May 9, 2009 at 1:00 am

Chrysler holdouts drop the fight, clearing way out of bankruptcy

Washington -- The surrender Friday of a group of Chrysler's dissatisfied lenders removed the largest remaining obstacle to the automaker's quick emergence from bankruptcy.

The holdout creditors -- who had argued that the Auburn Hills automaker's restructuring plan violated basic requirements of bankruptcy law -- gave up their fight Friday after two major members of the group dropped out.

The remaining lenders -- three New York investment funds -- represented just a fraction of Chrysler's outstanding debt, and acknowledged they had basically been outvoted.

"They just don't have the critical mass to withstand the enormous pressure and machinery of the U.S. government," said Thomas Lauria, an attorney for the objectors, in a written statement, taking another swipe at the Obama administration, which has labeled holdouts "speculators" who had refused to sacrifice to save the company.

Bankruptcy experts said that while surprises can pop up in court, the lenders were the largest remaining obstacle to a restructured Chrysler's emergence within the administration's aggressive 60-day time frame.

"I don't see any remaining impediment," said Lynn LoPucki, a bankruptcy expert at the University of California-Los Angeles law school.

Chrysler spokeswoman Shawn Morgan said the company is "pleased with the decision by the minority secured lenders to withdraw their opposition to Chrysler's proposed sale to Fiat. We believe this is in the best interests of all of Chrysler's stakeholders," Morgan said.

Judge orders IDs revealed

Friday's developments ended an organized resistance that began crumbling nearly as soon as it began.

The lenders, originally believed to hold a combined total of about 15 percent of Chrysler's $6.9 billion in secured debt, rejected the government's final offer of about $2.25 billion in cash, pushing Chrysler into bankruptcy April 30 and sparking rhetorical attacks from the administration and Congress.

Just hours after Chrysler filed for bankruptcy, Perella Weinberg, one of the dissident lenders, capitulated.

Others in the group, believed to include about 20 fund managers, peeled away. On Wednesday, after a New York bankruptcy judge ordered them to reveal their identities, only nine investment funds remained -- representing just $295 million in debt.

Two more firms surrendered Friday morning: Stairway Capital Management and OppenheimerFunds. The rest soon followed.

During their brief rebellion, the lenders and their lawyer became heroes to conservative critics of the Obama administration and much of the financial world.

Lauria accused the White House of assaulting bankruptcy law and the Constitution, and using threats to get its way. He didn't let up Friday.

"Undue pressure has been brought to bear by the executive branch to coerce (lenders) to accept the pending proposal," Lauria said.

The White House has denied Lauria's accusations.

While administration officials had promised a swift, 60-day bankruptcy, the lenders could have badly upset that calendar, said Douglas Baird, a University of Chicago law professor.

Group had 'strong' position

"Whatever you think of them as human beings, they had a very, very strong legal position," he said.

As secured lenders, they were entitled to what the bankruptcy code calls "absolute priority" -- entitled to be paid before any unsecured lenders.

But Chrysler's plan upends that priority, calling for a United Auto Workers health care fund to get 55 percent of the restructured company.

The lenders are now likely to get $2 billion in cash to swap the $6.9 billion debt. The Treasury Department is likely to forgive up to $7 billion in loans for Chrysler in exchange for an 8 percent equity stake.

"The idea that this could have gone to (an appeals court) or been overturned, or that the lenders could have created a lot of noise and delay -- this was a much bigger obstacle than the press understood," Baird said.

The White House celebrated elimination of that obstacle.

"Despite some skepticism that Chrysler could do this quickly, I think that the (Obama) auto team and the president are heartened that this appears to be happening as quickly as we had hoped," said White House press secretary Robert Gibbs.

Experts also suggested the development could resonate at General Motors Corp., which faces its own government-imposed June 1 deadline to strike a deal with its unsecured creditors or enter bankruptcy.

"It certainly has to make it more likely that GM's bondholders will make concessions," said Dana Johnson, chief economist at Comerica Bank.

GM wants at least 90 percent of its bondholders to swap $27 billion in debt in exchange for 10 percent equity in the firm, which would give bondholders between zero and 5 cents on the dollar, analysts said.

Deb Price and Alisa Priddle contributed."> (202) 662-8738