Chrysler Deal With Fiat Hits Legal Road Bump

By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, June 4, 2009

NEW YORK, June 3 -- A decision this week by a federal appeals court to take up the objections of a small but tenacious group of Chrysler's senior lenders likely means the automaker will have to delay plans to sell itself to Italian carmaker Fiat, experts said Wednesday.

Whether the delay becomes detrimental to Chrysler's plans -- and by extension, to General Motors -- remains to be seen. But several legal analysts who have closely followed the case said a likely outcome is a delay of several days that would still allow the sale to proceed before a critical June 15 deadline.

"This is more of a temporary glitch on the way to closing the sale," said Stephen Lubben, a bankruptcy expert and law professor at Seton Hall University. "If it turns out to be more than that, it could become a serious problem for Chrysler."

Appellate courts, Lubben and others noted, generally do not allow hearings to continue for days, instead basing their decisions on time-restricted oral arguments as well as briefs, which are to be filed by both sides by noon Thursday.

Under the terms of the Chrysler sale approved by U.S. Bankruptcy Judge Arthur J. Gonzalez, the firm could have closed the transaction as early as Friday at noon. But the U.S. Court of Appeals for the Second Circuit granted a request by three Indiana state pension and construction funds to postpone the sale pending a hearing, and a three-member panel of the appeals court has agreed to take up the matter on an expedited basis. It is to hear oral arguments at 2 p.m. Friday.

"I'm pleased that the points of law we've raised . . . are going to be fully aired in the U.S. Court of Appeals," Indiana State Treasurer Richard Mourdock said. "I'm not elated because there are 7,000 Chrysler employees in the state of Indiana. This is a gut-wrenching thing for me. I fear for them. But I have to do the duties of my job. "

The Indiana entities together hold $42 million of $6.9 billion in senior secured loans to Chrysler.

Under the terms of the government-orchestrated sale of most of Chrysler's assets to a new entity owned by Fiat, the United Auto Workers, and U.S. and Canadian governments, the senior or first-lien lenders would recover 29 cents on the dollar. The Indiana funds contend that their property rights were violated because they are receiving less than junior lenders. The funds also say the government did not have the authority to use federal money from the Troubled Assets Relief Program to rescue automakers.

Gonzalez, the bankruptcy judge, disagreed, saying late Sunday that the sale represented "fair value" and that "not one penny" would be going to anyone other than first-lien lenders.

The Indiana funds promptly appealed, and Gonzalez on Tuesday ordered that the case go directly to appeals court, skipping district court, because it involved "a matter of public importance." It was a move sought by Chrysler.

"This is not a routine thing by any means. I have trouble thinking of another case where this has happened," said Michael Wiles, a partner in the law firm of Debevoise & Plimpton who focuses on bankruptcy. "But given the importance of this particular case and the importance of having it done for the economy as a whole, and all of the time pressures, I'm not surprised at all they agreed" to hear the case.

Since the bankruptcy filing, Chrysler's lawyers have argued that time was of the essence because the carmaker's value fell the longer it stayed in court proceedings. Fiat has the option to back out of the sale if it does not close by June 15.

"We are gratified that the Second Circuit moved so quickly to consider this appeal and are confident they will affirm Judge Gonzalez's ruling," the Treasury Department said in a statement.

Lubben, the bankruptcy expert, said the appeal could strengthen the government's hand as it pushes for a quick GM bankruptcy.

"If this appeal turns out the way I suggest it will, it actually could turn out to be a good thing for GM because then you're going to basically have a Second Circuit ruling that backs up the overall structure that's also being used in GM. "

Staff writer Peter Whoriskey in Washington contributed to this report.

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