way the government has structured the deal.
I don’t know how anyone could possibly prove that.
Judging from what we’ve been seeing elsewhere, there isn’t much of a market for Chrysler’s automotive brands, designs or equipment. It’s not as if we’re seeing bidding wars for Saab, Hummer or Volvo, or that old engine factories are particularly in demand.
The collateral just isn’t adequate. The value of a machine is derived from its ability to produce products that people want to buy for more than they cost to make, not from the price of the used machine in a recessionary market.
Basically, the bondholders screwed up because they overestimated Chrysler’s prospects when they bought the bonds and/or the value of whatever swaps they may have bought to hedge it. It’s just hard for me to get teary-eyed over that.
@ jpcavanaugh
In effect, the question you asked earlier might be rephrased as “Is there a division, or product line from Chrysler, that stand-alone, makes a profit?”
Presumably that is what the PTFOA has been pawing through, therefore off to BK.
Why there is a Ch11 for Chrysler rather than ‘parting out’ Ch7 is harder to fathom. There are very capable and world-wise distressed asset people at my employer who are scratching their heads.
It’s dreamland to expect a reconstituted Good Chrysler to operate. See related stories regarding dealer finance, GMAC and Chrysler Financial, plus of course the suppliers that are just hanging on…..somehow.
Smart, synergy…
The ultimate sickening buzzphrase these days is “going forward.”
Why there is a Ch11 for Chrysler rather than ‘parting out’ Ch7 is harder to fathom.
The value to the buyer is the ability to hit the ground running and begin producing revenue as soon as possible. The sooner that they are able to resume production of whatever it is that they are going to produce, the better.
The buyer needs: some production facilities, a Rolodex of dealers who can be reengaged, a clean balance sheet, a workforce and working capital. They’re getting that here.
This deal makes sense to a few parties who are already in the business and who wish to expand their North American operations. It makes no sense to virtually anyone else.
The play here, if there is one, isn’t in breakup value but with market share. That’s one reason why the bondholders are going to get squat, and why the government is cozy with Fiat — there is virtually no one else to buy up this company, and if the government wants (at best) the chance to recoup some money or (at worst) a soft landing, doing this deal with someone like Fiat is the best shot they’ve got.
So,
it sounds like the Bondholder’s first strategy was to play that the company was worth more than what was being laid out – Toxic had pointed out that not enought time was being given to see if others would come to bid and PCH was saying that it didn’t matter since Chrysler has been trying to sell itself to everyone over the last 6 months and Fiat is the only one standing in the court room today.
And they lost.
Do the bondholders now have a second play with the way the percentages are being handed out (them only getting 10%)?
I know that today the company is really worth nothing – but do they deserve a bigger slice of the future potential?
I know that today the company is really worth nothing – but do they deserve a bigger slice of the future potential?
In theory, the bondholders should get at least as much out of an 11 as they would out of a 7.
That’s why they’re hosed, in my opinion. The liquidation value is low. Their strategy seems to have been centered around creating doubt about the value, and using the time involved in sorting it out to motivate the government to offer up more so that they would drop their claim. That is probably not going to work.
We also need to keep in mind that the “non-TARP bondholders”, as they like to call themselves, are $300 million of a $6.9 billion bondholder pie. They are obviously a small fraction of the overall piece. They really don’t have much leverage here, and they stand little to gain in absolute terms by slogging it out. The winner will be their lawyer, who must be making some decent billables for making arguments that won’t go anywhere.
“I’m visualizing the executive lunchroom at Daimler’s offices in Germany. I bet that every day, those guys sit down for lunch and have HUGE German laughs over this Chrysler situation.”
Yeah, and the laugh is on them for being such fools!
Pch101 :
May 6th, 2009 at 11:28 am
We also need to keep in mind that the “non-TARP bondholders”, as they like to call themselves, are $300 million of a $6.9 billion bondholder pie.
Pch101 seems to have no idea what “priority” is. Let me explain:
If you die without leaving behind a will, your wife, your son, your cousin, your cousin’s brother in law all want your assets.
But there is a queue. Your wife should get what she is entitled to (most likely 100%). And your cousin’s brother in law will likely get nothing. If he jumps into the front of the queue, something is wrong here.
No matter how much is the bondholder owned, $6.9B or $690B, junior creditors such as UAW and the government (i.e. your cousin’s brother in law) should always wait until the first ones in queue (i.e. your wife, your children) gets paid in full.
What the government is doing now is equivalent to your cousin’s brother in law forcing his way into having your assets with a gun and leaving your wife and children only 10%.
