New Group of Creditors Tries to Block Chrysler's Sale to Fiat

NEW YORK, May 20 -- The government-orchestrated sale of Chrysler to Italian carmaker Fiat is facing a fresh legal challenge from some of the American carmaker's lenders, which are trying to take the fight to federal district court.

Pension funds representing Indiana teachers and police officers, and a state construction fund, filed Wednesday to have the Chrysler bankruptcy proceedings heard by the district court, which has authority over the bankruptcy court.

The funds contend that the automaker's sale violates their rights as senior secured lenders to Chrysler, and that under the proposed sale, they would recover less than junior lenders. They also think the government does not have the authority to use federal rescue money designated for banks to bail out Chrysler.

"We would be irresponsible as fiduciaries if we didn't fight," Richard Mourdock, Indiana's treasurer, said in an interview Wednesday. "You hope reason and precedent will prevail. . . . I certainly feel like David vs. Goliath, but I know I'm doing the right thing for the pensioners."

He said the three funds would lose about $5.6 million under the government-backed plan, in which Chrysler is offering secured creditors 29 cents on the dollar.

The filing in district court followed a decision by U.S. Bankruptcy Judge Arthur Gonzalez to deny the pension funds' request to stay the bankruptcy proceedings until the district court heard the case.

The Indiana funds are represented by White & Case, the same law firm that represented a group of hedge funds that sought unsuccessfully to block Chrysler's sale. The hedge funds, also secured lenders, gave up their legal battle earlier this month, saying that publicly opposing the federal government had become too difficult.

Gonzalez also gave final approval Wednesday for Chrysler to use $4.96 billion in government loans to maintain operations until the sale of the company's assets to a new entity controlled by Fiat is completed.

Separately, Chrysler said Wednesday that former Duracell chairman C. Robert Kidder will become chairman of the new Chrysler once it emerges from bankruptcy proceedings. Kidder will succeed Robert L. Nardelli, who will step down once the restructuring is finished.

Chrysler also announced plans to lay off 992 of the 2,600 workers at its Belvidere assembly plant in northern Illinois and convert the plant to a one-shift operation, the Associated Press reported.