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Hearing Date: August 13, 2009 at 9:30 a.m (Eastern time) (expedited hearing requested)Objection Deadline: August 10, 2009 at 4:00 p.m. (Eastern time) (expedited deadline requested)
KRAMER LEVIN NAFTALIS & FRANKEL LLPThomas Moers MayerKenneth H. EcksteinPhilip Bentley1177 Avenue of the AmericasNew York, New York 10036(212) 715-9100
Counsel for the Official Committee of UnsecuredCreditors of Old Carco LLC (f/k/a Chrysler LLC), et al.
UNITED STATES BANKRUPTCY COURTSOUTHERN DISTRICT OF NEW YORK
x
In re: : Case No. 09-50002 (AJG)
OLD CARCO LLC (f/k/a CHRYSLER : Chapter 11LLC), et al.,
Debtors.x
(Jointly Administered)
MOTION OF THE OFFICIAL COMMITTEE OF UNSECURED CREDITORSFOR AN ORDER AUTHORIZING IT TO PURSUE CERTAIN CLAIMS
ON BEHALF OF THE ESTATE OF DEBTOR OLD CARCO LLC
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The Official Committee of Unsecured Creditors (the "Creditors' Committee" or
"Committee") of Old CarCo LLC (facia Chrysler LLC) ("Chrysler" or the "Debtor"), by and
through its undersigned counsel, submits this motion (the "Motion") for an order authorizing the
Committee to pursue certain claims on behalf of the Debtor's estate against Daimler AG
("Daimler") and related parties.
Preliminary Statement
Two months ago, by order dated June 5, 2009, this Court approved a global
settlement agreement, known as Settlement Agreement III, among the Debtors, Daimler and a
number of other parties. Among other things, this agreement provided for a broad release of the
Debtors' claims against Daimler, subject to a crucial carve-out. Specifically, the agreement gave
the Committee a two-month time period to investigate the Debtors' potential claims against
Daimler and to determine which' claims have merit and should be pursued. So long as the
Committee complies with specified procedures --- including filing a timely complaint against
Daimler after obtaining leave of Court to prosecute these claims on the Debtors' behalf — the
agreement exempts the claims brought by the Committee from the release given to Daimler. By
agreement of the parties, the deadline for the Committee to file suit against Daimler has been
extended to August 18, 2009.
The Committee's investigation has confirmed that the Debtor's estate possesses
claims against Daimler and related parties that, in the Committee's view, are meritorious and
have enormous potential value to the Debtors' estates. These claims are set forth in the draft
complaint (the "Proposed Complaint") attached as Exhibit A to this Motion. The firms of
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REDACTED COPYSusman Godfrey LLP and Stutzman, Bromberg, Esserman & Plifka have agreed to jointly
prosecute the Proposed Complaint on the Committee's behalf on a modified contingent fee basis,
an arrangement that will limit the cost of the suit to a small fraction of what it might otherwise
cost to pursue. By this Motion, the Committee seeks an order authorizing it to prosecute these
claims against Daimler, as well as against two Daimler affiliates and four former directors of the
Debtors.
The claims set forth in the Proposed Complaint arise out of a series of transactions
engineered by Daimler in 2007, which stripped Chrysler of its most valuable assets for grossly
inadequate consideration.' Daimler, the German car manufacturer, had acquired Chrysler in
1998.
Over the years, Chrysler has had a succession of names — first Chrysler Motors Corporation, then DaimlerChryslerCorporation, then DaimlerChrysler Corporation LLC, then Chrysler LLC, and finally Old CarCo LLC.
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The Committee seeks to hold Daimler responsible in damages for the billions of
dollars in assets stripped from Chrysler. The Proposed Complaint asserts claims against Daimler
and two of its affiliates for intentional and constructive fraudulent transfer, as well as claims
against Daimler and four former Chrysler directors for breach of fiduciary duty. The
Committee's determination that these claims have merit and should be pursued has been
corroborated by the independent judgment of the Susman Godfrey and Stutzman Bromberg
firms, which have agreed to pursue the claims on a largely contingent basis, thereby sparing the
estate most of the expense of this litigation. The Committee respectfully submits that the
Proposed Complaint amply satisfies the requirements set forth by the Second Circuit in In re
STN Enterprises, 779 F.2d 901 (2d Cir. 1985) ("STN"), and requests an order authorizing the
Committee to file and prosecute the claims set forth in the Proposed Complaint. 2
Jurisdiction, Venue and Statutory Predicates
1.
This Court has jurisdiction to consider this matter pursuant to 28 U.S.C.
