June 4 (Bloomberg) -- Chrysler LLC’s plan to sell its best assets to a group led by Fiat SpA tomorrow was put on hold by a federal appeals court that will hear arguments by creditors challenging terms of the deal.

U.S. Bankruptcy Judge Arthur Gonzalez in New York had said the planned sale could be completed at noon tomorrow. He moved the date up from June 15, noting in an order that Chrysler is losing $100 million a day as it awaits a sale designed to make it a viable company in world markets.

The Manhattan-based appeals court said written arguments were due by noon today and that it will hear the challenge to terms of the sale by a group of Indiana pension funds tomorrow at 2 p.m. Briefs have been filed with the court, the clerk said. They weren’t immediately available.

“I expect they’ll lift the stay and let the sale close,” said Stephen Lubben, a bankruptcy-law professor at Seton Hall University in Newark, New Jersey. “I think the courts all understand that the consequences for Chrysler are dire if the deal with Fiat falls through.”

Indiana Treasurer Richard Mourdock said he was pleased the Court of Appeals agreed to hear the state funds’ arguments that they and other secured creditors have been made secondary to government-preferred unsecured creditors “in contravention of longstanding bankruptcy law.”

“Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government,” Mourdock said yesterday in a statement.

TARP Funds

The treasurer said the illegal acts include using Troubled Assets Relief Program funds, designated for aid to “financial institutions,” in the Chrysler sale.

Gonzalez, in approving the sale May 30, rejected objections, including those of the Indiana funds, that hadn’t been withdrawn.

“Not one penny of value of the debtors’ assets is going to anyone other than” lenders who deserve it, the judge wrote.

The judges who will hear the creditors’ appeal are Amalya Kearse, Robert Sack and the chief of the circuit court, Dennis Jacobs.

Separately, the Auburn Hills, Michigan-based automaker said it reached agreement with creditors resolving most objections to its resolution of a $10 billion pension gap. Modifications were made that would prevent all parties from bringing lawsuits against Cerberus Capital Management LP, which bought most of Chrysler’s assets in 2007.

$1 Billion Guaranty

The accord was reached with the federal Pension Benefit Guaranty Corp., Cerberus and Daimler AG to provide money for the pension as Chrysler’s proposed sale would extinguish Daimler’s $1 billion guaranty securing the pensions, according to a court filing.

In exchange for the payments, Chrysler, Cerberus and Daimler will waive all claims against one another related to Cerberus’s acquisition of most of Chrysler in 2007.

Gonzalez approved the pact, overruling arguments that language barring all third-party lawsuits was improper.

“What you’re asking for is -- if you release claims of the estate, to the extent someone goes out and sues Cerberus, can Cerberus claim the suit belongs to the estate and therefore it was released?” Gonzalez asked a Chrysler lawyer.

“Yes,” said Chrysler lawyer Robert Hamilton, adding that because the estate doesn’t have enough money to fund an investigation that could lead to lawsuits, it would be up to the U.S. and Canadian governments to pursue the issue.

“It would go to the government, and the government hasn’t expressed an interest in pursuing those lawsuits,” Hamilton said.

Getrag’s Objection

Getrag Transmission Manufacturing LLC, a German transmission maker also in bankruptcy, had argued that the right to bring a lawsuit against Cerberus was property of its own bankruptcy estate. Getrag contended that by barring it from bringing lawsuits, Chrysler violated the so-called automatic stay that protects Getrag’s own assets in bankruptcy.

Gonzalez overruled Getrag’s objection and approved the settlement subject to a presentation of final wording agreed to by all parties.

Under last-minute modifications to the deal, Chrysler said it couldn’t come to an agreement with a Cerberus unit, Finco, to give it a “mirror” release from claims after Chrysler had agreed to release that unit.

“We are demanding, requesting, that Cerberus use its efforts to get Finco to give us a comparable release,” Hamilton said.

Daimler Contribution

Under the proposed settlement, Daimler will make $600 million in cash contributions to the pensions and reduce its guaranty to $200 million. Daimler will also forgive a $1.5 billion loan to Chrysler, and Cerberus will forgive a $500 million loan.

Gonzalez said he’ll hold a hearing today on Chrysler’s bid to cancel agreements with 789 dealerships across the U.S. A hearing was previously set for yesterday.

Chrysler said dealers wishing to testify in the hearing need to have a witness appear in court if they wish their declarations to be considered.

When it emerges from court protection, Chrysler stakeholders will include Fiat, an association formed for employees and the U.S. and Canadian governments.

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

To contact the reporter on this story: Tiffany Kary in New York Bankruptcy Court at tkary@bloomberg.net; David Glovin in U.S. District Court in New York at dglovin@bloomberg.net.

Last Updated: June 4, 2009 13:11 EDT