By Tomoeh Murakami Tse and Peter Whoriskey
Washington Post Staff Writers
Wednesday, May 27, 2009
NEW YORK, May 26 -- When Chrysler filed for bankruptcy April 30, restructuring veterans scoffed at the idea that such a big company could move through the process quickly, and industry veterans warned that the U.S. manufacturing base would be deeply disrupted.
But today, federal bankruptcy Judge Arthur Gonzalez is scheduled to consider a motion to sell most of Chrysler's assets to a new entity led by Italy's Fiat. The judge's approval would set up the automaker for one of the biggest and fastest bankruptcy proceedings of its kind.
"Given a company this size and this complicated an operation, a sale of substantially all of [Chrysler's] business in this short time frame is probably unprecedented," said Howard Seife, who heads the bankruptcy practice at Chadbourne & Parke.
The tactics are likely to be repeated by General Motors, which Tuesday reached agreement on key concessions from the UAW and failed to get a deal from its bondholders that would have kept it out of bankruptcy court. GM could file by Monday, the deadline set by the Obama administration for the automaker to restructure.
Chrysler has suffered few of the problems some predicted before it filed for bankruptcy. The process has resulted in only temporary setbacks to the nationwide network of suppliers, and sales have not plunged.
Experts said that's probably because many people view the bankruptcy as a temporary stop and because the federal government guaranteed car warranties. Preliminary reports from J.D. Power and Associates suggest that May sales were roughly on par with those of April.
Opposition from creditors that surfaced during the proceedings quickly evaporated, as Gonzalez wasted little time ruling against their claims. On Tuesday, a small group of Chrysler's senior secured lenders lost its battle to halt the sale, removing the last major hurdle to today's hearing.
Some restructuring experts said they had not fully appreciated the influence the federal government would wield over the process.
When Chrysler filed for bankruptcy, President Obama denounced a group of senior lenders who refused to accept the government's offer of 33 cents on the dollar. Obama portrayed them as selfish "speculators" and blamed them for sending the third-largest U.S. automaker into bankruptcy.
That day, the dissenting lenders said they numbered 20 organizations that held $1 billion of the loans. But under what they described as intense political pressure and public scrutiny, the lenders let up.
"I thought there would be a lot more organized opposition. But they fell by the wayside pretty quick," Scott Van Meter, restructuring expert and managing director of LECG. "The juggernaut that was launched against them was pretty effective. That's something we don't see normally in the bankruptcy world."
Indeed, many opponents thought their rights were trampled.
On Tuesday in U.S. District Court, Judge Thomas Griesa declined a request by Indiana pension funds to move Chrysler's case to the federal district court.
"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," Griesa wrote in his opinion.
The judge also denied the group's motion to stay today's sale hearing in Manhattan before Gonzalez, though he said parties should have "fair opportunity to appeal."
Indiana State Treasurer Richard Mourdock indicated in an interview that the state funds, which hold about $42 million of Chrysler debt, may do just that.
"This case is so much bigger than Chrysler," said Mourdock, adding that the Indiana funds would no longer buy debt issued by firms that received federal aid. "It has to do with whether the words 'secured creditor' have meaning. For 150 years of American law, it meant you were first in line. And if secured creditor doesn't have any meaning, does good faith in credit have meaning? This is such a fundamental issue."
The pension funds had argued that the government-orchestrated sale of Chrysler violated their rights as senior secured lenders to the automaker, and that under the proposed sale, they would recover less than junior lenders.
If the sale is approved, Chrysler is expected to move quickly to close the transaction and reemerge as a new entity. But Chrysler's bankruptcy case could continue for years as other stakeholders such as dealers resolve their claims.
A senior administration official Tuesday rejected the notion that Chrysler's case represented departure from the norm.
"When people look back they will see a process which was ordinary by conventional bankruptcy standards and the intervention saved a great American company and tens of thousands of jobs," said the official, who spoke on condition of anonymity because the matter is ongoing.
"When a bankruptcy judge looks at the lineup and says 'I've got about $10 billion of debt and the last remaining objector has a $42 million claim,' it not a close call," the official continued. "There has been a lot of noise made by an extremely small dissenting group . . . This is the flea on the end of the tail trying to wag the dog. [The judge] is not going to let the flea wag the dog."
Whoriskey reported from Washington.