Today's ChryCo Court Action II: Non-TARP Creditors Claim C11 is C7 in Disguise

Toxicroach says he’s not a C11 guy by training; C7’s more his style. Still, it’s obvious that he shares our OCD. Which is not so good for him. But very good for the greater good. Thanks, bug man.

“Nuts & Bolts: The first day emergency motions were granted for the most part. Chrysler can continue on and doesn’t have to file a complete list of creditors or a complete petition until June. Some minor creditor action that I’m going to mostly ignore. We already covered the main objections, but Uzzi (counsel for Chrysler’s non-TARP engorged creditors) filed another objection to the use of DIP financing ( download pdf here). This sums up their argument quite nicely:

According to the Debtors, the only payment that is relevant is the $2 billion to be paid to the first lien lenders. This amount they say represents the rough equivalent of what the first lien lenders would likely receive in a liquidation of the business (which is what the Debtors contend would happen absent the new financing promised by the United States government). If the Court can suspend its disbelief sufficiently to accept the Debtors’ argument, the transaction is still fatally flawed.

First, the Chrysler Non-TARP Lenders believe that the liquidation value of Chrysler is substantially higher than $2 billion. Second, the financing is in fact being provided and apparently drives an enterprise value of $27 billion. The fact that the postpetition lender, the United States Department of the Treasury (the “Treasury Department”), wishes to allocate that value among junior interests that it views from a political or policy perspective as more important than the contractually senior first lien debt is an insufficient basis for such a result.

It is incomprehensible that billions in cash should be borrowed and then paid out in satisfaction of obligations necessary to preserve going concern value, but that the recovery to the estates and their first lien lenders is nevertheless limited to an amount that the Debtors claim is roughly equivalent to liquidation value—if going concern value is preserved, the upside is to be paid first to the senior-most creditors.

“The argument that Uzzi and the non-TARP bondholders are making is this: the Chrysler Chapter 11 is in fact a Chapter 7, as evidenced by the fact that the ‘good’ assets are to be immediately sold to another company. Chapter 11 is for a reorganization of the company, not selling the viable parts of the company to Fiat. The motions pretending that Chrysler needs to pay all these unsecured creditors to protect Chrysler’s value as a going concern are therefore bogus.

“They also argue that the government financing is so constrictive (with its many covenants and milestones) that accepting it would force the judge to accept the sale of all the assets, because failing to do so would cause the Department of Treasury to immediately demand all of its money back and leave the rest of the creditors more exposed than if Chrysler had never taken the money in the first place.

“They further argue that the financing was not arranged at arms length or in good faith (this is very true), and that financing arrangements that try to dictate the Chapter 11 reorganization should be rejected (also true).

“They also content that using TARP powers to strip the senior liens to be replaced by liens to protect the TARP money is a violation of the 5 amendment takings clause, at least without “just compensation” for the taking.

“I haven’t had the time to sit down and study the cases they are citing, but my gut from reading the motions and objections, and Chrysler’s responses so far, is that the Non-TARP creditors are basically sitting on some very solid law, and that Chrysler is relying on scaring the judge into compliance.

“Which is not to say that what they are doing is extra-legal—so far.

“Asset valuation is largely a matter of opinion. It is possible that the assets are worth two billion, or at least arguable that they are only worth two billion. Debtor’s attorney’s will always pick the lowest plausible value for an asset. It’s then the creditor’s job to argue for the highest plausible value.

“What is so offensive about what is going on” the attempt to shut down the judicial process. Chrysler, the feds and Fiat don’t want to file a full petition, they don’t want to file a full list of creditors, they try to ambush the creditors with a last minute motion and hearing, they want to deny the creditor’s the standard 10-day stay to appeal the decision to sell the assets, and so on.

“They seem to be pinning their hopes on Gonzalez being so afraid of causing 50k people to lose their jobs that he will be their rubber stamp, and by the time an appeals court gets their eyes on the case, it will be a fait accompli.”