In Re Chrysler LLC
405 B.R. 84, 2009 Bankr. LEXIS 1323, 51 Bankr. Ct. Dec. (CRR) 181 (2009)
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Rule of Law:
A debtor-in-possession may sell substantially all of its assets outside of a plan of reorganization under 11 U.S.C. § 363(b) if there is a compelling business justification, the sale is not a sub rosa plan, and it can be done free and clear of liens under § 363(f) through proper consent mechanisms established in loan agreements.
Facts:
- Chrysler LLC, a major global automaker, operated with 32 manufacturing facilities, 24 parts depots, and a network of 3,200 independent dealerships primarily in the United States.
- By late 2008, a global credit crisis significantly impacted Chrysler's liquidity and consumer confidence, leading to substantial losses and a sharp decline in vehicle sales.
- Chrysler had accumulated approximately $6.9 billion in first-priority secured debt and $2 billion in second-priority secured debt, along with $5.34 billion owed to trade creditors.
- In December 2008, the U.S. Treasury provided Chrysler $4 billion in Troubled Asset Relief Program (TARP) financing, which was secured by a first-priority lien on unencumbered assets and a third-priority lien on other assets.
- Since early 2007, Chrysler had engaged in an 18-month worldwide search for strategic partners to improve its cost structure, expand into new markets, and develop more fuel-efficient vehicles.
- On January 16, 2009, Chrysler entered into a term sheet with Fiat S.p.A. for a strategic alliance, envisioning Fiat acquiring 35% of Chrysler's equity and providing access to competitive vehicle platforms.
- The President's Auto Task Force evaluated Chrysler's viability plans and indicated willingness to provide additional capital for a modified Fiat Alliance if outstanding issues were resolved within 30 days.
- Chrysler, Fiat, and New CarCo Acquisition LLC ('New Chrysler') tentatively entered into a Master Transaction Agreement (MTA) under which substantially all of Chrysler's operating assets would be transferred to New Chrysler in exchange for $2 billion cash and the assumption of certain liabilities.
Procedural Posture:
- On April 30, 2009, Chrysler LLC and 24 of its direct and indirect domestic subsidiaries (Original Debtors) filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York.
- On May 1, 2009, the bankruptcy court entered an order directing the Original Debtors' cases to be jointly administered for procedural purposes.
- On May 19, 2009, Alpha Holding LP (Alpha), another Chrysler affiliate, filed a petition for relief under Chapter 11, and on May 26, 2009, an order was entered directing its joint administration with the Original Debtors' cases.
- On May 1, 2009, at the first hearing, the Debtors sought approval for expedited hearings, including a proposed motion to approve bidding procedures and a hearing for the sale of assets.
- On May 3, 2009, the Debtors filed their motion seeking approval of bidding procedures and to schedule a hearing to consider the sale of their assets.
- On May 5, 2009, after a hearing, the bankruptcy court granted the request to approve the bidding procedures with certain modifications, entering an order on May 7, 2009 (Bidding Procedures Order).
- The hearing to consider the motion for the sale of assets (Sale Motion) was rescheduled for May 27, 2009.
- On May 19, 2009, the Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust, and Indiana Major Moves Construction (the "Indiana Funds"), holding approximately $42 million in first-priority secured claims, filed an objection to the Sale Motion.
- Numerous Dealers, Attorneys General of certain states, retirees, tort and consumer claimants, holders of mechanics' liens, lessors, and other miscellaneous parties also filed objections to the Sale Motion.
- The bankruptcy court conducted an 8-day evidentiary hearing from May 27 through May 29, 2009 (the "Sale Hearing"), to consider the sale of substantially all of the Debtors' assets.
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Issue:
Does a bankruptcy court have authority under 11 U.S.C. § 363(b) and (f) to approve the sale of substantially all of a debtor's assets, free and clear of liens, outside of a reorganization plan, when there is a compelling business justification, the sale is not a sub rosa plan, and a collateral trustee, acting under direction of a majority of lenders, has consented?
Opinions:
Majority - Arthur J. Gonzalez
Yes, the bankruptcy court has the authority under 11 U.S.C. § 363(b) and (f) to approve the sale of substantially all of a debtor's assets outside of a reorganization plan, free and clear of liens, when there is a compelling business justification, the sale does not constitute a sub rosa plan, and a collateral trustee, acting under the direction of the requisite majority of lenders, has consented. The court found that Chrysler established a 'good business reason' for the sale, as required by Comm. of Equity Sec. Holders v. Lionel Corp. (In re Lionel Corp.). The only viable alternative to the Fiat Transaction was immediate liquidation, which would yield significantly less value for creditors (an estimated $800 million compared to the $2 billion sale price), and was necessary to preserve going concern value which was rapidly eroding. The court determined the transaction was not a sub rosa plan because it did not dictate the terms of a future reorganization plan, nor did it improperly allocate sale proceeds, as the $2 billion cash consideration would flow directly to the First-Lien Lenders. The sale was also permissible free and clear of liens under § 363(f)(2) because the Collateral Trustee, who held the liens on behalf of the First-Lien Lenders, consented to the sale as directed by the Administrative Agent. The Administrative Agent had obtained the concurrence of 92.5% of the outstanding principal amount of the loans, which satisfied the 'Required Lenders' threshold under the First Lien Credit Agreement and Collateral Trust Agreement (CTA), binding even dissenting minority creditors like the Indiana Funds. The court rejected the Indiana Funds' argument that unanimous consent was required for a release of collateral, distinguishing this from amendments to loan documents. Finally, the court found New Chrysler to be a good faith purchaser under § 363(m), citing extensive marketing, intense negotiations, and the absence of fraud or collusion, concluding that the Debtors exercised sound business judgment despite the governmental entities' role as lenders of last resort.
Analysis:
This case significantly reinforces the broad discretion of bankruptcy courts to approve Section 363(b) sales of substantially all assets in Chapter 11, especially for financially distressed companies facing a rapid erosion of value. It provides a robust application of the 'good business reason' standard from Lionel Corp. and clarifies that such a sale is not a sub rosa plan if it maximizes value and does not circumvent the fundamental protections of the plan confirmation process. Crucially, the ruling confirms that collective action provisions in syndicated loan agreements are valid and can bind minority dissenting creditors under Section 363(f)(2) when a collateral agent, acting on behalf of a majority, consents to a sale free and clear of liens. This pragmatic approach allows for efficient asset disposition in exigent circumstances, even when government funding introduces unique dynamics, as long as traditional bankruptcy legal tests are satisfied.
