May 20 (Bloomberg) -- A group of Indiana pension funds that hold first-lien debt of Chrysler LLC objected to a plan to auction the company’s assets and said a U.S. District Court judge should rule on whether the sale is lawful.

The Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust and Indiana Major Move Construction filed court papers late yesterday and today asking U.S. Bankruptcy Judge Arthur Gonzalez in New York to block the sale, claiming the plan is illegal and tramples their rights. A hearing to approve the sale to a group led by Fiat SpA, or a bidder that tops its $2 billion offer, is scheduled for May 27.

Gonzalez denied a motion by the funds to stay the sale process while they seek a review by the U.S. District Court of whether the sale is proper. The funds’ attorney, Thomas Lauria, said after today’s hearing that the group already had filed papers with the district court.

The funds also have asked for the appointment of a trustee to run Chrysler, saying the company has “ceded control over their business and their restructuring efforts to the United States Treasury Department,” which is using the bankruptcy to reward certain creditors that “the government deems politically important,” according to one of the filings.

“The Treasury Department has taken constructive possession of Chrysler and is requiring it to adopt a sale plan in bankruptcy that violates the most fundamental principles of creditor rights,” lawyers for the pension plans wrote.

Non-TARP Lenders

The funds are represented by Lauria and other lawyers at White & Case LLP, the same law firm that represented a group known as Chrysler’s Non-TARP lenders.

U.S. District Judge Thomas Griesa in New York scheduled a hearing on the pension funds’ request for May 26 at 11:30 a.m. Court papers must be filed before then, he said.

President Barack Obama criticized the Non-TARP lenders for refusing to accept an offer that would have paid them about 30 cents on the dollar, saying they forced the automaker’s bankruptcy. The Non-TARP group abandoned its fight to block Chrysler’s sale plan earlier this month, citing political pressure.

The case is In re Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan)

To contact the reporters on this story: Christopher Scinta in U.S. Bankruptcy Court in New York at cscinta@bloomberg.net; Bob Van Voris at rvanvoris@bloomberg.net.

Last Updated: May 20, 2009 16:59 EDT