§§ 157 and 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper
2 As required by Settlement Agreement III, the Committee today delivered to the Debtors a written demand that theDebtors inform the Committee by August 10 whether or not they intend to prosecute the claims set forth in theProposed Complaint, and if they intend to do so, that they file a complaint of their own by August 11, 2009.
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REDACTED COPYbefore this Court pursuant to 28 U.S.C. §§ 1408 and 1409. The statutory predicates for this
Motion are Bankruptcy Code §§ 1103(c)(2) and (5) and 1109(b).
Procedural Background
2. On April 30, 2009 (the "Petition Date"), the Debtors commenced their
reorganization cases in this Court by filing voluntary petitions for relief under chapter 11 of the
Bankruptcy Code. The Debtors continue to operate their businesses and manage their properties '
as debtors-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
3. On May 5, 2009, the Office of the United States Trustee for the Southern
District of New York appointed the Creditors' Committee to represent the interests of all
unsecured creditors in these chapter 11 cases. The current members of the Committee are: (i)
International Union, United Automobile, Aerospace & Agricultural Implement Workers of
America, UAW; (ii) AutoNation, Inc.; (iii) DARCARS Imports, Inc.; (iv) Desiree Sanchez; and
(v) Patricia Pascale.'
4. On June 5, 2009, the Court issued an order that authorized certain Debtors
to enter into that certain Settlement Agreement HI, dated as of June 5, 2009 ("Settlement
Agreement III"), by and among Daimler, Daimler North America Finance Corporation
("DNAF"), Daimler Investments US Corporation ("DIUS", and together with Daimler and
DNAF, the "Daimler Parties"), CG Investment Group, LLC, CG Investor, LLC, Chrysler
Holding LLC, Carco Intermediate Holdco I LLC, Chrysler LLC, and the Pension Benefit
Guaranty Corporation ("PBGC").
3 As a result of the consummation of a sale transaction involving the Debtors and Fiat S.p.A., six Committeemembers — Continental Automotive Systems, Inc., Cummins, Inc., Magna International, Inc., Ohio ModuleManufacturing Co., Pension Benefit Guaranty Corporation, and Zanetti Chrysler Jeep Dodge — have resigned fromthe Committee.
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REDACTED COPY5. Settlement Agreement III provides for the release 'of certain claims against
certain parties, including the Daimler Parties. However, it provides that the Debtors' release of
claims against the Daimler Parties will be effective only until the later of (a) 45 calendar days
after the entry of the order approving the Settlement Agreement III (which time period would
have terminated on July 20, 2009), unless the Creditors' Committee during such period delivers
to Debtors' counsel a demand (the "Committee Demand") for the Debtors to bring claims against
the Daimler Parties as set forth in a proposed complaint, and (b) 25 calendar days after the
delivery of the Committee Demand (but in no event later than August 4, 2009), unless by that
date a complaint asserting. claims against the Daimler Parties is filed by the Debtors or by the
Committee (after obtaining leave of Court) if the Debtors do not do so.
6. On July 20 and 27, 2009, the Court "so ordered" stipulations modifying
Settlement Agreement III to provide the Committee with an additional two weeks (until August
3, 2009) to deliver the Committee Demand, and an additional 15 days (until August 18, 2009) to
file a complaint on behalf of the Debtors' estates after obtaining leave of Court to do so.
7. Today, in accordance with section 6(b) of Settlement Agreement III and
the Court's orders, the Creditors' Committee served the Debtors (with a copy to the Daimler
Parties) with a copy of the Proposed Complaint, together with a written demand that the Debtors
inform the Committee by August 10 whether or not they intend to prosecute the claims set forth
in the Proposed Complaint, and if they intend to do so, that they file a complaint asserting those
claims by no later than August 11, 2009.
The Committee's Investigation of Claims Against Daimler
8. In early June 2009, the Creditors' Committee began an investigation into
the existence and viability of potential claims arising out Daimler's restructuring of the Debtor
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REDACTED COPYand subsequent sale of the Debtor to Cerberus in 2007, including whether certain transfers that
occurred in connection with this restructuring were fraudulent and violated Daimler's fiduciary
duties to the Debtor and its creditors. In furtherance of its investigation, the Committee filed a
motion for an order authorizing Rule 2004 discovery, which order was entered by this Court on
June 17, 2009.
9. During the course of its investigation, the Committee served Rule 2004
discovery requests on six parties, reviewed many thousands of pages of documents, and
conducted depositions and interviews of witnesses produced by, among others, the Debtors,
Chrysler LLC, Daimler and Daimler's advisors Ernst & Young LLP ("E&Y"), Houlihan Lokey
Howard & Zukin, Inc. ("Houlihan Lokey"), and JP Morgan Chase & Co ("JP Morgan"). The
Committee was assisted in its efforts by its financial advisor, Mesirow Financial Consulting
LLC, which analyzed and interpreted financial and industry data, including business projections,
financial statements, valuations, analysts reports and myriad other relevant materials.
