Chrysler Enters Legal Homestretch
Friday, June 5, 2009
NEW YORK, June 4 -- In what is expected to be the last hurdle in Chrysler's effort to emerge from a rapid bankruptcy reorganization, a three-member federal appeals court panel is scheduled Friday to hear arguments on whether the automaker can sell itself to a new company run by Italian manufacturer Fiat.
A federal bankruptcy judge approved the government-orchestrated deal this week, but the closing is being delayed after three Indiana pension and construction funds that hold about $42 million of $6.9 billion in secured loans to Chrysler filed an appeal. In hundreds of pages of documents filed Thursday in U.S. Court of Appeals for the Second Circuit in Lower Manhattan, the Indiana funds, the U.S. government, Chrysler, Fiat and other stakeholders outlined their positions on the sale.
Invoking founding father James Madison and their rights under the Constitution, the Indiana pension funds argue that the government-orchestrated sale of most of Chrysler's assets violates numerous laws.
The funds argue that in essence the sale is a reorganization in disguise, and that Chrysler and the U.S. government are using it as a way to conveniently ignore billions of dollars worth of the automaker's assets -- collateral for first-lien lenders in case the loans defaulted. The purported liquidation value of Chrysler -- which an advisor to Chrysler has testified in bankruptcy court is between $0 to $800 million -- limits the lenders' recovery to $2 billion, or 29 cents on the dollar, writes Glenn Kurtz, a partner in the law firm of White & Case who represents the funds.
The funds contend that the assets representing the real value of Chrysler's assets will be "realized in the newly-created shell entity, new Chrysler, which then distributes at going concern value to Chrysler's junior, but politically favored, stake holders, including the United Auto Workers union."
This "attack on the most fundamental of creditor rights," Indiana argues, has been funded and controlled by the Treasury Department, even though the executive branch is prohibited from spending funds and taking over corporations without congressional approval. Further, Indiana contends that the Obama administration did not have the authority to spend Troubled Assets Relief Program funds intended for financial institutions to rescue automakers.
"Chrysler . . . can be saved without trampling the law and the rights of the first lien lenders," the funds assert in their 90-page brief. "The issues on appeal call on the Court to maintain the rule of law, even set against cries from others that the economy as a whole will benefit from the sale."
In a 70-page brief that at times takes a spunky tone, Chrysler criticizes the Indiana funds for their "cockeyed way of looking at the Fiat sale." The transaction is a sale of assets for a price that "far exceeds liquidation value, to a purchaser who wants to use the assets in a productive enterprise," Chrysler said.
Chrysler argues that in reorganization, courts have long recognized that a sale like the one Chrysler is seeking is justified in emergency situations.
The $2 billion recovery -- courtesy of the U.S. government -- for the Indiana funds and other secured lenders is "substantially" more than Chrysler could have gotten anywhere else, Chrysler's attorneys argue.
"Allowing the sale to proceed expeditiously serves the interests of the Debtors, their stakeholders and the country at large," Chrysler wrote.