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Bankruptcy

: Credit Slips

What did the Indiana funds want?

By Stephen Lubben

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Felix Salmon wonders about this editorial and why anyone would pay White & Case lots of money to contest either the Chrysler or GM deals. The editorial is easily dispatched as the usual jumble from people who can't be bothered to understand the actual deal structure.

The question of what the Indiana funds were up to and why anyone might want to hire White & Case to do the same thing in GM, where the dissenting creditors have an even weaker position, is less obvious.

The Indiana funds apparently paid $17 million for a stake in Chrysler's secured loan that had a face value of $43 million. That is, from inception they were investors in distressed debt and presumably understood the risk associated with that. Today they received $15 million as their share of the sale proceeds. That's exactly what they would have received on the first day of the case, but along the way the Indiana funds thought it might be nice to run up a bill with White & Case that must easily top $1 million, pursuing some arguments of dubious merit. Why do it?

One possible answer is that this is all about politics again. The politicians in control of these funds back in Indiana are Republicans and maybe they wanted to pester the Administration. Maybe, but a risky move given that if they had succeeded in derailing the sale, not only would the funds have lost substantially more money, but they would have put several thousand voters in Indiana out of work.

It's the last point -- and White & Case's desire to get into GM -- that makes me think this is a pure holdup play. I don't think the funds ever really wanted to "win" on the merits of their argument, rather they wanted to make themselves enough of a pest that Chrysler (or the Treasury) would pay them to go away. It's not an uncommon move in large chapter 11 cases, and its not new. In 1916 Paul Cravath, in explaining the stages of a railroad reorganization, stated:

You have now reached the stage when the professional obstructor is most likely to appear, if he has not already appeared. I was going to call him the professional striker, but that would hardly be fair, because the small security holder who seeks to obstruct a reorganization is not always a striker, by which I mean a person who seeks by creating a nuisance value for himself to force the payment of an amount wholly disproportionate to his interest in the property as the price of the withdrawal of the nuisance of his presence.

Sound familiar? There's not anything wrong with this strategy, so long as the attorney does not violate Rule 11, but it should be recognized for what it is.

Full post as published by Credit Slips on June 10, 2009 (boomark / email).