Chrysler Sale May Run Out of Fuel After Court Delay

By BREE FOWLER
|  Tuesday, Jun 9, 2009  |  Updated 12:30 AM CDT
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Chrysler Sale May Run Out of Fuel After Court Delay

AFP/Getty Images

Will Chrysler be able to emerge from bankruptcy?

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The Obama administration had expected Chrysler's sale to Italy's Fiat to close more than a week ago, and perhaps to have seen the automaker already emerge from bankruptcy protection. But the Supreme Court's decision to delay the sale while it studies an appeal now threatens to derail Chrysler's restructuring plans.

Meanwhile, dealers opposing the termination of 789 Chrysler franchises return to court Tuesday.

Chrysler is working to reduce its dealer ranks by about 25 percent as part of its cost-cutting actions. But the move, which still needs bankruptcy court approval, is being challenged by a group representing more than 300 dealers, as well as individual dealers.

A hearing on the motion that began Thursday with the testimony of about a dozen dealers is scheduled to continue Tuesday at 8:30 a.m. EDT with arguments. U.S. Judge Arthur Gonzalez is expected to rule after arguments conclude.

Chrysler LLC flew through five weeks of bankruptcy proceedings and appeared all but certain to be able to complete the sale of its assets to Fiat Group SpA before a June 15 deadline. But Justice Ruth Bader Ginsburg issued a stay Monday in order to review an appeal by a trio of Indiana pension and construction funds which own a small part of Chrysler's secured debt and are opposed to the sale. It is not clear how long the stay will last or if the high court will take up the case.

Fiat could walk away from the deal after June 15 and leave the struggling U.S. automaker with little option but to liquidate. Chrysler, which is losing $100 million every day its plants are closed, said it had no comment until it receives further information from the court.

A federal appeals court in New York approved the sale Friday, but gave opponents until 4 p.m. Monday to try to get the high court to intervene. Ginsburg issued her one-sentence order minutes before the deadline.

The delay may be only temporary. Ginsburg could decide on her own whether to end the stay, or she could ask the full court to decide.

Chrysler's ability to speed through the process has partially been a result of the involvement of the Obama administration's auto task force, which provided $4.5 billion in bankruptcy financing and helped negotiate a deal between the company's stakeholders.

Under a deal brokered in the days leading up to Chrysler's April 30 Chapter 11 filing, Fiat will receive up to a 35 percent stake in the new company created by the sale, in exchange for sharing the technology Auburn Hills, Mich.-based Chrysler needs to create smaller, more fuel-efficient vehicles.

The United Auto Workers union will get a 55 percent stake that will be used to fund its retiree health care obligations, while the U.S. and Canadian governments will receive a combined 10 percent stake.

Meanwhile, the automaker's secured debtholders would get $2 billion in cash, or about 29 cents on the dollar, for their combined $6.9 billion in debt. Some of the debtholders balked at the deal, saying as secured lenders they deserved more.

A group of investment firms that held about 4 percent of Chrysler's secured debt filed an objection to the sale shortly after the automaker's Chapter 11 filing, but the group later dissolved, saying it didn't have enough members to mount an effective challenge.

Later on, the Indiana funds, represented by the same law firm as the dissident debtholders, filed their own objection and eventually appealed to the 2nd U.S. Circuit Court of Appeals and the Supreme Court. They claim the sale unfairly favors Chrysler's unsecured stakeholders such as the union ahead of secured debtholders like themselves.

The funds also are challenging the constitutionality of the Treasury Department's use of money from the Troubled Asset Relief Program to supply Chrysler's bankruptcy protection financing. They say the government did so without congressional authority.

The funds hold about $42.5 million, or less than 1 percent, of Chrysler's $6.9 billion in secured debt. They bought it in July 2008 for 43 cents on the dollar.

Consumer groups and individuals with product-related lawsuits also are contesting a condition of the Chrysler sale that would release the company from product liability claims related to vehicles it sold before the asset sale to Fiat.

Compensation for such claims would have to be sought from the parts of the company not being sold to Fiat. But those assets have limited value and it's doubtful that there will be anything available to pay out.

The appeals come as Congress scrutinizes the Obama administration's restructuring of Chrysler and General Motors Corp. The Senate Banking Committee said it planned to call Ron Bloom, a senior adviser to the auto task force, and Edward Montgomery, who serves as the Obama administration's director of recovery for auto communities and workers, to a hearing Wednesday.

Sen. Christopher Dodd, D-Conn., the committee's chairman, planned to review the use of TARP funds to help the auto companies and look at whether taxpayers will receive a return on their investment.

GM and Chrysler executives faced questions last week from Congress over the elimination of hundreds of dealerships as part of the companies' reorganizations.
 

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