High court keeps Chrysler deal on hold
The U.S. Supreme Court in a surprise move ordered a temporary delay Monday in the bankruptcy sale of Chrysler to Italian automaker Fiat, saying it needed more time to decide on complaints that the government-engineered deal was 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 also 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.
Until Monday afternoon, 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. Eastern time Monday 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 June 15 as the deadline for completing the deal, though it appeared to soften its stance Monday.
Lawyers for the Obama administration warned the court Monday 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 will face liquidation and a loss of 38,000 jobs and 3,000 dealerships, the government’s lawyers said. The numbers were somewhat overstated as 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 that kept the deal on hold. She did not say when the court would act.
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 acted to delay the sale, though he believes that there are 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 union.
“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.”
The challenges to the deal involve only a comparatively small amount of money, but they raise large legal and ideological issues.
Those holding 92% of the $6.9 billion in secured debt already had approved a deal that would give bondholders $2 billion. Together, Indiana pension funds say they have $42 million invested in Chrysler, less than 1% 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 it in business of making cars and trucks.
But Indiana’s state lawyers, speaking for the pension funds, say the hastily arranged deal, pressed by the Obama administration, threatens the rule of law. They say it allows government-favored unions to gain at the expense of bondholders and in defiance of traditional rules of bankruptcy.
“The public is watching and needs to see that, particularly when the system is under stress, the rule of law will be honored and an independent judiciary will properly scrutinize the actions of the massively powerful executive branch,” Indiana’s lawyers said in their emergency appeal filed Saturday.
Their appeal reads less like a standard business brief than a plea for the Supreme Court to stand up to the Obama administration.
They urged the high court to block the sale orders and to decide “whether the law permits such wholesale alteration of bankruptcy law, not to mention the American capital markets, by the executive branch of the U.S. government acting beyond the color of congressional authority.”
The challengers also say the Chrysler bankruptcy is “a test case for what would be attempted -- on a much magnified scale -- in the bankruptcy of General Motors.”
Since Saturday, a group of consumer advocates and trial lawyers filed separate emergency appeals. They say owners of Chrysler vehicles -- and those who have had accidents in those vehicles -- should not have their legal rights canceled by the bankruptcy judgment.
The head of Fiat said Monday that the company “would never walk away” from the Chrysler deal, even if it were not completed by June 15.
“We should just be patient and let the system work,” Chief Executive Sergio Marchionne told Bloomberg News after the court announced the delay.
The Obama administration downplayed the court’s move.
“We understand this to be an administrative extension designed to allow sufficient time for the court to make a determination on the merits of the request for a stay,” said an administration official, who was not authorized to speak publicly and declined to be named.
Some conservatives have complained loudly about the Chrysler bankruptcy, saying the Obama administration was trampling on the long-standing rights of secured creditors to give a better deal to the United Auto Workers.
Under deals brokered by the administration, the UAW’s healthcare trust would get 55% of the new Chrysler in exchange for half the $10.6 billion the company owes the fund.
“Upsetting this fixed hierarchy among creditors is just an illegal taking of property from one group of creditors for the benefit of another, which should be struck down on both statutory and constitutional grounds,” University of Chicago law professor Richard Epstein wrote in Forbes.
The Supreme Court’s action in the Chrysler deal could have implications for the government-brokered bankruptcy of General Motors Corp., Skeel said. There is less of a problem with bondholder treatment in the GM case because they are not secured creditors.
But the GM bankruptcy has other potential problems, including less urgency than Chrysler’s. The high court action on Chrysler’s case could slow what the Obama administration had hoped would be a speedy resolution of GM’s bankruptcy, he said.