Chrysler creditors sue Daimler, seeking 'billions'

Chrysler LLC creditors sued Daimler AG, seeking to recover "billions" of dollars they say Daimler stripped of Chrysler's assets in 2007, just before a sale to Cerberus Capital Management LP.

Daimler knew in 2006 that Chrysler was a failure, burdened with debt and facing declining automobile sales, according to the complaint filed today as part of Chrysler's bankruptcy case in Manhattan. The creditors want a jury trial to determine damages for what they allege was a 48-step fraud. They accused Stuttgart, Germany-based Daimler's directors of allowing the fraud to take place.

The scheme "enriched Daimler at the expense of the many Chrysler creditors who are now unable to look to these assets to satisfy their claims," creditors alleged. They said about $9 billion in assets were transferred to Daimler, for which Chrysler got only $1.23 billion.

Creditors said Daimler moved some Chrysler assets to companies it controlled. Daimler also allegedly put some assets into a holding company that was protected from creditor claims in order to get a higher value for Chrysler in a sale.

"The most egregious" part of the fraud was the transfer of Chrysler's most valuable assets, its Canadian and U.S. financing units, into a new holding company that gave $2.5 billion in assets back to Daimler, creditors said.

Susman Godfrey

U.S. Bankruptcy Judge Arthur Gonzalez allowed creditors to bring the lawsuit after being told in an Aug. 13 hearing that law firm Susman Godfrey LLP would handle the case on a contingency basis.

The U.S. Treasury Department had said 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.

Alan Goudiss, a lawyer for Daimler, said in a phone interview Aug. 13 that "the lawsuit is without merit."

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

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.

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).