Key figures: Robert Nardelli (CEO, Chrysler LLC), Sergio Marchionne (CEO, Fiat), Steven Rattner and Ron Bloom (Presidential Task Force on the Auto Industry), Barack Obama (US President), Arthur J. Gonzalez (US Bankruptcy Judge)
Summary
Chrysler LLC and 24 affiliated subsidiaries filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York on April 30, 2009. The filing came after the company failed to reach an out-of-court agreement with its creditors by a deadline set by the Obama administration’s auto task force. Like the parallel General Motors case that followed five weeks later, the Chrysler reorganization was financed and directed by the US federal government and resolved through a government-backed “Section 363” sale that transferred the company’s viable operations to a new entity allied with the Italian automaker Fiat.
The expedited proceeding allowed the operating business to emerge from court protection in about six weeks, preserving Chrysler as a going concern in alliance with Fiat rather than liquidating it during the depths of the Great Recession.
Background
Chrysler’s finances collapsed during 2008 as the global financial crisis throttled vehicle sales and credit. The private-equity firm Cerberus Capital Management, which had acquired Chrysler in 2007 and installed former Home Depot chief Robert Nardelli as CEO, was unable to stabilize the company. In December 2008 the outgoing Bush administration extended Chrysler and GM emergency loans from the Troubled Asset Relief Program (TARP); Chrysler’s first major disbursement, roughly $4 billion, was made in early January 2009.
In January 2009 Chrysler and Fiat signed a term sheet under which Fiat would take an initial equity stake in exchange for fuel-efficient vehicle platforms, technology, and access to international distribution, contributing no cash. When Chrysler’s restructuring plans and creditor negotiations stalled, President Obama’s Presidential Task Force on the Auto Industry — led by advisers Steven Rattner and Ron Bloom — pushed the company into a managed bankruptcy as the condition for continued federal support.
The Bankruptcy and Section 363 Sale
The case was resolved not through a traditional reorganization plan but through a sale under Section 363 of the US Bankruptcy Code, in which substantially all of Chrysler’s productive assets were sold to a newly formed acquisition vehicle (New CarCo Acquisition LLC), free of most pre-existing liabilities. The remaining company was wound down. Judge Arthur J. Gonzalez approved the sale on May 31, 2009, and the transaction closed on June 10, 2009 after the US Supreme Court declined to block it. The surviving operating company was renamed Chrysler Group LLC.
At emergence, equity in the new company was allocated approximately as follows:
- the United Auto Workers retiree health-care trust (VEBA), the largest holder at roughly 67.7 percent of issued common equity;
- Fiat, an initial 20 percent, with contractual rights to increase its stake by meeting performance milestones;
- the US Treasury, about 9.85 percent; and
- the Canadian government (through Export Development Canada), about 2.46 percent.
The restructuring was contentious. Secured first-lien lenders recovered only a fraction of their claims, and a group of Indiana pension funds challenged the priority treatment all the way to the Supreme Court. Roughly a quarter of Chrysler’s US dealerships — close to 800 — were terminated, and several plants were excluded from the new company.
Aftermath
In total the US Treasury disbursed about $10.7 billion to Chrysler and recovered roughly $7.3 billion, recording a net loss of approximately $1.3 billion on the Chrysler portion of the auto rescue — among the larger single TARP losses. Fiat steadily increased its ownership, buying out the Treasury’s remaining stake in 2011 and acquiring the VEBA trust’s shares by January 2014 to become the sole owner; the combined enterprise was later reorganized as Fiat Chrysler Automobiles.
Significance
The Chrysler bankruptcy, together with the General Motors filing that followed on June 1, 2009, was one of the defining episodes of the Great Recession and one of the most consequential federal interventions in American industrial history. Chrysler’s case established the legal and structural template — a fast Section 363 sale to a government-backed new entity — that GM’s larger reorganization then followed. Supporters credited the rescue with preserving hundreds of thousands of jobs across the automakers, suppliers, and dealers; critics objected to the use of public funds, the subordination of secured creditors, and the alliance handing a controlling future stake to a foreign manufacturer. The episode became a central reference point in subsequent debates over government bailouts and the limits of federal economic intervention.
Sources
- 2009 Chrysler Chapter 11 reorganization — Wikipedia
- Chrysler — Eye on the Bailout — ProPublica
- Robert Nardelli — Britannica
- Implications of the Sale of Chrysler — Harvard Law School Forum on Corporate Governance