A U.S. bankruptcy judge allowed Delphi Corp. to move forward with a lawsuit that seeks to force hedge fund Appaloosa Management LP to complete its deal to invest in the bankrupt auto parts maker.
Judge Robert Drain refused a request by Appaloosa and other investors to dismiss the case, according to the Associated Press. The suit alleges fraud and breach of contract when the hedge funds tried to walk away from their commitment to participate in a $2.55 billion equity deal. Appaloosa, Harbinger Capital Partners Master Fund I Ltd., and Pardus Capital Management LP each created investment vehicles to participate in the deal.
The court did dismiss the parent companies of Harbinger and Pardus, the AP noted. But the judge reserved some harsh words for Appaloosa in refusing to dismiss that hedge fund, noting other claims, including that it interfered with Delphi’s efforts to secure loans, according to the report.
Drain said that were Appaloosa found to have undermined Delphi’s effort to get its loans, it would be “truly jaw-dropping conduct that might in fact rise to the level of a bankruptcy crime,” the AP reported. The wire service said that Delphi, a former unit of General Motors, wanted Appaloosa, founded by David Tepper, either ti take an equity stake in the company or compensate Delphi for the unraveling of the deal.
Appaloosa claims it should not shell out more than $250 million, asserting this cap is part of the original contract, the AP said. It said that Drain did not agree with Appaloosa’s argument that it had a $250 million contractural limit on losses in the arrangement. As a result, the court could actually require the investors to invest in Delphi.
Delphi’s lawyers also argued that Tepper gave his verbal commitment to do the deal when he testified in December 2007. This means Appaloosa’s withdrawal constitutes fraud, the lawyers reportedly theorize. According to the wire service, Tepper’s lawyers claim the contract allowed Appaloosa to walk away from the deal even if Delphi had met its obligations.