Delphi Drops Fraud Claim against Appaloosa Management in Adversary Proceeding Arising Out of Alleged Breach of Bankruptcy Exit Financing Agreement

On April 17, 2009, Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York ruled that Delphi Corporation (Delphi), the Troy, Michigan-based auto parts supplier that filed for chapter 11 bankruptcy protection in October 2005, may amend its complaint against Appaloosa Management LP (Appaloosa), a hedge fund manager that in April 2008 allegedly refused to participate in a funding that would have led to Delphi’s exit from bankruptcy.  As a result of that alleged refusal, Delphi sued Appaloosa, alleging, among other things, fraud.  Judge Drain’s decision will permit Delphi to remove fraud claims from its complaint while continuing with an adversary proceeding against Appaloosa.  On April 22, 2009, Appaloosa and affiliate A-D Acquisition Holdings LLC filed a Notice of Motion for Summary Judgment, asking for a hearing on that Motion on June 5, “or as soon thereafter as counsel can be heard.”  We offer a detailed review of the pleadings in the adversary proceeding – a cautionary tale for any hedge fund contemplating a DIP loan or other bankruptcy lending.

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