Aug. 13 (Bloomberg) -- Chrysler LLC creditors won permission to sue Daimler AG over $9 billion in transfers, saying law firm Susman Godfrey LLP will take the case on contingency after the U.S. Treasury said they can’t use the estate’s assets to fund it.

U.S. Bankruptcy Judge Arthur Gonzalez in Manhattan today said creditors can bring the lawsuit, though it’s undecided how they would share any proceeds with the U.S. and Chrysler’s bank lenders. Thomas Mayer, a lawyer for creditors, told Gonzalez that three law firms competed to take the suit on contingency, indicating the case may have merit.

“The lawsuit is in the best interests of the estate,” Gonzalez said. A redacted version of the suit will be filed no later than Aug. 18, Mayer said.

Creditors previously won the right to probe Chrysler’s 1998 acquisition by Daimler-Benz AG and 2007 sale to an affiliate of Cerberus Capital Management LP. The creditors claim Stuttgart, Germany-based Daimler moved $9 billion out of Chrysler in 48 fraudulent transfers, driving the automaker into bankruptcy.

“The lawsuit is without merit,” Daimler lawyer Alan Goudiss said in a phone interview. In court documents, Daimler said it “nurtured” Chrysler for nine years before selling control to Cerberus at a “steep loss” in a deal that injected $5 billion in fresh equity capital into the U.S. automaker.

Daimler Loss

“Daimler ultimately lost more on its investment in Chrysler than anyone -- more than the United States Treasury, Cerberus, or the complaining creditors,” Daimler lawyers wrote. The company also contributed to Chrysler’s pension plan and forgave its trade debt in bankruptcy, the lawyers said.

The Treasury, which gave Auburn Hills, Michigan-based Chrysler $4.9 billion to reorganize, has said creditors can’t use funds from the bankrupt estate to finance the lawsuit because its loan gives it a lien on all the remaining assets.

Gonzalez questioned what would happen to any proceeds from the lawsuit “if negotiations with Treasury do not release the liens?”

“The U.S. Treasury would own the lawsuit and have the right to ask this court to dismiss it,” Mayer answered, adding that Chrysler creditors would dispute that right.

In an interview after the hearing, Mayer said creditors have to reach an agreement with the U.S. about how any winnings from the lawsuit are shared. The U.S., as a so-called debtor-in- possession lender, has first rights to proceeds.

Corinne Ball, a lawyer for Chrysler, said the company supports the creditors’ lawsuit.

Chrysler filed for bankruptcy protection on April 30. A group led by Italy’s Fiat SpA completed the purchase of most Chrysler assets on June 10, forming the world’s sixth-largest carmaker. As part of that deal, secured lenders got $2 billion in cash for their $6.9 billion in loans.

Chrysler said in court documents filed yesterday that it has $21 billion in assets and $26.9 billion in debts.

The case is In re Old CarCo LLC f/k/a Chrysler LLC, 09- 50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan)

To contact the reporter on this story: Tiffany Kary in New York at tkary@bloomberg.net.

Last Updated: August 13, 2009 13:23 EDT