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The Honolulu Advertiser
Posted on: Tuesday, June 9, 2009

Court delays Chrysler sale to Fiat


By David G. Savage and Jim Puzzanghera
Los Angeles Times

Hawaii news photo - The Honolulu Advertiser

Chrysler still plans to terminate agreements with 789 dealers today despite a Supreme Court decision yesterday to delay the U.S. company's bankruptcy sale to Italian automaker Fiat. Some bondholders claim the deal is unfair.

DON RYAN | Associated Press

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WASHINGTON — In a surprise move, the U.S. Supreme Court ordered a temporary delay yesterday in the bankruptcy sale of Chrysler to Italian automaker Fiat, saying it needed more time to decide on complaints that the government-engineered deal is unfair to some bondholders.

The one-line order from Justice Ruth Bader Ginsburg raised the possibility that the court could halt the sale and force the Chrysler deal to be renegotiated. Such a move could complicate the much larger General Motors bankruptcy.

The justices are considering an emergency request from three Indiana pension funds that said they were being shortchanged by the bankruptcy plan.

The funds argued that the deal, brokered by the Obama administration in April and put on a fast-track through bankruptcy court, wrongly favors Chrysler's employees and union workers over secured creditors and that the government wrongly gave the automaker taxpayer money from a fund earmarked for financial institutions.

The case has become a rallying cry for conservatives who accuse the Obama administration of heavy-handed intervention in private industry.

LENGTH OF DELAY UNKNOWN

Until yesterday, the Supreme Court had been expected to turn away the last-minute challenge. Last week, a bankruptcy judge upheld the plan, and the U.S. Court of Appeals in New York did the same Friday but kept it on hold until 4 p.m. yesterday to allow for an appeal to the Supreme Court.

The court extended that temporary hold but could decide as early as today whether to issue an emergency stay while the bondholders appeal — or even decide their appeals.

Fiat has set Monday as the deadline for completing the deal, although it appeared to soften its stance yesterday.

Lawyers for the Obama administration warned the court yesterday against standing in the way. They said Chrysler was losing $100 million a day. Without a deal with Fiat, the nation's No. 3 automaker would face liquidation and a loss of 38,000 jobs and 3,000 dealerships, the government's lawyers said. Chrysler is proceeding with plans to terminate agreements today with 789 dealers as part of its restructuring.

Just after 4 p.m., Ginsburg, who handles emergency appeals from New York, sent out the brief order to keep the deal on hold. She did not say when the court would act.

CLOSER LOOK WARRANTED

It would take the votes of five of the nine justices to issue an emergency order to stop the deal. Normally, it takes only four justices to agree to hear a case, but an order stopping a case in progress requires a majority vote.

David Skeel, a professor of corporate law at the University of Pennsylvania, said he was "stunned" that the Supreme Court had acted to delay the sale, although he said he believed there were legitimate problems with the Chrysler bankruptcy.

"I'm very encouraged that they did decide to at least take a closer look, because the one thing that nobody has really done yet is that. Everything has been so rushed from the minute the sale was proposed," he said.

Skeel said Chrysler's bondholders had a legitimate complaint that their claims were treated worse than those of other creditors, particularly the United Auto Workers.

"Although the senior lenders are getting less than a third of what they're owed, the employees and the retirees are getting a big chunk of what they're owed," he said. "It sure looks like the sale promises (the union) a fair amount more than they would get in a normal bankruptcy."

LEGAL ISSUES RAISED

The challenges to the deal involve a comparatively small amount of money, but they raise large legal and ideological issues.

Those holding 92 percent of the $6.9 billion in secured debt already approved a deal that would give bondholders $2 billion. Together, Indiana pension funds said they had $42 million invested in Chrysler, less than 1 percent of its secured debt. They paid about 43 cents on the dollar to acquire their share and, under Chrysler's plan, would get back 29 cents on the dollar.

The bankruptcy judge said, in effect, that these small players should not stand in the way of a deal that could save Chrysler and keep the company in business making cars and trucks.

But Indiana's state lawyers, speaking for the pension funds, said the hastily arranged deal, pressed by the Obama administration, threatened the rule of law.

They said it would allow government-favored unions to gain at the expense of bondholders and in defiance of traditional rules of bankruptcy.