Last-Minute Hold for Chrysler-Fiat Dealby
The U.S. Supreme Court on Monday postponed a decision on whether to hear a court case brought by three Indiana pension funds challenging the legality of the government-assisted reorganization of Chrysler and planned sale of the company's best assets to Italian automaker Fiat. A decision to halt the sale could have the effect of blocking the deal, leaving Chrysler's future in limbo.
With minutes left to a 4 p.m. deadline to act or let the deal proceed, Associate Justice Ruth Bader Ginsberg issued a temporary stay, thus giving her more time to consider the merits of the case and decide whether the high court should hear it. There is time pressure, as a deal needs to be completed by June 15. If the deal is not done by then, Fiat can walk away from the agreement that would give it a 20% ownership stake in the reorganized company. Chrysler has warned the company could face liquidation if that happens.
The Indiana funds are claiming that as secured creditors they are not being treated fairly in the bankruptcy proceedings, which were engineered to fast-track Chrysler through the Chapter 11 process. Specifically, they argue that the United Auto Workers, who were owed billions in future health-care payments by Chrysler, are being given preferred treatment even though the union's debt with Chrysler is unsecured and should have lower priority. The UAW's health-care trust fund will own 55% of Chrysler once the proposed reorganization is completed.
GM Deal Could be Affected
The decision of a bankruptcy judge in New York to allow a deal with Fiat to go forward was upheld in federal Appellate Court last week. The pension funds petitioned the U.S. Supreme Court on Saturday night. It fell to Ginsberg to decide if the court would hear the case or let the deal go forward.
Chrysler said it had no comment until it receives further information from the court. However, Chrysler has argued that deal as structured is the company's only real chance for survival. "While the rule of law may be stretched or bent a little in the case of the Chrysler bankruptcy, given the extraordinary circumstances surrounding it, the course of action that the parties are currently on to sell Chrysler to Fiat remains the one with the ability to try and salvage something from the mess," says Aaron Bragman, an auto industry analyst at HIS Global Insight.
The decision of the Supreme Court in this case could affect more than just the Chrysler deal. General Motors (GMGMQ) is also in Chapter 11 with the White House's assistance, and if the pension funds holding bonds in the Chrysler case are able to derail the deal, it could have repercussions for GM's ability to emerge from bankruptcy. "GM may not have followed Chrysler into bankruptcy if it hadn't appeared to be going so smoothly," says Jeremy Anwyl, CEO of car buying site Edmunds.com.
TARP Funds Questioned
As part of Chrysler's restructuring plan, the automaker's secured debt holders will receive $2 billion, or about 29¢ on the dollar, for their combined $6.9 billion in debt. The Indiana funds bought their $42.5 million in debt in July 2008 for 43¢ on the dollar.
The Indiana funds have argued not only that they were being treated unfairly but also that the U.S. Treasury was overreaching its authority by using Troubled Asset Relief Program (TARP) funds to lend the automakers money and keep them in business. The White House counter-argued on Monday that no court had jurisdiction to question the government's use of TARP funds. And it also repeated the arguments for the bailout in the first place. "The liquidation of Chrysler would have very severe effects on the American and Canadian economies," said U.S. Solicitor General Elena Kagan.
The dual argument, some legal experts speculated, may be what is delaying Ginsberg's decision.
Trying to Do a "363"
The main method for barring the door by the high court, is a ruling that challengers don't have standing to present arguments on an issue, which means that they can't show they will be sufficiently harmed, noted the www.scotusblog.com, which tracks the movements of the Supreme Court. It is run by Akin Gump, a law firm with one of the top Supreme Court practice groups. Two lower courts have already ruled that the Indiana pension funds don't have standing to object to the use of TARP funds to bail out Chrysler, noted the blog. "And chances are high that the Supreme Court will agree."
Chrysler is trying to complete what is called a "363" reorganization under Chapter 11. This type of bankruptcy divides a company into two companies—one with good assets the company plans to continue business with, and a second company made up of troubled, hard-to-sell assets—in the case of Chrysler, that would include unneeded factories and real estate—that could take years to dispose of. The process is meant to enable a company like Chrysler to start operating normally as quickly as possible after filing for bankruptcy.
The new Chrysler will be made up of valued assets like Jeep and Dodge, and the factories that are needed to turn out the most valuable vehicles in those brands. Fiat, the only carmaker that stepped forward to cut a deal with Chrysler, will own part of the new Chrysler, as well as control management of the company. The White House, however, will handpick a new board of directors for the company based on the taxpayer loans being granted the company and the majority ownership of the automaker by the U.S. government.
Meanwhile, groups representing personal-injury victims have raised their own objections to the sale, claiming that it will deny current and future accident victims the right to pursue claims against Chrysler. This raises knotty questions of "due process" under the Constitution, and courts have wrestled with similar concerns in cases in cases involving asbestos victims.
Senior writer Michael Orey contributed to this story