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By Ronald Fink
A lawsuit recently filed by Chrysler's bondholders and other unsecured creditors against Daimler is a sign of more to come, restructuring attorneys warn. Such complaints reflect the weak position in which such creditors find themselves as a result of highly leveraged companies' widespread use of subordinated debt.
The suit, brought by a committee of unsecured creditors, charges that Daimler stripped Chrysler of many of its most valuable assets--including the company's financing arm--before selling the company to Cerberus. As a result, Chrysler received only a third of the value of its assets when it was sold, according to the complaint. The law essentially says that sellers get "reasonably equivalent value" from buyers in return for their assets, according to the attorneys.
Chrysler emerged from Chapter 11 in June after Italian automaker Fiat provided financing in return for a 35 percent stake.
Lawyers say the creditors' lawsuit isn't unusual. The charges amount to asset stripping,or engaging in "fraudulent conveyance" in legal terms. And the set of facts involved in the case is similar to those seen in others cases. But because the stakes are so large --and the charges so complex-- attorneys say a ruling in favor of the plaintiffs would encourage other unsecured creditors to take such action.
In April, a federal court in Texas ruled that the U.S. subsidiary of a Mexican mining company had to pay the bankrupt U.S. copper mining company Asarco's creditors an equity stake worth $4.7 billion in a Peruvian copper company, plus $1.4 billion in cash. That decision followed a ruling the previous August, in which another court found that the Mexican-owned company fraudulently conveyed the Peruvian company's assets to itself in selling a stake in the Peruvian company to Asarco.
Similar dollar amounts are at stake in the Chrysler case. While the exact value claimed for the Chrysler assets in question has not been made public, the complaint charges that Daimler illegally extracted "billions" of dollars before selling Chrysler toCerberus for $7.4 billion.
"You're talking big dollars here," said one bankruptcy attorney who asked not to be identified."Unsecured creditors want as much back as they can get."
The case is highly complex, with the transaction involving 48 steps that the judge must rule on. But while that could delay any decision, the lawyer noted that the plaintiffs' attorneys are being paid on a contingency basis, so they have an incentive to see it resolved as soon as possible. He added that most fraudulent conveyance cases are settled out of court, notwithstanding the Asarco decision.
Regardless of the outcome of the suit against Daimler, the lawyer said that more of these cases can be expected. Why? Because so many private equity deals have gone bust as a result of the credit crisis. "These cases are on the rise," he said.
In a post Wednesday on the website, Credit Slips, Seton Hall University law professor Stephen Lubben observed that the Chrysler case and another, much smaller one in which unsecured creditors of Circuit City are suing Sirius reflect the extent to which secured creditors have changed the nature of bankruptcy proceedings through the use of second liens and other subordinated forms of secured lending.
"Both suits strike me as desperate attempts to find something, anything for unsecured creditors," wrote Lubben. But he doubts that Chrysler's creditors will come away with much. "What are the chances Daimler spun off Chrysler without getting an opinion that the deal did not constitute a fraudulent transfer?" he added.
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