Yesterday, the “Truth About Cars” popped up with winning weird Chrysler rumor of the day, and then gave it credence. According to the “Truth,” Cerberus is thinking of suing Daimler, claiming that the sale of Chrysler was a “fraudulent transfer.” First, according to the claim, Cerberus would put Chrysler into bankruptcy – a Chapter 11 reorganization, to be precise – and then it would have the bankruptcy trustee sue, claiming that Chrysler concealed exactly how poor was the financial condition of Chrysler.
Sound familiar?
Legendary greenmailer Kirk Kerkorian tried a similar stunt after Daimler bought Chrysler, claiming that Daimler defrauded Chrysler shareholders because it was actually acquiring the company, not really merging with it.
Kerkorian sued for $9 billion.
He got nothing but a big bill for attorney’s fees. Nada from Daimler. His lawsuit got tossed out.
But, according to the “Truth,” the new master plan at Cerberus is to claim that they got suckered. The “Truth” says that this will shore up Cerberus’ reputation, making it seem like they weren’t complete dunces, but just got taken. Exactly how being a sucker is an improvement on being a fool isn’t so clear, particularly since it seems that Cerberus makes a practice of getting taken – they did, after all, buy GMAC just before it imploded. Nor is it obvious how filing Chapter 11 is going to help Chrysler sell cars and trucks, or have any business left to reorganize.
But, let us tarry a moment to consider the “Truth’s” notion, nonetheless.
The bankruptcy code does not exist to protect debtors from their stupidity. It exists to protect creditors from the debtor’s stupidity. The first group that gets paid in a bankruptcy is the “secured creditor,” i.e., the creditor who has a security interest in the debtor’s assets. Most of the bonds issued by Chrysler to finance the buy-out are secured by the company’s assets. The bond holders are secured creditors.
What that means is that if Daimler withheld information from Cerberus intending to con it into buying a worthless car maker, it is the bondholders – not Cerberus – who stands to reap the reward. The bond holders are first in line. The stockholders – Cerberus, in other words, are last in line. They come even after the ordinary unsecured creditor.
Under those circumstances, the motivation that Cerberus would have for taking Chrysler into bankruptcy court in order to sue Daimler is, to say the least, obscure.
But, there’s more:
It is an axiom of the legal profession that it is better to sue someone than not, and then wish you had. Should Cerberus sue Daimler claiming that Daimler pulled the wool over the eyes of Cerberus, you can be quite sure that the bondholders would immediately sue them both. They’d join Cerberus’ claim against Daimler, but then bring up their own claim. They’d claim Cerberus should have known better, that it didn’t do due diligence, and that it conned the bondholders into buying bonds that Cerberus should have known were, in fact, worthless.
By doing that, the bondholders would potentially have two pots of money to tap: Daimer and Cerberus. Of course, one of the very first things that the bondholders would do in that situation is seek court protection to prevent Cerberus from further wasting its assets. Cerberus already has one mortgage company it owns in Chapter 11 and GMAC’s not looking very healthy. A court might be reluctant to much interfere with Cerberus’ operations, at least without a pretty strong showing that it had been culpable. But, just the lawsuit would be enough to put an end to its ability to secure additional capital, either by borrowing or from luring in more investor cash.
The “Truth” actually got it right when it called this one a “wild ass” rumor.