May 6 (Bloomberg) -- Chrysler LLC won bankruptcy court approval to auction most of its assets by May 27 with an offer from Italy’s Fiat SpA as the lead bid in a deal that would create the world’s sixth-largest automaker.

U.S. Bankruptcy Judge Arthur Gonzalez approved Chrysler’s auction plan at about 11 p.m. yesterday in Manhattan. He overruled an objection from a group of Chrysler’s secured lenders that the process was overly influenced by President Barack Obama’s administration and would distribute proceeds improperly because it involved a “sub rosa” or secret reorganization.

“Barring any appeal or further consideration of the sub rosa plan issue, the ruling likely means that ‘New Chrysler’ can emerge in 60 days,” said Brian Johnson, a Barclays Capital analyst in Chicago in a note to investors today.

Chrysler’s success makes it more likely that General Motors Corp. would follow the same path into bankruptcy, Johnson said.

The carmaker proposes to sell itself to an entity owned by Fiat, a union benefit trust, the U.S. Treasury and the Canadian government. Auburn Hills, Michigan-based Chrysler wasn’t able to do the merger outside bankruptcy protection because of opposition by some of the lenders holding $6.9 billion in secured debt.

The Fiat group’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 by June 15, with a 30-day extension for lack of regulatory approvals, according to court filings.

The dissident lenders argued the auction process was moving too quickly and the judge should extend deadlines set by the U.S. Treasury to allow for potential bidders to investigate Chrysler.

‘No Evidence’

“There’s no evidence regarding the reasonableness of the bidding procedures,” Thomas Lauria, a lawyer for the lender group, said in court. He said the auction process should be rejected as “facially inadequate.”

Robert Manzo of Capstone Advisory Group LLC, a Chrysler financial adviser, testified the company has essentially been for sale for more than a year, as Chrysler executives sought automaker partners around the world and no bidders surfaced.

Without the Fiat alliance, secured creditors may not receive any recovery, he said.

Ball said distressed assets were often sold quickly, pointing to asset sales by Lehman Brothers Holdings Inc., Bear Stearns and Refco Inc.

“It’s not perfect,” she told Gonzalez. “No one is saying it is perfect. We are doing what is necessary. Time isn’t our friend here.”

April 30 Filing

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 about 33 cents on the dollar.

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.

Gonzalez ordered that the names of the holdouts be revealed by noon today, New York time, extending last night an original deadline of 10 a.m. The lender group argued their names should be kept secret because some members had received death threats.

Funds Named

OppenheimerFunds Inc., Stairway Capital Management LP, Group G Capital Partners LLC and Schultze Asset Management LLC were named as some of the fund owners that tipped Chrysler into bankruptcy and oppose the Fiat sale. The group shrank to 9 members from 20 and now hold only $295 million of the $6.9 billion loan, down from about $1 billion last week, according to a court filing posted just before noon.

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 6, 2009 13:12 EDT