Bankruptcy

Deadbeat Hedge Funds? Delphi Says So

Auto parts maker sues Appaloosa Management and eight other investors it says renegged on agreements to help it out of Chap. 11.
Stephen TaubMay 19, 2008

Delphi Corp. sued hedge fund Appaloosa Management L.P. and eight other investors, seeking to force them to honor an agreement to invest $2.55 billion in the bankrupt auto parts maker.

The complaints, filed in U.S. Bankruptcy Court for the Southern District of New York, alleges that the plan investors schemed to avoid their obligations, according to a Delphi press release.

The auto parts maker is accusing the investors of breach of contract and fraud.

“We believe that the plan investors breached their obligations under the Equity Purchase and Commitment Agreement (EPCA) that was the financial foundation for our Court-approved plan of reorganization,” said David Sherbin, Delphi vice president, general counsel, and chief compliance officer. “The plan investors vigorously pursued a prominent role in our restructuring, received over $60 million in fees for their commitments and positioned themselves to reap substantial profits after consummation of the Plan.”

Delphi is asking the court to require the plan investors to provide equity funding of $2.55 billion under the EPCA, and to pay compensatory and punitive damages to be determined at trial.

Delphi filed for Chapter 11 on Oct. 8, 2005, and its first amended reorganization plan was confirmed last Jan. 25, with the confirmation becoming final on Feb. 4. It had hoped to emerge from bankruptcy last month.

“Our efforts to emerge were seriously undermined when we failed to close because of the actions of Appaloosa and the other plan investors,” Sherbin said. “We hold them accountable for the harm they have caused to Delphi and our stakeholders.”

In addition to Appaloosa, defendants named in the complaints were A-D Acquisition Holdings LLC; Harbinger Del-Auto Investment Company Ltd.; Pardus DPH Holding LLC; Merrill Lynch, Pierce, Fenner & Smith Inc.; Goldman Sachs & Co.; Harbinger Capital Partners Master Fund I Ltd.; Pardus Special Opportunities Master Fund L.P.; and UBS Securities LLC.

The Associated Press noted the Appaloosa alone had committed to invest as much as $1.08 billion under the reorganization plan. However, its relationship with Delphi became rocky as the auto parts maker had trouble coming up with the $6.1 billion in loans that it needed to emerge from bankruptcy.

Delphi wanted its former parent General Motors to have a larger role in the reorganization, which Appaloosa, led by David Tepper, vehemently opposed, according to reports.

Tepper claimed he should get $82.5 million in fees because Delphi breached their agreement by seeking an alternative transaction, according to the AP.

Delphi, however, claims it is owed the more than $60 million in fees and damages it suffered after Appaloosa backed out of the deal.