Chrysler Chapter 11 reorganization facts for kids

The Chrysler Chapter 11 reorganization happened on April 30, 2009. This was when the Chrysler car company and 24 related businesses asked for bankruptcy protection. They filed their request with a special court in New York. This happened because the company could not agree with its lenders on a plan to fix its money problems outside of court. The government had set an April 30 deadline for this agreement.

Chrysler was greatly affected by the automotive industry crisis of 2008–2010. This crisis led to the company needing to reorganize under Chapter 11. At that time, a private investment company called Cerberus Capital Management owned most of Chrysler. They had bought their share in 2007.

Court Decisions and the Sale of Chrysler

First Steps in Court

On May 31, 2009, a judge named Arthur J. Gonzalez approved a plan from the government. This plan allowed most of Chrysler's assets (things it owned) to be sold. A new company would buy them. In this new company, Fiat would own 20%. A special health care fund for autoworkers (called VEBA) would own 55%. The U.S. and Canadian governments would own smaller parts.

Lenders who had secured loans (meaning their loans were backed by Chrysler's assets) would get 29 cents for every dollar they were owed. Some of these lenders, especially pension funds from Indiana, disagreed with this. They appealed the decision.

Supreme Court Steps In

The case went to the New York circuit court, which agreed with the sale on June 5, 2009. But the Indiana pension funds appealed again, this time to the U.S. Supreme Court. They wanted to stop the sale.

On June 8, 2009, Supreme Court Justice Ruth Bader Ginsburg temporarily stopped the sale. She needed more time to review the case. However, on June 9, 2009, the Supreme Court decided not to block the sale. They said the Indiana funds had not shown why the Supreme Court needed to get involved.

The Sale is Completed

The U.S. Department of the Treasury was happy with this decision. They said no court, including the Supreme Court, found any problems with how Chrysler or the U.S. government handled the situation.

The sale of Chrysler's assets was set to finish on June 10, 2009. On that day, the U.S. government sent the money needed for the deal. Fiat would get its share in the "New Chrysler" by providing car designs. These designs would be used for new Chrysler cars.

On June 10, 2009, the sale of most of Chrysler's assets to "New Chrysler" was completed. The new company was officially named Chrysler Group LLC. The U.S. government provided $6.6 billion to help with the deal. This money went to the "Old Chrysler," which was then renamed Old Carco LLC.

Not everything was transferred to the new company. Eight manufacturing plants, many pieces of land, and equipment leases were not included. Also, contracts with 789 U.S. car dealerships that were being closed were not transferred.

Before Bankruptcy: Talks with Fiat and Unions

Working with Fiat

On January 20, 2009, Fiat S.p.A. and Chrysler LLC announced they were thinking about forming a global partnership. Under this plan, Fiat could get a 35% share in Chrysler. This would give Fiat access to Chrysler's dealer network in North America. In return, Fiat would give Chrysler the designs to build smaller, more fuel-efficient cars in the U.S. Chrysler would also get access to Fiat's global sales network.

Agreements with Workers

By mid-April, talks between the two carmakers became very serious. They needed to reach an agreement by the government's April 30 deadline. Fiat's initial share was expected to be 20%, and they would have some say in Chrysler's top management.

Fiat made it clear that there would be no deal if Chrysler could not reach agreements with its worker unions. These were the UAW (United Auto Workers) and the Canadian Auto Workers' Union. On April 26, 2009, it looked like Chrysler had reached a deal with the unions. This deal met the government's requirements. Chrysler said the union agreement would help the company be more competitive and meet the U.S. Treasury Department's rules.

Chrysler Files for Bankruptcy

Chrysler officially filed for Chapter 11 bankruptcy protection on April 30, 2009. This happened at the Federal Bankruptcy Court in New York. On the same day, they announced their partnership with Fiat.

Both the White House and Chrysler hoped for a quick bankruptcy process, lasting only 30 to 60 days. The goal was to reduce Chrysler's debts and help it come out of bankruptcy in better financial shape. Court papers showed a reorganization plan would be presented by August 28, 2009.

A White House official said the government would provide $3 billion to $3.5 billion to help Chrysler operate during bankruptcy. After the bankruptcy was finished, Chrysler could get up to $4.5 billion more to restart its operations. This meant a total of $8 billion in government support. Before filing for bankruptcy, Chrysler had already received $4.5 billion from the U.S. government in December 2008. This was part of a plan from the George W. Bush administration.

A new company, called New CarCo Acquisition LLC, would be formed to buy Chrysler's assets.

Factories Temporarily Close

On the day it filed for bankruptcy, Chrysler announced it would stop most manufacturing operations on May 4, 2009. Production would start again "when the transaction is completed," which they hoped would be within 30 to 60 days.

On May 1, two assembly plants in Canada, Brampton Assembly and Windsor Assembly, were shut down. This affected about 2,700 and 4,400 employees. A Chrysler parts plant in Etobicoke, Toronto closed on May 10, 2009, affecting 300 employees.

Chrysler's lawyers said eight of the company's factories would not be part of the Fiat deal. These included five plants that would close in 2010, affecting 4,800 employees. The company also announced that its president, Tom LaSorda, was retiring.

