San Jose Bankruptcy Attorney Talks about the Chrysler Bankruptcy
San Jose Bankruptcy Attorney Talks about the Chrysler Bankruptcy
On April 30, 2009, Chrysler’s filed for a Chapter 11 Bankruptcy. The Chrysler Bankruptcy would be a huge undertaking because the company is one of the big three automakers in the United States. To see how this bankruptcy will work, it is helpful to look at a different large bankruptcy. In late 2008 and early 2009, the Circuit City Bankruptcy rocked the retail world because it signaled the shut down a major player in products that consumers purchase on a regular basis. Circuit City filed for Chapter 11 bankruptcy which is what Chrysler would do. Under the Chapter 11 bankruptcy, Circuit City was able to continue business including selling during the holiday season and pay their employees for the work. Circuit City was given protection against creditors while it looked for a new source of capital or a buyer. Neither could be found so Circuit City had to be shut down.
In Chrysler’s case, they have Chapter 11 creditor protection while it looked for solutions to its problems. Based on reports, Chrysler had to file for Bankruptcy so that it could close the investment from Fiat of Italy. Fiat had previously been identified as a potential buyer ranging from a 20 percent to 35 percent stake in the company. Chrysler owes $6.9 billion to lenders and once a few begin collections, could cause the whole company to shut down. (A car cannot be sold unless it has all the parts, like the wheels) The Chapter 11 protections are needed because Chrysler needs to continue operating while the deals are being worked out.
The straw that broke the camel’s back and forced Chrysler into bankruptcy is being blamed on a small minority of creditors. The lenders originally wanted 65 cents to the dollar with a 40 percent equity stake in whatever company Chrysler becomes. The government wanted the lenders to get 22 cents on the dollar with 5 percent of the new company. The key note was that government came to the table with money to help finance any deals but wanted to spend as little as possible while the lenders want as much as possible. The risk for the lenders was that the deal fell apart and Chrysler was liquidated similar to Circuit City where they could receive much less than 22 cents on the dollar and only after items have been auctioned off. (One can imagine that there are few buyers of car building plants in the US) The other risk was that under Chapter 11 laws, Fiat (or any other buyer) can choose which assets to keep and which to get rid. This pits the lenders against each other as the owners marquee property can command a premium while the undesired debts are left with hats in hand asking for bail outs.
In the end, most of the major lenders agreed to the government’s proposal prior to bankruptcy but a few minority lenders held out. The final group of lenders who withheld approval were called “speculators” by President Obama. Many of the lenders were hedge funds and boutique investment funds who alleged that the big banks were yielding to the government’s proposal because of prior bailout money. Now that bankruptcy is filed, the decision as to whether Chrysler’s plan is accepted or not will lie with the Bankruptcy Judge instead of the lender’s hands.
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