Last-Minute Hold for Chrysler-Fiat Deal
Justice Ruth Bader Ginsburg issues a temporary stay so the U.S. Supreme
Court can consider objections by creditors to the deal
By David Kiley
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
Kiley is a senior correspondent in BusinessWeek's
Detroit bureau.