Monday, August 24, 2009

Chrysler Fraudulent Transfer Case Study Part I - Background

In my last post, I promised to break down the lawsuit filed recently by Chrysler LLC's creditors alleging fraudulent transfer against Daimler AG. That project begins with this entry, which discusses the procedural background, the parties, and the attorneys.

Chrysler LLC filed for Chapter 11 Bankruptcy relief earlier this year, at least in part in order to allow it to restructure itself for the purposes of partnering with Italian automaker Fiat. Since then, Chrysler LLC has been reorganized into a new company called Chrysler Group LLC, of which Fiat is part owner. As part of the Bankruptcy, in June the Federal government helped finance the sale of most of Chrysler LLC's assets to Chrysler Group LLC (New Chrysler) in the amount of $6.6 billion paid to Chrysler LLC (Old Chrysler). The Bankruptcy continues with respect to the remaining assets of Old Chrysler.

The Plaintiff in the fraudulent transfer action is the committee of creditors of Old Chrysler (New Chrysler is not involved). The Defendants are Daimler AG, several of its American subsidiaries, and several common members of the boards of Daimler AG and Old Chrysler (although Old Chrysler is the Bankruptcy debtor, it is not a fraudulent transfer lawsuit defendant). Daimler AG is a German company whose earliest predecessor began operations in the 1800s. In 1926, the company became Daimler-Benz AG, the name by which it was known until 1998, when it merged with Chrysler, and Daimler and Chrysler became sister companies under the newly created parent company DaimlerChrysler AG. What's now Daimler AG is the remainder of DaimlerChrysler AG after its sale of Chrysler to Cerberus Capital Management in 2007.

Daimler AG is sued in its capacity as the owner of Old Chrysler. The creditor's committee obtained court authority to pursue Daimler AG in the Bankruptcy Court earlier this month. Creditor's counsel has apparently taken the case on a contingency fee basis, which means their analysis of the claims made by the committee is that there is more than minimal merit to them (documents indicate the firms may have agreed to be responsible for a certain portion of the litigation costs as well, another good indicator of counsel's positive impression of the claims). They do appear to have been advanced $2 million in fees for taking the case, however. Commercial collection cases are often taken on a contingency fee basis (by my firm for example), but fraudulent transfer actions would only be pursued on contingency when the analysis of the claims indicates a strong likelihood of recovery of a significant amount of money. When there is too much of a risk of little or no recovery, creditor's attorneys will pursue the case (as long as it has merit), but only if the client agrees to pay for our services by the hour, and often in advance.

Obviously, this lawsuit does not represent the run of the mill collection case, and neither the complexity of the corporate structures involved in this lawsuit, nor their size, is typical. But as we will discuss in further detail in coming posts, the next with respect to the allegations of fraudulent transfer under the Bankruptcy Code, the issues and the analysis are quite similar.

Wednesday, August 19, 2009

The Daimler Chrysler Fraudulent Transfer Lawsuit: A Case Study

Earlier this month, United States Bankruptcy Judge Arthur Gonzalez in New York entered an order allowing an organization of creditors of former Chrysler LLC to file a lawsuit against Daimler AG alleging fraudulent transfer of a significant portion of Chrysler's assets on the eve of the 2007 sale of Chrysler by Daimler to Cerberus Capital Management LP. The lawsuit was filed Monday, and I have reviewed a redacted version thereof.

The 31 page complaint alleges that Daimler recognized in 2006 that its merger with Chrysler would ultimately prove to be detrimental to Daimler, partially because Chrysler's pension and employment related liabilities (and Daimler's potential responsibility for those liabilities) outweighed its assets, the most valuable of which were its financial services subsidiaries (collectively FinCo). According to the complaint, in an effort to segregate FinCo from Chrysler's liabilities in anticipation of selling the company, Daimler carried out an intricate restructuring plan, which resulted in Daimler and its own subsidiaries receiving in excess of $9 billion in Chrysler assets in exchange for Chrysler's receipt of a promissory note valued at roughly $1.5 billion and equity in arms of Daimler that were allegedly "worthless." Then, it is alleged, Daimler sold a majority of FinCo (without Chrysler's liabilities) to Cerberus for roughly $7 billion, $3.45 billion of which went to Chrysler, $2.275 billion to FinCo (who then immediately paid off the note owed to Daimler), and $1.212 directly to Daimler. According to the complaint, these transfers were made with the knowledge on the part of Daimler that there were numerous lawsuits pending against Chrysler that could be satisfied, at least partially, with the transferred assets; and with the intent on the part of Daimler to defraud Chrysler creditors.

The creditors seek damages against Daimler on theories of constructive and intentional fraudulent transfer under the Bankruptcy Code, and on state law causes of action for breach of Daimler's fiduciary duty as sole shareholder and controlling force behind all Chrysler decisions, unjust enrichment, and corporate alter ego liability. Daimler has filed no formal response to the complaint yet, as the time to do so has not come, but their initial reaction to the lawsuit is that it is without merit.

This case should be of interest to business debtors and creditors of all shapes and sizes (and their attorneys) because it highlights the remedies available to creditors when assets that could be used to satisfy creditor claims are transferred beyond the reach of creditors without justification, and hopefully it will provide the public some insight into how these remedies are obtained (or avoided). Over the next few weeks we will present a discussion on each theory of liability raised by Chrysler's creditors (and on the defenses raised by Daimler), with an aim toward relating these issues to more typically-structured businesses and their attorneys.