In an important ruling issued on Sunday, May 31, 2009, Bankruptcy Judge Arthur J. Gonzalez in the Southern District of New York approved the sale of Chrysler in exchange for two billion dollars in cash and the assumption of certain liabilities.[1]
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In connection with approval of this sale transaction, Judge Gonzalez opined on sub rosa challenges, the ability of a secured lender to object to a transaction if the administrative agent has consented, and the survival of tort claims after assets have been sold pursuant to section 363 of the Bankruptcy Code. The ruling makes it yet easier for debtors to consummate sales under section 363.

Background
On April 30, 2009, the date Chrysler filed for bankruptcy protection, Chrysler, Fiat S.p.A (“Fiat”) and New CarCo Acquisition LLC (“New Chrysler”), an acquisition vehicle formed by Fiat, entered into a Master Transaction Agreement (the “MTA”) in accordance with section 363 of title 11 of the U.S. Code (the “Bankruptcy Code”). Under the MTA, Chrysler would transfer substantially all of its operating assets to New Chrysler, in exchange for two billion dollars in cash and the assumption of certain liabilities (the “Sale Transaction”). Upon consummation of the Sale Transaction, New Chrysler agreed, pursuant to the MTA, to issue stock to certain interested parties: 67.69% to an independent Voluntary Employee Beneficiary Organization (the “VEBA”) for the benefit of certain Chrysler employees and retirees, 9.85% to the U.S. Treasury, 2.46% to Export Development Canada (“EDC”) and 20% to Fiat.[3]

Objections
Among the objecting parties were: a group of pension funds from the State of Indiana (the “Indiana Funds”) objecting, inter alia, on the grounds that the Sale Transaction amounted to a sub rosa plan; certain Chrysler dealers objecting to the attempted rejection of their dealership agreements and arguing that state dealer protection laws are not preempted by the Bankruptcy Code; and various tort and consumer claimants objecting that their claims were not “interests in property” and that Chrysler’s assets could not, therefore, be sold free and clear of them pursuant to section 363(f)(5) of the Bankruptcy Code. Judge Gonzalez (i) distinguished a valid sale transaction under section 363 of the Bankruptcy Code (a “363 sale”) from a sub rosa plan, (ii) enforced contractual provisions that restrict a minority secured lender’s standing to object and (iii) ruled that tort claims are extinguished in a 363 sale.[4]

Court Denies that the Sale Transaction is a Sub Rosa Plan
The Indiana Funds argued that the Sale Transaction was an attempt to circumvent chapter 11 requirements for plan confirmation and, thus, was a sub rosa plan of reorganization. Judge Gonzalez, expanding on and clarifying prior case law,[5] ruled that it is not a sub rosa plan for “a debtor [to] sell substantially all of its assets as a going concern and later submit a plan of liquidation providing for the distribution of the proceeds of the sale,” if such proceeds both (i) exceed the value that could be received in a liquidation and (ii) go directly to the first priority lenders. Judge Gonzalez went on to state that the receipt of equity interests in New Chrysler by the VEBA, the U.S. Treasury, EDC and Fiat are the result of separately negotiated agreements with New Chrysler – including the unprecedented modifications to the collective bargaining agreement between the United Auto Workers and New Chrysler for the VEBA, the financing that the U.S. Treasury and EDC will provide to New Chrysler and the provision of small car technology by Fiat – and are not on account of any prepetition claims. As such, he ruled that there had not been an inappropriate attempt to divert sale proceeds away from the Indiana Funds or to affect anything other than a pro rata distribution of the proceeds to all first priority claimants.

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