Zero Hedge

A very good summary by Douglas Baird, professor at the University of Chicago law school, who analyzes the implications of the 363 sale and the (ab)use of 1129(a)(7) of the bankruptcy code on the Chrysler bankruptcy and why the first 5 days will likely be critical. In essence, this fair and equitable treatment of the case for creditors, who will likely lob objections to the 363 asset sale immediately, will be contingent on whether Judge Gonzalez will steamroll through objections in very much the same way Judge Peck gave roughly 3 nanoseconds of consideration to every creditor objection in the Lehman case before the fastest 363 sale ever, before immediately denying it. (of course referring to the "sale" of the Lehman US Broker-Dealer operations to Barclays for negative cash). If Gonzalez follows in Peck's footsteps, expect to see the Obama team try to get the 363 sale approved over the next day or two over any objections.

The following analysis from AmLaw Daily is a must read for people who want to follow the salient issues in the Chrysler bankruptcy (hat tip Jack).

Hello, Professor Baird. Lawyers today have been urging us to check out section 1129(a)(7) of the federal bankruptcy code, saying the bondholders who refused Treasury's deal are going to cite it to object to the Chrysler Chapter 11. We've read it, but want your expertise. What exactly does this part of the code mean?

This is known as the "best interests of creditors" rule. It says each individual creditor is entitled to at least as much as they would get in a straight-up liquidation of the company. What these bondholders could say is that, if you took the Jeep brand name, the transmission business--a really successful business--the real estate, the company jets--that all of these things add up to more than $2.25 billion. Therefore, Chrysler is worth more than $2.25 billion, and a judge shouldn't be able to confirm the reorganization plan because it does not follow 1129(a)(7).

That sounds like a solid argument.

There's a "but" coming, now, though.

Okay, tell us about that "but."

The plan for Chrysler is to have a 363 asset sale before the confirmation of the Chapter 11 plan. Chrysler will ask to hold an auction for their most desirable assets and the court will conduct a sale. The new Chrysler corporation will buy those assets for $2.25 billion, and what's left for the bondholders and the rest of the creditors is that pool of cash--$2.25 billion.

So by using the asset sale strategy under Section 363, Chrysler and the government are basically making objections under 1129(a)(7) moot? The bondholders can't even use that clause to argue they are not getting their fair share?

Yes, the sale moots [that argument]. They will not be able to use that argument to block the sale. And all that will be left for them is the proceeds from that sale. That's it. This is what they get.

So the process could go pretty quickly, considering Fiat is already on board. Is there anything the bondholders can do to upset this process?

Yes. The strategy they would have to use--and the one I think they will use--is to object to the 363 sale from the outset.

On what grounds can they do that?

They will have to argue that it's not actually a sale--that it's an end run around their rights under 1129(a)(7)--that this not a sale, but rather a reorganization plan disguised as a sale.

Could that work?

Well, I'm not their lawyer. But I would bet this is what their lawyers are telling them to do. This is certainly the argument I would be making if I were their lawyer