Delphi U.S. Trustee ordered to appoint official equity committee

By Caroline Salls

Pittsburgh, March 31 - Delphi Corp.'s U.S. Trustee was ordered to appoint an official committee of equity security holders for its Chapter 11 case at the request of shareholder Appaloosa Management LP, according to a Thursday filing with the U.S. Bankruptcy Court for the Southern District of New York.

Judge Robert D. Drain placed conditions on the appointment of the committee.

First, Drain said the court will entertain a motion to disband the committee if circumstances or conduct of the equity committee support the conclusion that Delphi is hopelessly insolvent or the equity committee has become dysfunctional, has directly or indirectly influenced the trading value of Delphi's securities or has sought to gain undue leverage for itself.

If Appaloosa applies to be appointed to the equity committee, the U.S. Trustee is directed to investigate Appaloosa's ability to serve as a fiduciary for equity security holders and all facts related to the apparent release of confidential information.

According to Appaloosa's motion, the company says an equity committee should not be appointed, relying principally on the premises that equity committees are "rarely appointed in Chapter 11 cases" and that Delphi is "hopelessly insolvent."

However, Appaloosa said a review of the 10 largest Chapter 11 cases of public companies demonstrated that equity committees were appointed in four of these 10 cases, "hardly a rare occurrence."

In addition, Appaloosa said Delphi's Chapter 11 filings were not based on any immediate or looming liquidity crisis but instead were begun solely because Delphi identified a strategic advantage, in light of its inability to reach timely agreement with its organized labor unions, in commencing the cases before recent amendments to the bankruptcy code took effect.

"Although Delphi clearly has substantial employee-related legacy obligations that must be addressed, the circumstances surrounding the filings call into question whether the bankruptcy filings were at all necessary to address such obligations and hardly serve as a basis for presuming that equity is out of the money," Appaloosa said in the motion.

Delphi and its official committee of unsecured creditors objected to the request, saying the only evidence that Appaloosa has identified so far - which it has refused to produce - is a reference to a preliminary recovery analysis by Ronald Goldstein of Appaloosa, which Appaloosa said was conducted during the three months before Delphi filed for bankruptcy.

According to the objection, Appaloosa said this preliminary analysis somehow demonstrated that Delphi has substantial equity value, based in part on Appaloosa's proprietary forecasts of EBITDA and the restructuring of unidentified employee benefit-related obligations.

However, Delphi said this analysis is irrelevant to the question of whether there is sufficient equity in the estate to justify the costs of an equity committee now.

The company also said Appaloosa acknowledges that it has given no thought to the question of the cost of appointing an equity committee and Appaloosa cannot prove that an equity committee is necessary to adequately represent the interests of equityholders.

The committee agreed with the company in its objection, saying the interests of equityholders are adequately represented and Appaloosa has not proven that there will be enough equity value for a distribution to holders under a plan of reorganization.

"Appaloosa is highly sophisticated and capable of representing its own interests without burdening [Delphi's] estates with the substantial additional administrative costs that would be incurred were an equity committee to be appointed," the committee said in its objection.

Delphi, a Troy, Mich.-based automotive electronics manufacturer, filed for bankruptcy on Oct. 8, 2005. Its Chapter 11 case number is 05-44481.

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