10. The Committee's Rule 2004 discovery took place within a very tight time
frame, particularly considering the complexity of the restructuring and sale transactions, as well
as the fact that several key parties are located in foreign jurisdictions. Moreover, many of the
parties that produced Rule 2004 discovery did not produce all subpoenaed documents or
witnesses, and sufficient time was not available to compel full compliance. For these reasons,
the Committee's investigation was necessarily preliminary, and many relevant issues and
transactions will need to be further explored through merits discovery.
The Proposed Complaint
11.It is apparent from the Committee's investigation that Daimler's 2007
restructuring of the Debtor stripped it of its most valuable assets, causing billions of dollars of
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REDACTED COPYdamages and leaving the Debtor insolvent or deepening its existing insolvency. The Debtor's
resulting claims against Daimler are set forth in the Proposed Complaint, which we summarize
below.
12.
13.
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21. Based on the allegations just summarized, the Proposed Complaint asserts
claims against Daimler and others for fraudulent transfer, breach of fiduciary duty and related
claims:
a. Counts I through IV assert constructive fraudulent transfer claims againstDaimler,.DCNAH and DC Holding under sections 544, 548 and 550 of theBankruptcy Code and New York Debtor & Creditor Law ("NY DCL") §§273, 273-a, 274 and 275.
b. Counts V and VI assert intentional fraudulent transfer claims againstDaimler, DCNAH and DC Holding under Bankruptcy Code §§ 544, 548and 550 and NY DCL §§ 276 and 276-a.
c. Counts VII and VIII assert claims for breach of fiduciary duty against fourformer directors of the Debtor, as well as against Daimler as the Debtor'scontrolling shareholder.
d. Count IX asserts a claim against Daimler for unjust enrichment.
e. Count X asserts a claim against Daimler as the corporate alter ego of itssubsidiaries Holding, DCNAH and DC Holding.
The Committee's Engagement of Susman Godfrey and Stutzman Bromberg toProsecute the Proposed Complaint on a Modified Contingency Fee Basis
The Committee has reached agreement with the law firms of Susman Godfrey and
Stutzman Bromberg, subject to documentation, on the terms of a modified contingent fee
agreement. Specifically, these firms will prosecute the claims set forth in the Proposed
Complaint on the Committee's behalf in exchange for attorneys' fees equal to (a) an up-front flat
fee of $2 million, and (b) a contingent fee equal to 20% of any recovery up to $200 million
obtained in the Committee's suit, plus 15% of any recovery in excess of $200 million. The
Committee will be responsible for payment of up to $7.5 million in expert fees and other costs,
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REDACTED COPYand Susman Godfrey and Stutzman Bromberg will be responsible for payment of any costs in
excess of $7.5 million. By its terms, this agreement will ensure that the cost to the Committee of
prosecuting this suit is in no event more than $9.5 million.
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REDACTED COPYARGUMENT
^.
The Committee Has a Right to Initiate Adversary Proceedings in theName of the Debtor With the Approval of the Bankruptcy Court
22. The Second Circuit has held that "there is a qualified right for creditors'
committees to initiate adversary proceedings in the name of the debtor in possession with the
approval of the bankruptcy court." In re Commodore Intl Ltd., 262 F.3d 96, 99 (2d Cir. 2001)
("Commodore") (quoting STN, 779 F.2d at 904) (internal quotation marks omitted). The
Bankruptcy Court may approve a creditors' committee initiating such adversary proceedings
where the debtor either unjustifiably fails to bring suit or consents to the creditors' committee's
suit. STN, 779 F.2d at 904; Commodore, 262 F.3d at 100; see also In re KDI Holding, 277 B.R.
493, 507-08, 519 (Bankr. S.D.N.Y. 1999) (Gonzalez, J.) (discussing STN).
23. Where a debtor refuses to bring suit, the Court must decide whether the
refusal is unjustifiable by determining whether (i) "the committee presents a colorable claim or
claims for relief that on appropriate proof would support a recovery," and (ii) "an action
asserting such claim(s) is likely to benefit the reorganization estate." STN, 779 F.2d at 905. The
latter determination includes, among other things, consideration of the "probabilities of legal
success and financial recovery in the event of success" and "the terms relative to attorneys' fees
on which suit might be brought." Id. Where a debtor consents to a committee bringing suit, the
Second Circuit has stated that a Court must determine whether the suit is "in the best interest of
the bankruptcy estate" and "is necessary and beneficial to the fair and efficient resolution of the
bankruptcy proceedings." Commodore, 262 F.3d at 100 (internal quotation marks omitted).
