[...]

Chrysler’s opening memorandum of law, however, does not address the important question of why, absent the consent of the dissident lenders, 65% of the equity in New Chrysler should go to junior creditors in satisfaction of their respective claims against Old Chrysler while the claims of senior dissenting lenders go unpaid?

One thing’s for sure, Chrysler’s (and soon GM’s) court battles will afford us a rare opportunity to witness one of bankruptcy law’s most fundamental questions being litigated in the highest stakes battles of all time: when does the “absolute priority rule” which establishes a hierarchy of recovery rights among creditor classes, take a back seat to the “fresh start,” rehabilitative policy of chapter 11?

Chrysler’s opening memorandum touched upon this question by focusing on the US Supreme Court’s pronouncement in NLRB v. Bildisco & Bildisco, 465 U.S. 513, 528 (1984). The Court stated that the “fundamental purpose of reorganization is to prevent the debtor from going into liquidation, with an attendant loss of jobs and possible misuse of economic resources.” This principle, Chrysler argues, is paramount and (quoting NY’s judicial patriarch, Bankruptcy Judge Lifland, in the old Eastern Airlines case) “all other bankruptcy policies are subordinated” to it.

Many, however, will surely disagree with Judge Lifland’s statement from twenty years ago that all bankruptcy policies should be subordinated to the reorganization objectives of the Bankruptcy Code. Indeed, even on a practical level, as “Chapter 11’s Failure in the Case of Eastern Airlines” note, such a policy is a failure:

Eastern Airlines’ bankruptcy illustrates the devastating effect of court-sponsored asset stripping—using creditors’ collateral to invest in negative net present value “lottery ticket” investments—on firm value. During bankruptcy, Eastern’s value dropped over 50%. We show that a substantial portion of this value decline occurred because an over-protective court insulated Eastern from market forces and allowed value-destroying operations to continue long after it was clear Eastern should be shut down.

And what of Northern Pacific Railway Co. v. Boyd?

Following the Panic of 1893, shareholders and bondholders combined in a proposed reorganization plan to transfer the debtor’s assets to a new company that they would own, while freezing out the railroad’s general unsecured creditors, whose priority fell between the bondholder and shareholder classes (sound familiar?).

The unsecured creditors argued that the foreclosure sale contemplated by the plan “was the result of a conspiracy between the bondholders and shareholders to exclude general creditors” from the new company.

The trial court overruled the unsecured creditors’ objection. They held that as the debtor was insolvent and there was no value for unsecured creditors (or in this case, the dissident lenders). So the unsecured are entitled to nothing.

[...]

Private equity firms see substantial breakup value in Chrysler alone. The Jeep brand plus its factories could bring $5 billion to $7 billion. At least a few of Chrysler's plants would be of interest to Hyundai Motor, Chinese automakers, Renault-Nissan, India's Tata Motors, and possibly Volkswagen. DaimlerChrysler Financial Services, almost a forgotten asset, earned about $2 billion last year. The wild card? A private buyer would have to negotiate UAW worker buyouts and figure out who pays for it.

What began last Thursday as a collection of about 20 investment firms holding a combined $1 billion in debt has dwindled to a set of five, holding a total of about $295 million. (The group apparently lost a member, since in a filing on Tuesday, it reported holding about $300 million.)

The members include three funds associated with Schultze Asset Management; Stairway Capital Management; Oppenheimer, which holds debt in two funds; Group G Partners, which has holdings in two funds; and Foxhill Capital Partners.

By opposing the Obama administration’s out-of-court debt restructuring plan, this group of holdout creditors has found themselves in the national spotlight. Last Thursday, as Chrysler filed for bankruptcy protection in New York, President Obama criticized the holdouts as “speculators,” even as the creditors argued that they were being treated unfairly under the government’s plan.

The majority of the holders of Chrysler’s $6.9 billion in senior secured debt, a group led by JPMorgan Chase, has agreed to accept the government’s proposal and take a big loss on their holdings.

Another characterized Obama was "the most dangerous smooth talker on the planet- and I knew Kissinger."