Appeals Court to Hear Argument Over Chrysler Sale

By Bree Fowler | June 5, 2009 | 5:01 AM EDT
New York (AP) - The decision on whether Chrysler can sell the bulk of its assets to a group led by Italy's Fiat as part of its plan to emerge from bankruptcy protection heads to a federal appeals court Friday.
The 2nd U.S. Circuit Court of Appeals is to hear arguments Friday afternoon from attorneys representing Chrysler LLC, Fiat Group SpA and a trio of Indiana state pension and construction funds, the latter of which say the deal unfairly favors the interests of the company's unsecured stakeholders ahead of those of secured debtholders such as themselves.
Late Tuesday, the appeals court halted the sale pending the Indiana state funds' appeal. Chrysler had hoped to close the sale by the end of this week.
Auburn Hills, Mich.-based Chrysler has maintained that the sale is its only hope of avoiding selling itself off piece by piece. If the sale doesn't close by June 15, Fiat has the option of pulling out of the deal. In addition, production at Chrysler's manufacturing plants remains halted pending the closing of the sale.
The funds, which include the Indiana State Police Pension Fund, the Indiana Teacher's Retirement Fund, and the state's Major Moves Construction Fund, also are challenging the constitutionality of the Treasury Department's use of Troubled Asset Relief Program, or TARP, funds to supply Chrysler's bankruptcy protection financing. They say the Treasury did so without congressional authority.
In a brief filed with the court Thursday, the funds said Chrysler can be saved "without trampling the law and the rights of the first lien lenders."
"The fact that others did not believe they could take on the government is no basis for setting aside the rule of law and the rules of priority that are fundamental to the workings of our capital markets," the attorneys wrote.
The investment firm OppenheimerFunds, which previously was part of a group of dissident Chrysler debtholders opposing the sale, filed its own brief supporting the Indiana funds.
In its brief, Chrysler called the Indiana funds' argument about use of TARP money "flawed."
"The bankruptcy court properly rejected that argument, finding that the funds do not have standing to even raise the TARP and (Emergency Economic Stabilization Act) issues, as they have suffered no injury as a result of the alleged violation," attorneys for Chrysler wrote.
U.S. Judge Arthur Gonzalez, the bankruptcy judge overseeing Chrysler's case, approved the sale on Sunday. He ruled that the funds do not have the standing to challenge the use of TARP money because they will receive their fair share of the $2 billion set aside for secured debtholders, which is more than they would receive if Chrysler is liquidated.
On Wednesday, a parade of Chrysler dealers slated to lose their franchises as part of the automaker's restructuring testified in the automaker's bankruptcy case, one choking back tears. Many touted their sales and service records and questioned how they were chosen for termination.
Arguments on Chrysler's motion to cancel the dealerships' franchise agreements are scheduled for Tuesday. It was unclear when Gonzalez will rule, or how this will affect Chrysler's plans to sever ties with the dealerships effective Tuesday.
Chrysler claims that it needs to reduce its dealer base by 789 dealers, or about 25 percent, to a leaner network of about 2,400 dealers in order to emerge from Chapter 11 bankruptcy protection as a stronger company.
But the dealers argue that they don't cost the automaker anything. They say that if Gonzalez approves Chrysler's motion, hundreds of dealerships will be shuttered, and thousands of workers will lose their jobs.
A group representing about 300 of the dealers have filed an objection. They also earlier opposed Chrysler's sale to Fiat, saying it was tied to the plan to eliminate the dealerships. Several attorneys for individual dealers also have filed objections.
Before Thursday's testimony began, Gonzalez noted that Chrysler has a good case to terminate the dealer franchises.
Gonzalez said that under Chrysler's plan, the rejected dealers will remain with "Old Chrysler," a collection of assets that aren't slated to be sold to the Fiat group. And since those leftover assets won't be making vehicles, there would be little use for the dealers that would go with them, he said.
AP Auto Writer Dan Strumpf contributed to this report.
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