May 5 (Bloomberg) -- Chrysler LLC won approval to auction most of its assets by May 27 with an offer from Italy’s Fiat SpA as the lead bid.

U.S. Bankruptcy Judge Arthur Gonzalez approved Chrysler’s auction plan at a hearing today in Manhattan. He overruled an objection from a group of Chrysler’s secured lenders that said the process was too heavily influenced by President Barack Obama’s administration and would distribute proceeds improperly.

“The court concludes the bidding procedures are appropriate and necessary,” Gonzalez said in a ruling from the bench at about 11 p.m.

Chrysler’s proposed sale to an entity owned by Fiat, a union benefit trust, the U.S. Treasury and the Canadian government would help create the world’s sixth-largest carmaker if completed. Auburn Hills, Michigan-based Chrysler wasn’t able to close the merger outside bankruptcy protection because of opposition by some of the lenders holding $6.9 billion in secured debt.

Fiat’s $2 billion offer for most of Chrysler’s assets will be the lead bid in an auction, which is typically required for assets sold in bankruptcy. Chrysler extended the sale process at the request of its creditors’ committee, putting the deadline for competing bids at May 20 and setting a May 27 hearing to approve the winning bid, said Corinne Ball, a lawyer for the company.

Breakup Fee

Gonzalez also approved a $35 million breakup fee for Fiat if it’s outbid at the auction. Chrysler’s financial adviser, Greenhill & Co., said the Fiat offer was fair and the only deal available to Chrysler. Fiat’s 20 percent stake in the new company could be increased to 35 percent if certain milestones are met, the company has said.

The U.S. Treasury is providing a $4.5 billion bankruptcy loan to help Chrysler reorganize. Loan terms require the company to complete an asset sale to Turin-based Fiat or close another comparable deal in less than 60 days, a deadline set by Obama.

Following the auction, the sale must be closed by June 15, with a 30-day extension for lack of regulatory approvals, according to court filings.

The automaker filed for Chapter 11 bankruptcy on April 30 after a group of 20 secured lenders rejected an offer by the U.S. government that would have paid unsecured lenders $2.25 billion for $6.9 billion of debt, or 28 cents on the dollar.

Lender Support

The offer was supported by most of Chrysler’s secured lenders, who are represented by JPMorgan Chase & Co. and an attorney for the government. Sixty-two percent of those lenders holding 90 percent of $6.9 billion in loans, supported Chrysler’s plan, said Peter Pantaleo, a lawyer for the bank.

Chrysler’s 22 U.S. factories with about 26,800 hourly workers were idled on May 1.

Chrysler, in its April 30 court filings, listed assets of $39.3 billion and liabilities of $55.2 billion, making it the fifth-largest bankruptcy in U.S. history, according to data compiled by Bloomberg.

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

To contact the reporter on this story: Christopher Scinta in U.S. Bankruptcy Court in New York at cscinta@bloomberg.net.

Last Updated: May 5, 2009 23:23 EDT