Chrysler heads back to bankruptcy court

NEW YORK Robert Nardelli, Chrysler LLC's departing chairman and chief executive, testified in court Thursday that he expects the required U.S. regulatory approvals for the sale of the bulk of Chrysler's assets to a Fiat-led group to be in place by Friday, with international approvals to come later.

But after a nearly 13-hour marathon session, the hearing was adjourned shortly before midnight, and it remains unclear when testimony and arguments related to the sale will wrap up and allow U.S. Judge Arthur Gonzalez to rule.

The hearing will resume at 9 a.m. EDT Friday.

Even if Gonzalez does approve the sale, it's likely that attorneys representing three Indiana state pension and construction funds, which hold Chrysler debt and are aggressively opposing the sale, will appeal the decision and force the company to postpone the closing. Fiat could back out if the deal doesn't wrap up by June 15.

Chrysler on Thursday began its second day of testimony to convince Gonzalez that selling itself to Fiat was the best way to avoid liquidation. Attorneys for the Auburn Hills, Mich.-based automaker say a leaner company could shift more easily to building smaller, more fuel-efficient cars.

But many Chrysler dealers, bondholders and former employees say they are being steamrolled by the exceptionally speedy bankruptcy court proceedings.

If the sale ultimately goes through, the automaker could emerge from Chapter 11 bankruptcy protection within weeks, defying observers who said that the company could linger under court oversight for years. Chrysler filed for Chapter 11 bankruptcy protection April 30, 2009.

Meanwhile, Chrysler's U.S.-based rival General Motors Corp. earlier Thursday said a bondholders' committee has agreed to a sweetened deal proposed by the U.S. government to erase the automaker's unsecured debt in exchange for company stock. The deal should help Detroit-based GM reorganize more quickly through Chapter 11 reorganization.

A person familiar with GM's plans said it was "probable" that the company would seek bankruptcy protection on Monday. The person didn't want to be identified because the plans were still under discussion with the U.S. and Canadian governments.

In his more than six hours of testimony Thursday, Nardelli described the events leading up to Chrysler's bankruptcy filing. He said the company attempted to cut costs and restructure itself throughout 2008, but a steep drop in vehicle sales and tight credit proved to be too much, sending the industry into a "death spiral" by summer.

"The bottom fell out," he said.

Nardelli said he favored a plan for a stand-alone company and was disappointed when the government's auto task force gave him until the end of April to join with another automaker if it wanted the government's financial help. Nardelli plans to leave Chrysler and take a job as an adviser at the automaker's previous owner, New York-based private equity firm Cerberus Capital Management LP. He said Thursday that he expects to start his new job on Monday.

Nardelli was questioned by Thomas Lauria, an attorney for the Indiana funds, for more than three hours. Lauria questioned how the company settled on an offer for its senior secured debtholders of $2 billion in cash in exchange for their $6.9 billion in debt.

In the days leading up to its filing, Chrysler reached an agreement with most of its debtholders on the deal which would be worth 29 cents on the dollar, but some debtholders refused to support it, saying that as secured lenders they deserved more.

Nardelli said Chrysler attempted to negotiate with the holdout debtholders right up until the company's filing, with the Treasury at one point upping its offer by $250 million to $2.25 billion.

In the end, Nardelli said Chrysler officials couldn't justify liquidating the company instead of restructuring, given the number of jobs that would have been lost and communities that would be affected.

"I think it would have had a cataclysmic effect on the industry and the overall economy," he said.

Later on, Nardelli was questioned by lawyers representing some of the 789 Chrysler dealers whose franchises the automaker is seeking to terminate as part of its reorganization.

Amy Brown, an attorney for the Committee of Chrysler Affected Dealers, which represents more than 330 dealers, asked why it was necessary to eliminate the franchises when neither the government or Fiat asked for it to happen.

Nardelli said that the 789 dealers, which represented 14 percent of Chrysler's 2008 sales, also represent "a host of expenses" for Chrysler related to things such as tooling, service training, advertising and sales incentives.

But when asked to quantify how much those things cost the automaker, Nardelli said he could not and wasn't sure if the automaker had determined those exact costs.

Nardelli said the decision to terminate the franchises was just one of the many "gut-wrenching" choices Chrysler was forced to make in order to save the company, not unlike its decisions to layoff thousands of white- and blue-collar workers over the past year.

Peter Gary, Chrysler's director of dealer operations, also was questioned by lawyers representing Chrysler dealers for about two hours about the validity of Chrysler's need to reduce its dealer base.

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