24. In making the determinations required by STN and Commodore, the Court
should not conduct a mini-trial. STN, 779 F.2d at 905-06; see also In re Adelphia •Commc'ns
Corp., 330 B.R. 364, 369 (Bankr. S.D.N.Y. 2005) ("[1]t was inappropriate for the Court to
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REDACTED COPYconduct a `mini-trial' or evidentiary hearing on the ... STN issues."). "Because the creditors'
committee is not required to present its proof, the [standing] inquiry is much the same as that
undertaken when a defendant moves to dismiss a complaint for failure to state a claim." In re
America's Hobby Center, Inc., 223 B.R. 275, 282 (Bankr. S.D.N.Y. 1998); accord, KDI, 277
B.R. at 508.
>I.
The Court Should Authorize the Committee to File the Proposed Complaint
25. The Proposed Complaint readily satisfies both the STN standards (which
will apply if the Debtor refuses to commence suit) and the Commodore standards (which will
apply if the Debtor consents to the Committee's suit). The Proposed Complaint's principal
claims rest squarely on black letter principles of fraudulent transfer and breach of fiduciary duty
and would, if successful, support a recovery in the billions of dollars. In contrast, the cost to
prosecute the suit amounts to a tiny fraction of the potential recovery — particularly given the
Committee's modified contingency fee agreement with Susman Godfrey and Stutzman
Bromberg, which caps the cost at less than $10 million.
A.
The Claims For Constructive and Intentional Fraudulent Transfer
26. Counts I and II of the Proposed Complaint rest on basic constructive
fraudulent transfer principles. These claims assert that the transfers that Daimler caused Chrysler
to make —
— were made for far less
than fair consideration (specifically, assets with an aggregate value of less than $ ).
Moreover, these transfers either rendered Chrysler insolvent or deepened its already-existing
insolvency. See Bankruptcy Code § 548(a)(l)(B). As a remedy, the Proposed Complaint seeks
to recover more than $3 billion of transferred assets' or their value from two subsequent
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REDACTED COPYtransferees ( ), and seeks also to recover the value of all transferred
assets from Daimler as the entity for whose benefit these transfers were made. See Bankruptcy
Code § 550(a)(1), (2); see also, e.g., In re Buckhead America Corp., 178 B.R. 956, 962 (D. Del.
1994) (fraudulent transfer claim was properly pled against corporate parent under Bankruptcy
Code § 550 where complaint alleged parent benefited from subsidiary's alleged fraudulent
transfer); In re Join-In International (U.S.A.) Ltd., 56 B.R. 555, 561 (Bankr. S.D.N.Y. 1986)
(denying defendant's motion for summary judgment on fraudulent transfer claim because
defendant was corporation's sole shareholder and "potentially a beneficiary of the transfer . . . in
the form of a dividend"). 6
27. Counts V and VI rest on equally settled principles of intentional fraudulent
transfer. The Proposed Complaint alleges, in considerable detail, that Daimler caused the Debtor
to make the challenged transfers in order to put the transferred assets beyond the reach of the
Debtor's creditors. This claim is amply supported by the usual "badges of fraud," including the
inadequacy (or in several instances, the complete absence) of consideration for the transfers, the
extremely close relationships between the transferor and the transferees, and the cumulative
effect of the multiple transfers that stripped the Debtor of its most valuable assets. See Salomon
v. Kaiser, 722 F.2d 1574, 1582-83 (2d Cir. 1983).
6 Counts III and IV assert additional constructive fraudulent transfer claims, each of which rests on principlesparticular to New York law. Count III asserts that the transfers were fraudulent because (a) the Debtor received lessthan fair consideration, and (b) at the time of the transfers, multiple lawsuits were pending against the Debtor thatsubsequently resulted in unpaid judgments or settlements. See NY DCL § 273-a. Count IV rests on allegations thatDaimler caused the Debtor, while insolvent, to repay approximately $ - of third party debt that Daimlerhad guaranteed. These repayments were not made in good faith, and therefore constituted constructive fraudulenttransfers under New York law for which Daimler is liable as the party for whose benefit the payments were made,because they were made for the benefit of Daimler, a corporate insider. See Levit v. Ingersoll Rand Financial Corp.(In re V.N. Deprizio Construction Co.), 874 F.2d 1186, 1194 (7th Cir. 1989) (corporate insider may be liable fordebtor's repayment to third party tender, within the preference period, of debt it guaranteed); see also.HBE LeasingCorp. v. Frank, 48 F.3d 623, 634 (2d Cir. 1995) ("New York courts have carved out one exception to the rule thatpreferential payments of pre-existing obligations are not fraudulent conveyances: preferences to a debtorcorporation's shareholders, officers, or directors are deemed not to be transfers for fair consideration.").