In short, the bond structure is a queue structure and not a democratic vote structure. A democratic vote system to deprive your private asset is called Communism.
Pch101 :
May 6th, 2009 at 11:52 am
You’re obviously not a bankruptcy lawyer. Sorry.
I didn’t read though all your previous posts. In case I missed it, are you implying, in this post, that you are a bankruptcy lawyer (and thus your comments has more authority)?
Are you?
I have worked as a consultant on business bankruptcy cases, and have hired BK lawyers and been to BK court and in creditors’ hearings in the process. So I do have some professional experience with this that you presumably lack, yes.
You should read the content elsewhere on this website. This piece addresses the issue of how absolute priority is not an absolute doctrine in bankruptcy court. http://www.thetruthaboutcars.com/chrysler-bankruptcy-analysis-iii-will-the-absolute-priority-rule-kill-the-sale/
The US court system is not as you described it. Sorry, but you’re just incorrect. You might wish it was true, but it isn’t.
You didn’t answer whether your are a licensed bankruptcy lawyer or not.
It’s a “yes” or “no” question. Not a “post your resume” question.
I’ve answered your question.
And as usual, you’re wrong on the facts. You have a tendency to confuse your political views with what’s actually in the law and with real-world business practices.
If that’s your answer, then I assume that your are not a bankruptcy lawyer, because you “have hired BK lawyers.”
If hiring and talking to BK lawyers is some kind of credential, then remember that the dissent bondholders also “hired BK lawyers.” Very high profile BK lawyers according to the price tag. They certainly know far more about BK laws and real-world business practices than you do.
If hiring and talking to BK lawyers is some kind of credential
It is when you’ve been engaged to turnaround the entity.
In any case, your claim about absolute priority is obviously wrong. That link discusses aspects of it, and makes it clear that it is not an absolute doctrine in US courts.
Your comment would be inaccurate, irrespective of my professional experience. But as I have dealt specifically with this issue myself, I knew that going into this. You, as is typical, did not, and apparently still don’t.
I admit that I am amateur in this area. But your are no professional either. I view you as a “DIY BK lawyer.” It may turn out OK with simpler projects. But there are tons of DIY disasters out there too.
This issue, as I pointed out, is not bounded by BK laws. As government stepped in last year without following conventional routines. The implication is further than bankruptcy.
From the link you provided, there is the following text:
Adding to that complaint the creditors have claimed that because it is the gov’t that is queue jumping (both on its own behalf and on behalf of the UAW) the deal constitutes an illegal “taking” by the gov’t and violates the Fifth Amendment.
I don’t see much difference from Cuban government seizing the assets of Coca Cola years ago.
But your are no professional either.
Er, I’ve been the one making the decision as to whether to file in the first place, which required that I understood what my odds and constraints were before going into it. The lawyers are handling the paperwork; they don’t handle the professional wrangling that determines much of the outcome.
This issue, as I pointed out, is not bounded by BK laws.
Now you’re contradicting yourself. First, you claim the doctrine of absolute priority (which does not rule supreme in the US system, contrary to your staetment.) Now, you want to change your story.
Sorry, but yet again, you confuse your political goals with how things actually work. You may have opinions, but your insights as to what to expect are just not helpful. Your wishful thinking about how the world should be has no bearing on how things actually turn out.
Your wishful thinking about how the world should be has no bearing on how things actually turn out.
The Unite States government seizing private properties is not my wishful thinking. It’s a fact.
The Somalian pirates have taken GM and Chrysler with help from their leader.
Remains to be seen whether people will buy the cars.
The issue of whether or not the commentor is a Bankruptcy attorney is irrelevant, given that Chrysler hired a group of bankruptcy attorneys to argue their side, and the non-TARP bondholders hired their own bankruptcy attorneys to argue the opposite side.
Pch’s analysis has been spot-on from the beginning and has now been further validated by the judge’s ruling.
Unfortunately, the commentors who choose to believe the “Socialist Takeover” theory are not going to be persuaded otherwise no matter what happens. The government wants to run Chrysler even less than it wants to run Citibank, which is, not at all.
As I understand things, there are now 2 weeks for bidders to come forward. Likely only one. Then the court has a week to review the bid and either approve it or disapprove it. It looks like $2 billion will come in and the parts of the company that Fiat/Treasury wants will go out.
Am I correct that the next step will be a conversion to a Chapter 7 liquidation? Because once the valuable assets are gone, I see little to work with to forge a reorg plan from.
If the liquidation starts, I am guessing again that the secured creditors should get everything that is left after any other assets are sold off or abandoned.
