May 1, 2009 at 1:00 am

Pain and gain await Chrysler in bankruptcy court

The "very quick type of bankruptcy" President Barack Obama promises for Chrysler LLC may be quick, but it will only be partial -- and certainly not painless.

Bankruptcy experts said Thursday that while some Chrysler assets could be sold in 30-60 days as the administration envisions, other aspects of Thursday's Chapter 11 filing will drag on for years.

"Part of Chrysler will come out of the bankruptcy process pretty quickly, but I think the rest of the case could take a couple of years to resolve," said Stephen Lubben, a law professor at Seton Hall University School of Law.

A "clean Chrysler" is likely to emerge in a sale under Section 363 of the bankruptcy code, where some Chrysler assets are sold, free and clear, to a new entity.

A clean Chrysler can then move forward with a new capital structure, out from under its old debts and contracts. This is the Chrysler that will work with Fiat SpA, GMAC financing, a revamped union contract and fewer dealers.

But the leftovers, including assets the new company doesn't want and bad debt held by bondholders who wouldn't sign off on a new deal, will linger under a regular Chapter 11 bankruptcy reorganization. That part could drag on for years, as with the Delphi Corp. Chapter 11 case that's been crawling through bankruptcy court since 2005.

Chrysler will be able to operate normally, paying employees, suppliers and contractors and doing business as usual, although much of the company will be idled until the 363 sale.

After initial motions to continue business operations, Chrysler is expected to file for the asset sale within a week in U.S. Bankruptcy Court in New York, experts said. Other bidders could emerge at that point for Chrysler's assets.

Senior creditors with a claim on assets involved in the sale can file their objections. However, unlike a typical Chapter 11 case, Judge Arthur Gonzalez can approve the sale without the agreement of all creditors if the judge decides it's in the best interest of moving Chrysler forward.

"Those creditors will have a chance to object, but they won't have a vote," Lubben said. "My sense is that they will have a big ugly fight over the 363 sale."

That ability to fight -- rather than go along with the Obama administration's deal -- may be why some creditors resisted settling out of bankruptcy, said Sheryl Toby, of Dykema Gossett PLLC.

"They are likely to argue that it can't be done over their objections," Toby said. "Outside of bankruptcy, they couldn't make those arguments."

Once the dust from the initial legal fight settles, the real battle for Chrysler's future will move from bankruptcy court to the court of consumer opinion, noted Patrick Anderson, founder and CEO of Anderson Economic Group in East Lansing.

"A bankruptcy can be short and painful or long and painful but there is no short, painless bankruptcy," Anderson said. "And the judge doesn't have the power to order anyone to buy a Chrysler."

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