Supreme Court won’t block Chrysler merger
Chrysler batted 1.000 on Tuesday, clearing away two critical legal obstacles to its restructuring plan and putting the automaker on track for a merger with Italian automaker Fiat in the next few days.
In a late ruling, the Supreme Court ended two days of suspense by turning down a request for a stay of the automaker’s sale filed by a trio of Indiana pension funds and several consumer groups. The decision eliminates any further barrier to the sale, which now could happen as soon as today.
Earlier in the day, the federal judge overseeing Chrysler’s bankruptcy case in New York ruled that Chrysler could proceed with plans to terminate the franchises of 789 of its dealers, effective immediately.
As of today, those dealerships may not operate as Chrysler new-car showrooms, nor may they provide warranty service.
The two courtroom triumphs were clear wins for the automaker, which filed for bankruptcy April 30 and has been blazing through what can be a drawn-out process.
They are also a victory for the Obama administration.
It has lent Chrysler $8.6 billion in bailout funds and has pushed the automaker’s bankruptcy on a fast track, arguing that time is of the essence in ensuring the company stays in business. Under terms of its deal with Fiat, the sale of Chrysler into a new entity must be completed by Monday.
Chrysler’s swift progress gives the administration a strong indication that General Motors’ Chapter 11 proceeding could also go smoothly.
Had the high court agreed to hear a challenge in the Chrysler case, it could have halted, or at least complicated, the move to restructure GM.
“We are gratified that not a single court that reviewed this matter, including the U.S. Supreme Court, found any fault whatsoever with the handling of this matter by either Chrysler or the U.S. government,” the White House said in a statement. “We are delighted that the Chrysler-Fiat alliance can now go forward, allowing Chrysler to reemerge as a competitive and viable automaker.”
The Supreme Court’s ruling announced that three separate challenges to the Chrysler deal were denied. There were no dissents or separate comments.
The decision also lifted the stay granted Monday by Justice Ruth Bader Ginsburg. She was responding to emergency appeals filed over the weekend that contended the bankruptcy deal should be stopped because it wrongly wiped out the rights of some creditors.
The chief challenge -- filed by Indiana pension funds representing roughly $42 million out of a total of $6.9 billion in secured Chrysler notes -- argued that creditors were receiving too little in the deal. Furthermore, they questioned the bailout, suggesting that the automaker should never have been eligible for federal TARP funds earmarked for financial institutions.
Those arguments have been echoed by conservatives, who have complained that the Obama administration was running roughshod over the rights of some creditors, in effect rewriting the bankruptcy code.
Lawyers for a consumer group and accident victims filed separate appeals. They complained the deal will trample the legal rights of those who own or were hurt in Chrysler vehicles.
The government pointed out that 92% of the debt holders had accepted the deal, and that in the sale process, the creditors would be able to split $2 billion, while a liquidation of Chrysler would net them only $800 million. Furthermore, administration lawyers warned that an idle Chrysler was losing $100 million per day and that delaying the deal would be costly to taxpayers.
Tuesday’s ruling did not dwell on the legal questions in the case. Instead, it said the parties challenging the sale had not sufficiently demonstrated the need for further delay of the sale. The ruling said, in part, that “denial of a stay is not a decision on the merits of the underlying legal issues.”
UCLA law professor Lynn LoPucki said that the prearranged sale of Chrysler’s assets stripped away traditional legal protections for creditors but said he was not surprised at the court’s decision.
“They know if they take up the case, the danger is they will ruin the sale,” LoPucki said. “And if the Chrysler deal unraveled, the General Motors deal would unravel too.”
According to lawyers who argued against the day’s other big decision -- on shutting down the 789 Chrysler dealers -- substantive legal issues were steamrolled as well.
“The original motion to reject the dealers’ contracts was, in our view, extremely overreaching and appeared to preempt multiple state franchise laws,” said Stephen Lerner, an attorney representing roughly 340 of the targeted dealers.
He and other lawyers argued for several hours Tuesday that the automaker’s decision to eliminate a quarter of its dealer body was capricious, unwarranted and arbitrary. Further, they contended, the automaker had not shown that doing so would improve its financial situation.
On May 14, the automaker notified the dealers slated for elimination that it would use the bankruptcy process to terminate their franchises Tuesday. Chrysler argued that its network of roughly 3,200 dealers was far too large, affecting profitability and customer service.
In response, dealers sought to nullify the terminations or at least extend the deadline, giving them more time to unload inventories of vehicles and parts. But the bankruptcy judge, Arthur Gonzalez, soured those hopes. His ruling dictated that as of close of business Tuesday, those dealers would no longer be allowed to sell new Chrysler, Jeep and Dodge vehicles, perform factory warranty service or display signage indicating that they are Chrysler retail showrooms.
“We are pleased with the judge’s decision allowing us to go forward with the realignment of our dealer network,” said Jim Press, Chrysler vice chairman and president. “The 2,392 Chrysler Jeep and Dodge dealers moving forward with the new Chrysler are poised and ready to take care of customer sales, warranty, service and parts requirements.”
Unlike GM, which has told about 1,350 of its 6,000 dealers that it will not renew their franchise contracts when they expire in October 2010, Chrysler gave its dealers just weeks to sell off 42,000 vehicles.
On Friday, the automaker sent those dealers contracts guaranteeing reallocation of their remaining stock -- amounting to roughly 26,000 vehicles as of last week, according to spokeswoman Carrie McElwee.
But the automaker will charge dealers $350 for each car and truck that is reallocated, and in some cases the loss on the vehicles could be larger than that. McElwee said that closed dealers also would have the option of selling any remaining new cars on their own, but that they would not have access to any sales incentives, nor would they be able to advertise as Chrysler dealers.
But because dealers had been scrambling to unload vehicles, many had sold cars for a larger loss, leading to frustration among those selected for closure.
“We had another dealer come by who basically wanted us to lose 10% of invoice price on every car,” said Gary Kihs, general manager of Larry Menke Inc., a Chrysler dealer in Seaside, Calif.
Kihs said that although the Chrysler store will close, Larry Menke won’t go out of business because it also has Volvo and Buick franchises.
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ken.bensinger@latimes.com
Times staff writer Jim Puzzanghera contributed to this report.