I wonder now if anyone is working on any theories to reach back to Cerberus for more money? I understand that Cerberus took the real estate out of Chrysler and kept it for itself – but my understanding is based only on blog rumor. So, Toxicroach, where are you?
And before anybody asks, I AM a lawyer and Have done a couple of chapter 11s, but they were small and a long time ago, so I do not consider myself much of an authority on this. Just an interested bystander with questions.
Make that Federal bankruptcy judge Arthur “Peg Boy” Gonzalez.
Those of you who believe that his name was drawn in a fair random procedure probably believe in Santa Claus. The boys from the Chicago Machine do not believe in luck, they believe in stuffing ballot boxes and throwing out petitions that do not “qualify” because they do not comply with “legal technicalities”.
If you do not have a video tape of the entire wheel procedure being run under the supervision of Nassim Nicholas Taleb, do not be fooled by the lack of randomness. It is no more random than a three card monte.
I am not sure the fat lady has sung, but I am damn sure the actors and musicians haven’t yet picked up their share of the receipts. I am not an optimist by nature, but I think the bond holders may still come out better off than the offer.
AnalogKid :
May 6th, 2009 at 1:34 pm
The issue of whether or not the commentor is a Bankruptcy attorney is irrelevant, given that Chrysler hired a group of bankruptcy attorneys to argue their side, and the non-TARP bondholders hired their own bankruptcy attorneys to argue the opposite side.
Very well said. Pch001’s boasting of his prior experience is pathetic.
Unfortunately, the commentors who choose to believe the “Socialist Takeover” theory are not going to be persuaded otherwise no matter what happens. The government wants to run Chrysler even less than it wants to run Citibank, which is, not at all.
No socialist will take over. It’s the people turning to the dark side during times of uncertainty, not unlike that of Star Wars or WW2 Germans.
I never said the government wants to run Chrysler. But it’s a fact the government wants to hand senior creditor’s collateral asset to the UAW.
wsn writes:
No matter how much is the bondholder owned, $6.9B or $690B, junior creditors such as UAW and the government (i.e. your cousin’s brother in law) should always wait until the first ones in queue (i.e. your wife, your children) gets paid in full.
Let us concede that the answer is basically “yes.” But then the question is, out of which pot of money?
The theory here is that we have two pots. Right now, the “old” pot (call it “Chrysler”) has a bunch of business assets and business liabilities (of different seniority), and a little cash which was recently thrown in by the government. Along comes another pot (let’s call it “New Chrysler”) who’s lined up another big cash loan from the U.S. Treasury, and proposes exchanging some cash for the business assets. The judge said that there are now two weeks for other bidders to step in with better offers, plus another week after the close of the auction to review what’s come in — it’s a fair auction. After the winning bidder’s check clears, the old pot has a bunch more cash, no worthwhile business assets, and a bunch of liabilities. We then have to distribute the cash in the old pot according to the bankruptcy rules. The non-TARP bondholders may or may not get more than the 29% recovery they were offered out of court before the bankruptcy began. That’s business.
The owner of the new pot, which is essentially the U.S. Government, proposes doling out equity shares in it to all sorts of people: Fiat, the UAW, the Treasury for later resale on the markets, etc. The fact that some of those people were also junior creditors to the old pot is not strictly relevant: They’re being paid off not by virtue of some sort of illegal queue jumping in bankruptcy court, but because the Administration likes them, and bought them a present by virtue of coughing up more dough. Run of the mill government handout — nothing to see here. We might debate the utility of such handouts (I actually see some sense in this one), but don’t dress it up as some sort of banana-republic expropriation, because it isn’t.
You almost summed it up in a follow up post:
I never said the government wants to run Chrysler. But it’s a fact the government wants to hand senior creditor’s collateral asset to the UAW.
I agree. It wants to hand the collateral asset over to the UAW. But only after paying a fair price for it.
For the “DIY BK lawyer” Pch001, here are some comments from licensed lawyers and law professors. Let here what’s their take:
Chrysler’s Greedy Hedge Fund Holdouts Get It Right: Ann Woolner
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Commentary by Ann Woolner
May 6 (Bloomberg) — You can call the plan to merge Chrysler and Fiat good for the economy. You can think it creative.
You can say it’s the start of “a vibrant new company,” as Chrysler LLC Chairman Robert Nardelli did last week.
But there’s one word that you can’t call the Chrysler bankruptcy package: legal.
