May 4 (Bloomberg) -- Chrysler LLC, under orders by President Barack Obama to conduct a quick bankruptcy, asked for court approval to auction most of its assets in three weeks.

Lawyers for the automaker will seek approval today of a sale that would create an alliance with Italy’s Fiat SpA, according to a filing yesterday with the U.S. Bankruptcy Court in Manhattan. The transaction would help create the world’s sixth-largest carmaker, a merger Chrysler wasn’t able to do outside court protection because of opposition by some of its secured lenders.

Fiat’s offer will be the lead bid in an auction, which is typically required for assets sold in bankruptcy. Chrysler is asking U.S. Bankruptcy Judge Arthur Gonzalez to approve bidding rules for an auction which would require creditor objections to the sale be submitted by May 11, followed by a May 15 deadline for competing bids. The bankrupt company seeks a May 21 hearing to approve the winning bid, according to the court filing.

“Key suppliers and dealers simply cannot survive a prolonged period of uncertainty,” Chrysler said in its motion seeking approval of the sale process. “Consumers will look elsewhere for vehicles if delays persist.”

Chrysler, based in Auburn Hills, Michigan, is also seeking approval to pay Fiat a breakup fee of $35 million if it’s outbid at auction. Greenhill & Co., the financial adviser Chrysler hired in March, said the Fiat deal was fair. Cassandra Bujarski, a spokeswoman for the secured lenders who opposed the proposed deal before the bankruptcy filing, didn’t immediately return a call seeking comment after regular business hours.

Potential Buyers

“No potential buyers have expressed an interest in acquiring Chrysler as a going-concern as an alternative to the proposed transaction with Fiat,” Greenhill Managing Director Bradley Robins said in an affidavit filed with the court in support of the sale. “Chrysler has insufficient funds to continue operating and no other providers of financing.”

The new entity, yet unnamed, will be the lead bidder in the auction and offer $2 billion for most of Chrysler’s assets, while assuming some liabilities, according to court papers. The new company would be owned by an employee association, Fiat, the U.S. Treasury and the Canadian government, Chrysler has said. Fiat’s 20 percent stake could be increased to 35 percent if the company meets certain milestones, 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 timeframe set by Obama.

June 15 Closing

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

The automaker filed for Chapter 11 bankruptcy April 30 after a group of 20 secured lenders rejected an offer by the U.S. government that would have paid them $2.25 billion for $6.9 billion of debt, or 33 cents on the dollar. 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 U.S. Treasury and the Canadian government have agreed to provide a total of $6 billion in taxpayer money to the Chrysler-Fiat alliance to start and maintain operations, according to court papers.

Chrysler operations that aren’t sold would receive about $200 million through the bankruptcy loan “to run a safe, prudent and orderly wind down and sale,” the company said. Those assets will include eight manufacturing plants and related machinery with a book value of about $2.3 billion, according to a Chrysler executive’s affidavit filed with the court.

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 4, 2009 00:01 EDT