Delphi Shareholder Pay Plan Opposed

From Detroit Free Press

DETROIT — Bondholders in Delphi Corp.’s Chapter 11 bankruptcy case are protesting the company’s plan to pay shareholders to settle two class actions against the company.

In court papers filed Friday, five investment groups holding at least $420 million in notes objected to Delphi’s plan that treats these shareholders, usually the bottom rung in any bankruptcy, as unsecured creditors. They are doing so, the bondholders argue, "without regard for whether or not general unsecured creditors are actually paid in full."

Central to the final phase of any Chapter 11 case is the order in which creditors are paid. The top rung usually consists of lawyers and consultants, followed by other secured creditors, such as banks that loaned the company money after the bankruptcy.

After secured creditors come unsecured creditors, such as vendors and bondholders. Unless all sides agree, lower classes aren’t paid until higher classes are paid in full.

The bottom rung usually consists of shareholders. They typically get nothing in a bankruptcy. That’s what happened in recent cases involving Northwest Airlines Corp. and Tower Automotive Inc.

Before leaving bankruptcy, Delphi set out to settle class actions that accused it of misleading shareholders and irresponsibly investing employee retirement money in Delphi stock.

In August, the company reached a settlement in which plaintiffs would receive $228.5 million from Delphi and another $112.5 million from other sources. The settlement gives shareholders the same treatment as unsecured creditors.

Bondholders argue that shareholders shouldn’t be given the same priority as unsecured creditors because they have no guarantee that unsecured creditors will be paid in full.

Delphi viewed a settlement to these cases as essential before leaving Chapter 11.

On Monday, Delphi spokesman Lindsey Williams declined to comment on the objection, saying the company expects to file its response this week. Delphi could argue that the settlement would save it money and avoid a costly trial, said John Pottow, assistant professor specializing in bankruptcy law at the University of Michigan Law School.

The objections come as Delphi deals with a snag in its bankruptcy exit. The supplier is due in court Thursday to resume a hearing that would send its plan to a vote among creditors.