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After weeks of negotiations, the senior lenders, led by J.P. Morgan Chase NA (NYSE:JPM), reluctantly agreed to accept $2 billion -- or roughly 29 cents on the dollar -- for their total claims, while other constituents including the United Autoworkers Union and Fiat SpA (which is not even a creditor in the bankruptcy) received more favorable treatment. While such an equitable subordination of senior secured lenders is almost unheard of, it is not a new phenomenon in bankruptcy proceedings -- nor is Chrysler the most recent example. Judge Ralph Kirscher of the U.S. Bankruptcy Court for the District of Montana in Butte on Tuesday dealt a similar blow to Credit Suisse Group, ruling that the lender's $375 million prepetition loan to bankrupt Yellowstone Mountain Club LLC should be subordinated in favor of other creditors. Finding the loan to be "overreaching and predatory," Kirscher subordinated the bank's $232 million claim to all of the other debt in the bankruptcy case -- even that of unsecured debt. In his tersely worded order, Kirscher said that Credit Suisse "had not a single care" of how the loan was used and found that the bank was only concerned with reaping fees and "letting the chips fall where they may." "Unfortunately for Credit Suisse, those chips fell in this court," Kirscher quipped in his order subordinating the bank's claim (For more about Yellowstone, see the full story in The Deal Pipeline). Other examples of equitable subordination can be found in the recent bankruptcies of Palmdale Hills Property LLC and MicroIslet Inc. Palmdale, an affiliate of nonbankrupt residential community developer SunCal Cos., filed an amended reorganization plan two weeks ago that seeks to subordinate some $2.3 billion owed to an affiliate of bankrupt Lehman Brothers Holdings Inc. Meanwhile, an ad hoc committee of shareholders in the MicroIslet bankruptcy earlier this year requested a Rule 2004 Examination under the U.S. Bankruptcy Code to determine if $4 million worth of investments in the debtor prior to the bankruptcy filing could be equitably subordinated because they prevented MicroIslet from obtaining the financing needed to avoid Chapter 11. - John Blakeley
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Much has been made about the Obama administration's controversial decision to subordinate some $6.9 billion in Chrysler LLC senior secured debt in the hopes of pushing the automaker through a painless bankruptcy. 
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