The plan would overturn basic rules of bankruptcy by setting up a sort-of sale to sidestep pesky legal requirements. It would bulldoze well-established rights of secured creditors, property rights the U.S. Constitution guarantees.
So if U.S. Bankruptcy Judge Arthur Gonzalez follows the law, the Chrysler rescue plan dies. If he blinks and approves it, secured creditors everywhere should feel a shiver of unease, and quick sales of insolvent companies to avoid court scrutiny would multiply.
The other option is a settlement, and that might well be where this is headed.
I hate to say it, but the dissident Chrysler lenders are right, the ones President Barack Obama described as greedy hedge funds selfishly blocking Chrysler’s survival.
The president’s fist-waving looks a lot like the posturing lawyers use to scare an adversary into surrender, never mind the law. In fact, several are giving up the cause.
At the heart of the plan, and at the heart of the plan’s problem, is the idea that Chrysler would sell itself quickly rather than go through months or years of court-supervised reorganization.
Within 60 Days
Called a 363 sale for the relevant section of the bankruptcy code, it can close within 60 days and unload all or part of the company. The sale to Barclays of a piece of Lehman Brothers Holdings Inc. took about a day.
A 363 sale is perfectly legal when a sound business reason demands it and when it isn’t reorganization in disguise.
But if it’s aimed at resolving creditors’ claims, that is what reorganization is for. Bankruptcy reorganization promises secured creditors at least the same payout they would get if the company liquidated, and Chrysler’s proposed sale looks like a way around that.
Figuring what creditors have coming to them requires lots of paperwork and hearings. That’s why it takes so long.
Drawn-Out Bankruptcy
And that is what Chrysler is trying to avoid. In fact, it must avoid a long, drawn-out bankruptcy if it is to survive.
But with a 363 sale, there is no chance to figure the value of Chrysler’s assets if sold piecemeal, much less what each creditor should get.
The secured creditors who are complaining about this helped save Chrysler the last time it almost went under, in 2007 after the marriage to Daimler AG soured. How much of a haircut should they be forced to take?
The dissidents say the sale is nothing more than what bankruptcy law calls a sub rosa reorganization, a secret reordering dressed up to look like a sale, which the law forbids.
Plus, would it even be a true sale?
In public statements Chrysler says a United Auto Workers health benefits trust would get 55 percent of the shares of New Chrysler and a $4.6 billion note to satisfy some of the group’s unsecured claims against the company.
Paying nothing but offering its fuel-efficiency expertise, Fiat SpA would own 20 percent initially and could increase its stake by another 15 percent. The U.S. and Canadian governments, which are providing billions in interim financing, would own the rest.
Phony Sale
Chrysler is essentially selling itself to itself, says Lynn LoPucki, a law professor at the University of California, Los Angeles. He teaches secured transactions and maintains a database of major bankruptcies.
So, if the “sale” isn’t a true sale, and if it dictates payout to secured creditors, isn’t that a sub rosa reorganization?
If it favors junior creditors over senior creditors, doesn’t it violate the very basics of bankruptcy law? Senior creditors can volunteer to give up some of what’s due them but they can’t be forced to by a bankruptcy court.
“Those are property rights, and they are protected by the Constitution,” says Daniel Glosband, a partner in Boston’s Goodwin Procter. “You can’t just take them away.”
And yet, it could happen.
‘Enormous Momentum’
“There’s an enormous momentum in favor of the government plan,” says Jay Westbrook, who teaches bankruptcy law at the University of Texas.
It’s naïve to assume bankruptcy judges feel compelled to follow the law, says LoPucki.
He argues that bankruptcy courts across the country compete for the big cases by giving lawyers for major companies what they want.
“According to the law, this plan should not be approved,” LoPucki says.
Yet he predicts Gonzalez will do it anyway to persuade other companies (General Motors Corp. comes to mind) to pick Manhattan’s bankruptcy court over, say Detroit’s.
Already the Chrysler case is one for the books. You have the federal government sending a company into bankruptcy court, financing its reorganization, deciding who will get what, setting a strict timetable and urging a judge to blink at the law.
If the argument that Chrysler’s welfare is so critical to the national interest that longstanding laws can be ignored, what’s next?
Some future president will find a way to justify blatantly illegal conduct. Such as torture.
(Ann Woolner is a columnist for Bloomberg News. The opinions expressed are her own.)
To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net.
Last Updated: May 6, 2009 00:01 EDT
So is this decision appealable? Or at what point can the bondholders first appeal this decision to a higher court? If an appeal is allowed, I imagine it would go to the federal circuit court, though I’ve never been entirely clear on the organization of bankruptcy courts.