Negotiated alternatives to bankruptcy, and negotiated bankruptcy settlements that differ from strict seniority rules happen all the time. Particularly when there's the chance that some viable entity or set of assets might emerge from the wreck, the various creditors and equity holders will often dicker and deal towards an outcome that reflects their own sensitivities towards getting back some cash now, versus hoping for a better tomorrow. Terms that include 'carve outs' to offer a return for executives or even staff who agree to stay through the process are also common. It happens all the time in the venture world, just more quietly than the ongoing Chrysler debacle.
But these outcomes are all voluntary. Unless there are specific 'drag along' provisions that were disclosed at the time a financing occurred, any holder can decline to participate in such a work-out agreement, and throw the matter into the hands of the bankruptcy court. Which court is then obliged to respect the interests of the debt and equity holders in strict order by statute and prior contract.
Voluntary means no coercion. If an interested party in the matter threatened retaliation outside the deal for not cooperating in a desired outcome, that would be actionable, and quite likely criminal (a little matter known as blackmail). If I pulled such a stunt as a VC, and got caught, I would expect to be having a chat with my counsel and perhaps the district attorney.
Bringing us to the behavior of the Obama White House and the Treasury Department in respect of the Chrysler bankruptcy. It is now confirmed that Treasury officials threatened retaliation against Chrysler creditors who declined to accept terms proposed by the White House. And further used implied control over TARP banks to intimidate holders who have other business with them. See the second link for some specifics on the administration behavior and relevant bankruptcy law.
I hope the 'speculator' hedge funds stick to their guns, and bring the White House behavior into open court. This administration has been playing fast and loose with the law and Constitution, and is being covered by the Democrat-controlled legislative branch. Time to see if the judicial branch still has any cojones. Meanwhile, I'll just nod agreement with this quote from Finem Respice:
There are three things that are scarier than the actual resort to common thuggery. The ease with which it comes to this administration. The ubiquitous and rank ineptitude that makes a resort to thuggery necessary in the first place- and promises it will become a common tactic in the days to come. And the forgiveness the population regularly affords the administration after one or another of these episodes is, yet again, made public.
Update: Thuggery has consequences. Check out this Roger Kimball column at PJ Media, and scroll down to the open letter from hedge fund manager Clifford Asness. Here's a sample:
Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.
Update 2: 'Gangster government', including the full text of Asness' letter.