Tuesday, July 29, 2008
Delphi said a hedge fund interfered with its efforts to secure loans.
NEW YORK (AP) — A bankruptcy judge said Monday that auto parts maker Delphi Corp. can pursue a lawsuit designed to force hedge fund Appaloosa and several others to participate in a $2.55 billion equity deal that they had earlier abandoned.
U.S. Bankruptcy Judge Robert Drain has denied a request by Appaloosa Management LP and other investors to dismiss the fraud and breach of contract lawsuit in full. The judge dismissed certain aspects of the case.
Like Appaloosa, two other hedge fund investors — Harbinger Capital Partners Master Fund I Ltd. and Pardus Capital Management LP — created shell companies for the deal. The Harbinger and Pardus parent companies were dismissed from the part of the case designed to force the investment, but Drain did not let Appaloosa out of the commitment because of other conduct claims against it.
Those included claims that Appaloosa interfered with Delphi’s efforts to secure loans.
Troy, Mich.-based Delphi is the former parts-making unit of car maker General Motors.
Delphi had said in its lawsuit filed in May that it wanted Appaloosa either to re-enter the investment plan and take an equity stake, or to compensate the company for the loss of the deal.
Appaloosa had argued it should not pay more than $250 million, a cap it claims was set in the original contract.
Drain ruled Monday that he didn’t accept Appaloosa’s argument about the $250 million limit, meaning that the court could potentially compel the investors to actually go forward and invest in the company as laid out in a plan approved by the court in January.
Delphi said the Appaloosa-led group violated a court-approved agreement by pulling out of the deal in April, and accused Appaloosa of interfering with its efforts to get $6.1 billion in loans that it needed to meet the terms of the investment agreement.
Drain said that if Appaloosa was found to have undermined Delphi’s effort to get the loans, he considered it “truly jaw-dropping conduct that might in fact rise to the level of a bankruptcy crime.”
After the auto parts maker struggled to get $6.1 billion in loans, Delphi sought more financing from its former parent, General Motors Corp. Appaloosa strongly opposed GM’s increased involvement, saying the loans would make GM the company’s biggest creditor, in addition to being its biggest customer. The investors said that would threaten their influence.
The company’s lawyers also argued that Appaloosa manager David Tepper, a Goldman Sachs alum and well-known hedge fund manager, had given his verbal commitment to do the deal when he testified in December 2007. They described his testimony as a declaration that “a deal is a deal,” so they said Appaloosa’s withdrawal constitutes fraud.
Tepper’s lawyers said the terms of the contract are what matter, and the contract allowed the hedge fund to pull out of the deal even if Delphi had met its obligations.
Delphi has been operating under Chapter 11 bankruptcy protection since October 2005. A collapse of the Appaloosa deal would force Delphi to redraw its restructuring plan, further delaying a case that has been postponed several times already because of the drying up of the credit markets.
In addition to Harbinger and Pardus, the Appaloosa-led group also included Merrill Lynch, Pierce, Fenner Smith Inc., UBS Securities LLC, and Goldman Sachs Group Inc.