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B.
The Claims For Breach of Fiduciary Duty
28. The breach of fiduciary duty claims, Counts VII and VIII, also rest on
black letter principles — in particular, Delaware corporate governance principles concerning
conflict of interest. It is fundamental that corporate directors and controlling shareholders owe a
duty of loyalty to the corporation and, when the corporation is insolvent or in the zone of
insolvency, to the corporation's creditors. See Claybrook v. Morris (In re Scott Acquisition
Corp.), 344 B.R. 283, 286-88 (Bankr. D. Del. 2006) ("[T]he directors and officers of an insolvent
wholly-owned subsidiary owe fiduciary duties to the subsidiary and its creditors."). This duty
requires a corporation's directors and controlling shareholder to act free from any conflict of
interest and, where such a conflict arises, to bear the burden of proving the entire fairness of their
actions. See Weinberger v. UOP, Inc., 457 AD.2d 701, 710 (Del. 1983) ("The requirement of
fairness is unflinching in its demand that where one stands on both sides of a transaction, he has
the burden of establishing its entire fairness, sufficient to pass the test of careful scrutiny by the
courts.").
29. Here, Chrysler's transfers of FinCo and other assets to affiliates owned
and controlled by Daimler posed an obvious conflict between Chrysler's and Daimler's interests.
Nevertheless, every one of the Chrysler board members who voted to approve these transfers sat
on the board not only of Chrysler but of Daimler as well; not one director was independent.
Consequently, each of the four director defendants bears the burden of proving the entire fairness
of these transfers. Daimler bears this burden as well, given the undeniable control it had over
Chrysler as its sole shareholder and its use of that control to cause Chrysler to make these
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Notice
30. Notice of this Motion has been provided to (i) the U.S. Trustee, (ii)
counsel to the Debtors, (iii) counsel to Daimler, and (iv) all parties identified on the General
Service List and the Special Service List (as such terms are defined in the Case Management
Order]. The Creditors' Committee submits that no other or further notice is required.
Memorandum of Law
31. As this Motion includes citations of legal authority, the requirements of
Local Bankruptcy Rule 9013-1(b) for the submission of a memorandum of law
contemporaneously herewith has been satisfied pursuant to the Court's Case Management Order
No. 2, entered in these Cases on January 27, 2009.
No Prior Request
32. No prior request for the relief sought herein has been made by the
Creditors' Committee to this or any other Court.
Conclusion
33. The Creditors' Committee respectfully requests that this Court enter an order
authorizing the Committee to file and prosecute the claims set forth in the Proposed Complaint
' The Proposed Complaint's two remaining claims are for unjust enrichment (Count IX) and corporate alter ego(Count X). The unjust enrichment claim asserts that Daimler benefited unjustly from the transfers, and that it isinequitable for Daimler to have received these transfers without paying for their value. The alter ego, a/k/a veil-piercing, claim seeks to hold Daimler liable for the obligations of its subsidiaries DCNAH and DC Holding (but notfor Chrysler's obligations), on the ground that Daimler dominated and controlled those subsidiaries, functioned as asingle economic unit with them, and used them to commit a fraud on Chrysler's creditors. See Morris v.Mergenthaler, 1980 WL 268072, at *2 (Del. Ch. 1980) ("The plaintiffs' general allegations as to facts concerning aclose interrelationship between the defendants and as to corporate assets which have purportedly been fraudulentlyconveyed, appear to be sufficient averments of the elements of a claim [for piercing the corporate veil] to withstandthe test of a motion to dismiss."); Sonne v. Sacks, 314 A.2d 194, 197 (Del. 1973) (piercing claim available against"other corporations which have received assets without consideration" as an equitable claim when fraudulentconveyance unavailable).
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REDACTED COPYon behalf of the Debtor's estate, and granting such other relief as the Court deems proper.
Dated: New York, New YorkAugust 3, 2009
Respectfully submitted,
KRAMER LEVIN NAFTALIS & FRANKEL LLP
By:
Is/ Philip Bentley.
Thomas Moers MayerKenneth H. EcksteinPhilip Bentley1177 Avenue of the AmericasNew York, New York 10036(212) [email protected]
Counsel for the Official Committee of UnsecuredCreditors of Old Carco LLC (f/k/a Chrysler LLC),et al.
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