May 28, 2009 2:31 PM

Making Sense of Chrysler's Proposed Section 363 Sale

Posted by Brian Baxter

Several news reports today offer great tidbits on the Chrysler Chapter 11 proceedings that played out this week in federal courts in Manhattan regarding Chrysler's proposed section 363 sale to Fiat, the UAW, and the U.S. and Canadian governments. There was plenty of drama, it seems, and farce too. We're sorry we couldn't make it in person--we had another legal battle to attend--but offer up a few second-hand highlights.

The New York Times's Dealbook reports that the security line to enter U.S. bankruptcy judge Arthur Gonzalez's courtroom on Wednesday was so long that one of the lawyers representing a group of Indiana pension funds objecting to Chrysler's sale--White & Case financial restructuring and insolvency chair Thomas Lauria--got in only after the hearings started.

Lauria, whom we've covered in this space before, and W&C global commercial litigation chair Glenn Kurtz were on the losing end of a decision rendered on Tuesday by U.S. district court judge Thomas Griesa.

The Indiana funds objected to Chrysler's section 363 sale because they purchased a portion of the automaker's $6.9 billion in secured debt last year for 43 cents on the dollar. The government-backed sale will pay them 29 cents on the dollar while junior creditors like the UAW get to own 55 percent of the new company, albeit without any formal control.

"This [sale] is basically a sham," Kurtz told the court. "The federal government is orchestrating and funding this plan outside of the Constitution and TARP."

While Griesa ruled against the rebellious Indiana funds, he did admit that the issues raised by the group were important enough to merit an appeal. Griesa criticized lawyers for Chrysler and the government--led by Jones Day litigation chair Thomas Cullen, Jr., for Chrysler and assistant U.S. attorney Jeannette Vargas for the Treasury Department--for requesting that a $2 billion bond be posted in order to appeal the proposed sale.

Also appearing before Griesa: Kramer Levin Naftalis & Frankel corporate restructuring cochair Kenneth Eckstein for Chrysler's creditors' committee, Vedder Price bankruptcy partner Michael Edelman for Export Development Canada, Sullivan & Cromwell litigation partner Steven Holley for Fiat, and Simpson Thacher & Bartlett bankruptcy chair Peter Pantaleo and litigation partners Thomas Rice and Mary Beth Forshaw for JPMorgan Chase, agent bank for first-lien Chrysler lenders.

After Griesa's ruling, the spotlight shifted back to Gonzalez in the bankruptcy court.

The Committee of Chrysler Affected Dealers, a group of more than 300 dealers slated for closure as part of the reorganization plan, asked Gonzalez on Wednesday to block the bankruptcy sale and to consider the ramifications of the loss of so many businesses.

The dealers--represented by Squire, Sanders & Dempsey bankruptcy chair Stephen Lerner and McCarter & English franchising and distribution law partner Josefina Martinez--contend that shuttering their shops will destroy local businesses and decrease competition.

In all, the NYT reports, there were some 347 objections to the Chrysler sale. But proponents of the section 363 deal had their say as well.

Chrysler's former president Tom LaSorda testified that the Auburn Hills, Mich.-based automaker had scoured the world since the fall of 2006 looking for a merger or strategic partner. But Germany's Volkswagen and India's Tata Motors, as well as several Chinese automakers, weren't interested. The ensuing economic collapse scuttled potential deals with Kia and Nissan, leaving Fiat as Chrysler's sole savior.

"We couldn't bring anyone to the altar to bring us five cents," LaSorda said. "No one would bring us a nickel."

The W&C lawyers representing the Indiana funds introduced always-entertaining lawyer e-mails obtained during discovery over the objections of Jones Day. It didn't take long to see why. One e-mail showed that Jones Day lawyers tried to discourage the government from setting a June 15 deadline for the Chrysler sale because it would appear "hurried" or might be taken as an attempt to "stuff the judge."

Another e-mail exchange between Treasury lawyer Matthew Feldman, a bankruptcy partner at Willkie Farr & Gallagher until this past March, and a restructuring adviser for Chrysler had Feldman balking at negotiating with a "terrorist like Lauria."

At the time Lauria was representing another dissident Chrysler faction, the dearly departed Committee of Non-TARP Lenders. Lauria told the NYT after Wednesday's hearing that he's been called a few choice words over the years, but never by a government official.

Hearings before Gonzalez continued on Thursday with current Chrysler CEO Robert Nardelli taking the stand. Gonzalez has reportedly indicated he's prepared to sit well into the night.

Until then, Chrysler isn't going anywhere.

Photo: Tim Engstrom / Flickr

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