Chrysler Proposes Joint Plan of Liquidation; Unsecured Creditors' Distribution Contingent Upon the Outcome of the Daimler Lawsuit
In April 2009, Old Carco LLC (f/k/a Chrysler LLC) and related entities (the Debtors) filed chapter 11 bankruptcy petitions. Since then, the old Chrysler was sold to a new company called Chrysler Group LLC, of which Fiat is part owner. After the sale of its "good" assets, the Debtors formed Old Carco to liquidate the "bad" Chrysler assets, which ultimately represents the assets that the Debtors were unable to sell to Fiat. In January 2010, the Debtors filed their Disclosure Statement and Proposed Amended Joint Plan of Liquidation (the Plan), respectively, wherein they outline the proposed winddown of their bankruptcy estates, and the treatment of the claims asserted against their estates. The Plan describes the Debtors' proposed liquidation, and the subsequent distribution of the proceeds realized to creditors. The Plan provides that upon confirmation, a liquidation trust (Liquidation Trust) will be created to liquidate any remaining assets of the Debtors and make all distributions on allowed claims from the liquidation trust assets (Liquidation Trust Assets). According to the Plan, most classes of claims will receive no distribution, the "other secured claims" holders* will be fully compensated, the federal government (Government) will take a $4 billion loss and unsecured creditors are unlikely to recover on their claims, unless the Official Committee of Unsecured Creditors' (Committee) lawsuit against Daimler AG (Daimler) bears significant fruit.
The Debtors and the Committee recommend that creditors entitled to vote on the Plan, vote to accept it.
In August 2009, the Committee sued Daimler, in its capacity as the owner of Old Chrysler, along with some of Old Chrysler's former directors, accusing them of, among other things, fraudulent transfers, unjust enrichment and breach of fiduciary duty (Daimler Action). According to the Plan, the recovery for unsecured creditors and some holders of secured claims, is dependent upon the outcome of the Daimler Action. Whether the Daimler Action will yield any return may take months or even years to determine.
Even if the Committee is successful in the Daimler Action, unsecured creditors are still not guaranteed a recovery on their claims. According to the Plan, distributions to general unsecured creditors are dependent, not only on success of the Daimler Action, but also:
- a recovery that nets proceeds in excess of $25 million and
- a vote in favor of the Plan by holders of the general unsecured claims, and eventual approval of the Plan by the bankruptcy court.
Based on all of the still-to-be-determined items related to the Chrysler bankruptcy, it may be years before general unsecured creditors will know if they will receive any recovery on their claims under the Plan.
According to the Plan, the Liquidation Trust will retain avoidance actions (the Avoidance Actions) other than the Daimler Action, as appropriate, and all such proceeds thereof shall constitute part of the Liquidation Trust Assets. The Avoidance Actions include:
- preference actions against parties identified on the Debtors' schedules of assets and liabilities; and
- fraudulent transfer actions against any party that received a transfer from the Debtors during the relevant statutory periods.
However, the trustee (the Liquidation Trustee) of the Liquidation Trust may only pursue the Avoidance Actions if directed to do so by the Government. The Government derives its control over the Liquidation Trustee's pursuit of Avoidance Actions from the orders (Winddown Orders) entered by the court regarding the winddown of the Debtors' estates. The Winddown Orders provide that the Government has a first priority lien on the Avoidance Actions.
Pursuant to section 546 of the bankruptcy code, the statute of limitations period for avoidance of preferences and fraudulent transfers is two years from the petition date (April 30, 2009). Therefore, if the Avoidance Actions are pursued, they must be commenced by April 30, 2011. It is important to note that the assumption of a contract under section 365 of the bankruptcy code bars an avoidance action to recover alleged avoidable payments made pursuant to that validly assumed contract.
Additional information regarding the Chrysler bankruptcy can be obtained at: www.chryslerrestructuring.com