Documents showed that plants in Sterling Heights, Michigan, Detroit (Conner Avenue), and St. Louis (North) would close. Also closing were the Twinsburg, Ohio parts-stamping plant and the Kenosha, Wisconsin engine plant.

The St. Louis South plant and a Newark, Delaware plant were already closed and would not be sold to Fiat. Work from the Detroit axle plant, also not part of the Fiat deal, was moving to Port Huron, Michigan. The eight plants would be leased by "new Chrysler" and then closed in 2010. As many employees as possible would be offered jobs at other Chrysler plants.

Early Court Approvals

On May 1, bankruptcy judge Arthur J. Gonzalez approved six initial requests from Chrysler. At a hearing on May 4, lawyers asked the judge for permission to use the $4.5 billion the company had already received from the U.S. and Canadian governments. This money would allow the company to keep operating. They also asked for a date to sell assets to "new Chrysler."

No other bids were expected, but documents showed Chrysler had tried to make deals with many companies. These included Renault–Nissan, Toyota, Honda, Volkswagen, and General Motors. Banks holding 70% of Chrysler's debt agreed to be paid 29 cents on the dollar. However, some other lenders (hedge funds and creditors) had not agreed to the debt restructuring before bankruptcy.

A health care trust fund owned by the United Auto Workers was proposed to own a 55% share in the new Chrysler.

Sale Process Approved

On May 5, 2009, Judge Gonzalez approved the proposed bidding rules. This was a setback for the lenders who were holding out. The rules would likely lead to Chrysler selling its assets to a company where Fiat was a major owner. The lawyer for the lenders who disagreed argued that the proposed sale rules prevented other possible buyers. The plan was for several major Chrysler assets to be sold to a new company. This new company would be owned by the United Automobile Workers Union health care trust fund, Fiat, and the United States and Canadian governments.

Dealerships Closed

On May 14, 2009, Chrysler asked the bankruptcy court to end the agreements with 789 of its dealerships. This was about 25% of all its dealerships.

Sale to "New Chrysler" Approved

On May 31, 2009, Judge Arthur J. Gonzalez approved the proposed plan. He rejected more than 300 objections to the sale. The sale allowed most of Chrysler's assets to be bought by a new company. In this new company, Fiat would own 20%, and the autoworkers' union health care trust (VEBA) would own 55%. The U.S. and Canadian governments would be smaller owners. Lenders with secured bonds would receive 29 cents for every dollar they were owed.

A group of Indiana pension funds that held secured bonds immediately appealed the judge's decision. They claimed that the Department of the Treasury treated Chrysler's secured creditors unfairly. They said it was the first time in over 150 years of American bankruptcy law that secured creditors received less than unsecured creditors. They also argued it violated the Fifth Amendment, which says private property cannot be taken without due process of law.

These funds included money for teachers and police officers. They held about $42.5 million of Chrysler's $6.9 billion in secured debt. Secured debt usually gets paid first. However, holders of 92% of this type of debt had agreed to the government's plan to exchange their debt for 29 cents on the dollar. The Indiana funds had bought their bonds in July 2008 for 43 cents per dollar.

The federal appeals court agreed with the decision to approve the sale on June 5, 2009. They gave the objecting bondholders until June 8, 2009, to get a stay (a temporary halt) of the decision.

On June 8, 2009, Supreme Court Justice Ruth Bader Ginsburg temporarily stopped the sale. Fiat had the right to back out of the deal if it didn't close by June 15. However, the head of Fiat said they "would never walk away" from the Chrysler deal. U.S. government lawyers said if Fiat left, Chrysler would likely have to close down completely.

On June 9, 2009, the Supreme Court denied the Indiana funds' request to stop the sale. This allowed the sale of assets to "New Chrysler" to go forward. The two-page decision said the Indiana funds "have not carried the burden" of showing that the Supreme Court needed to get involved.

The U.S. Department of the Treasury was pleased. They said no court, including the Supreme Court, found any fault with how Chrysler or the U.S. government handled the matter. The sale of assets was scheduled to close on June 10, 2009, when the government would send the money to finance the deal. Fiat would get its share in the New Chrysler by providing car designs for new Chrysler models.

On June 10, 2009, the sale of most of Chrysler's assets to "New Chrysler," officially known as Chrysler Group LLC, was completed. The U.S. government provided $6.6 billion in funding for the deal. This money was paid to the "Old Chrysler," which was formerly Chrysler LLC and is now called Old Carco LLC.

The transfer did not include eight manufacturing locations, many pieces of real estate, or equipment leases. Contracts with 789 U.S. car dealerships, which were being closed, were also not transferred.

Who Owned the New Company?

At first, the ownership percentages in Fiat Chrysler Automobiles were: Fiat, 20 percent; U.S. government, 9.85 percent; Canadian government, 2.46 percent; and the UAW retiree medical fund, 67.69 percent. This information came from the bankruptcy court documents.

See also

• General Motors Chapter 11 reorganization
• Automotive industry crisis of 2008–2010