Daimler Wins Dismissal of Chrysler Creditors' Lawsuit Over 2007 Buyout

Daimler AG won dismissal of a lawsuit brought by Chrysler LLC’s creditors that blames a buyout by Cerberus Capital Management LP for the U.S. carmaker’s 2009 bankruptcy.

The creditors sued seeking to recover billions of dollars in assets that they say Daimler stripped from Chrysler in 2007, just before a sale to Cerberus. U.S. Bankruptcy Judge Arthur Gonzalez in Manhattan said in an order today that the suit can be dismissed, giving the creditors 60 days to replead some of their allegations.

“It is implausible to suggest that an investor, such as Cerberus, would invest $7 billion to acquire a controlling position in a finance company whose value depended upon the performance of a company that was poised to fail,” Gonzalez said in the order, referring to Chrysler’s finance arm, FinCo.

Chrysler filed for bankruptcy protection on April 30, 2009. A group led by Italy’s Fiat SpA purchased most Chrysler assets, 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.

Daimler knew in 2006 that Chrysler was burdened with debt and facing declining car sales, according to the original complaint, filed Aug. 17 in bankruptcy court. The creditors sought a jury trial to determine damages for the alleged fraud. They said about $9 billion in assets were transferred to Daimler, for which Chrysler got only $1.23 billion.

‘Of a Piece’

Daimler said Chrysler received roughly equivalent value and wasn’t made insolvent by the 2007 restructuring and sale. Daimler, based in Stuttgart, Germany, said the creditors tried to view some money transfers in isolation from the entire deal.

“The restructuring and the transaction with Cerberus were all of a piece,” Daimler lawyer Alan Goudiss told Gonzalez on May 13.

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. The German company also contributed to Chrysler’s pension plan and forgave its trade debt in bankruptcy, Daimler’s lawyers said.

Chrysler’s board members, originally cited in the complaint, were dismissed under an agreement made with the trust and entered in court documents June 29, Gonzalez said.

Gonzalez allowed creditors to bring the lawsuit after being told that law firm Susman Godfrey LLP would handle the case on a contingency basis. The U.S. Treasury Department had contended creditors couldn’t use the estate’s assets to fund a lawsuit against Daimler. The Treasury, which let Auburn Hills, Michigan- based Chrysler borrow $4.9 billion to reorganize, has argued that its loan gives it authority to bar the use of estate funds for lawsuits.

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.

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