Legal News

A Breath of Relief for Creditors: Judge Scuttles Delphi-Sale Plan

By Ashby Jones

Well, here’s some good news for all those creditor-side bankruptcy lawyers who’ve spent the last month grumbling over the treatment of the secured lenders in the Chrysler bankruptcy.

Robert Drain, a federal bankruptcy judge in New York, on Wednesday sided with a group of lenders to bankrupt auto-parts maker Delphi who said a government-orchestrated plan to sell Delphi operations trampled on their legal rights. The judge ruled that Delphi must revamp its auction process, allowing new bidders to challenge the government-brokered deal. Click here for the WSJ story, from our old friend Peter Lattman.

The ruling is a victory for a group of hedge funds who stand to lose up to 80% of the $4.5 billion in bankruptcy loans first extended in 2007. The Delphi case is the latest in an escalating debate over the Obama administration’s attitude toward creditors’ rights in bankruptcy court. The federal government has been criticized in both the Chrysler and General Motors bankruptcies for subverting bankruptcy law, harming senior lenders in order to complete a transaction.

“The rule of law and commercial rights of lenders cannot bend in the face of political forces,” said Marc Abrams, a lawyer for a group of the hedge funds, in a standing-room-only courtroom in lower Manhattan Wednesday before Judge Robert Drain.

The plan, which revolves largely around the financial aid of General Motors and a private-equity firm in Beverly Hills, Calif., called Platinum Equity, calls for Delphi’s most senior creditors owed in excess of $3.25 billion — to receive 20 cents on the dollar for their loans. The lenders argue that based on Delphi’s plan, the value of those loans could actually be worth far less than that. In a prior Delphi reorganization plan that collapsed in April 2008, such lenders were to be paid 100 cents on the dollar.

“A DIP loan should be money good,” said one of the lenders’ laywers. “It’s the T-bill of a bankruptcy claim.” A majority of the lenders would have to approve the plan, as would Judge Drain, who expressed similar skepticism as the lenders. He has set a July 23 deadline for approving a sale.

Full post as published by Law Blog - WSJ.com on June 10, 2009 (boomark / email).