Crysler gets problem with Supreme Court

[Tribun]

I didn't see this one coming.

Chrysler has troubles at the court

NEW YORK -- The Supreme Court threw a wrench into the plans to have a quick bankruptcy process at Chrysler LLC, delaying the company's combination with Italian automaker Fiat.

The bankruptcy judge overseeing the Chrysler case had given approval for the company's most valuable assets, such as plants, dealerships and contracts, to become part of a new company in which Fiat would hold a significant stake.

Supreme Court Justice Ruth Bader Ginsburg, in an order issued late Monday, granted a request for a delay of that approval sought by Indiana state pension funds, which had argued that they and other lenders deserved better treatment by the bankruptcy court.

No reason for the delay was given in the order, and there were no details about how quickly the issue could be resolved by the nation's highest court.

The Obama administration has stated that Chrysler is no longer viable as a standalone company and that it must join with Fiat in order to justify additional federal tax dollars needed to keep the company alive.

Chrysler's top executives have argued in court filings that a long delay in approving a deal with Fiat could kill the company by forcing its suppliers to go out of business and leaving dealers without the parts they need to repair Chrysler vehicles on the road.

Chrysler said it had no comment about the Supreme Court's ruling. Fiat could not immediately be reached for comment.

Indiana state Treasurer Richard Mourdock told CNNMoney.com Monday morning that it was important to protect secured lenders, including three of his state's public employee pension funds, which have a priority in bankruptcy cases to recover debts owed to them.

The three Indiana funds loaned $42 million to Chrysler and would recover only 29 cents on the dollar under the proposed Fiat-Chrysler deal.

Mourdock also argued that the Treasury Department should not have been allowed to use money in the Troubled Asset Relief Program, or TARP, to help Chrysler and General Motors (GMGMQ) reorganize.

The Treasury Department also had no immediate comment. But in a filing Monday U.S. Solicitor General Elena Kagan, arguing for the administration, said the losses to the Indiana pension funds "cannot outweigh" the potential broader problems a collapse of Chrysler would present.

"As an economic matter ... blocking the transaction would undoubtedly have grave consequences," Kagan wrote. "Even if the stay were continued for a short time and Fiat did not withdraw from the transaction, the consequences of delay for both Chrysler and the United States government would far outweigh any benefit to applicants."

Kagan cited estimates that Chrysler is losing $100 million per day.

Some bankruptcy and auto industry experts said Monday that the Supreme Court action could cause problems for General Motors' own bankruptcy case.

GM filed for bankruptcy on June 1 and also planned to to have a quick trip through bankruptcy court.

"The GM reorganization is now in serious trouble," said Jerry Reisman, a Long Island bankruptcy lawyer. "If the Chrysler creditors win this case, the GM lenders are going to smell blood and try to do the same thing."

GM spokesman Greg Martin, when asked by CNN if similar lawsuits could hinder its bankruptcy plans, said the company was "surprised" by the ruling, but added that "absent additional information from the Court to better understand the reason for the stay, I'm not sure we have enough to comment on."

But Jeremy Anwyl, CEO of auto research firm Edmunds.com, said GM and Treasury might not have been as willing to use bankruptcy as a way to reorganize the company if they had known the Supreme Court might slow the process.

On the day of GM's bankruptcy filing, President Obama pointed out how quickly the Chrysler bankruptcy case was moving along as proof that GM would be in and out of court within 90 days.

"As George W. Bush learned from his 'Mission Accomplished' debacle, there's always a danger in declaring victory prematurely," Anwyl said.

Reading through it, the one thing I bolded stood out to me. How the hell can they lose 100 million Dollar per day? That's insane!

[J]

No surprise to me, this was expected by myself and most other people with working knowledge of bankruptcy laws. This case, if & when the Supreme Court decides to hear & rule on it, will have far ranging repercussions on the markets and the economy.

If the court rules in favour of the deal, it means bondholders no longer have precedence over equity holders and other subordinated stake & credit holders. This means the bondholders will now demand much higher interest payments on corporate bond offerings to compensate for the added risk which they're now exposed to, the entire corporate lending sphere implodes and goes kablooie. The end effect is this, it's now going to be a lot harder for companies to float bond offerings to fund capital investments such as building new factories or ordering equipment, and also for covering temporary shortfalls in revenue. It becomes a lot harder for a company to grow and if it needs to cover some short term deficits it may not be able to do so, once again, kablooie, it goes bankrupt. Any company which isn't 100% financially sound with a sizable cash reserve is going to get killed. If its balance sheet doesn't look like Exxon-Mobil's, it's in deep trouble.

On the other hand if the court rules in favour of the bondholders the Fiat buyout likely falls apart and the UAW gets a well deserved smack in the face. Chrysler & the government will need to work out new terms for the bankruptcy deal or face Chapter 7 liquidation bankruptcy. The same is also true for GM, work out a new deal with the bondholders or be liquidated, and again the UAW gets nothing as their claims are subordinate to those of the creditors.

---

It's important to note that both bankruptcy deals are blatantly illegal in more ways than I care to count. It poops all bankruptcy law with the way it subordinates bondholders to equity holders, plus it's a violation of the Federal Reserve Act and Treasury laws in that TARP money is being used to buy up equities, which is strictly against the FRA. The FRA states that only government guaranteed instruments may be purchased or lent against, Chrysler & GM don't fit this criteria.

This is going to be long & ugly. The government bungled the deals by giving in to the UAW's demands and pooping all over bankruptcy law by screwing over the bondholders. Now it's up to the courts to try and straighten out the mess.

[J]

Another thing I forgot which has the potential become very interesting.

Section 8 of the TARP/EESA

Sec. 8. Review.

Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Chrysler & GM were put into Chapter 11 bankruptcy using TARP funds so the government might claim the deal is above review, even by the Supreme Court. Now that could get ugly and tie things up in court for a heck of a long time.

[D.Turtle]

But how is the entire thing supposed to work while they are in court over the whole bankruptcy thing. They can't just put a hold on the entire thing while the courts work it out - they don't have the money to survive that long. So will it basically result in a dissolution of Chrysler (and GM) while the courts decide who gets the last pickings? Or will the US government continue to give them money while the courts try to figure this thing out? Or will they simply continue with the deal and ignore the courts until they decide that the whole deal is off?

[aerius]

What's happened is both GM & Chrysler have filed for Chapter 11 (reorganization) bankruptcy, with the US government providing DIP financing while the companies carry out their reorganization plans and get everything sorted out with the unions, courts, and other interested parties. Basically, the US government keeps giving them money so they can remain operational until all the legal issues are sorted out in court and the reorganization is finished. This has been going on since they filed Chapter 11, and it'll keep going until the companies emerge from Chapter 11 or the courts rule against them making the deals fall through and forcing a Chapter 7 (liquidation) bankruptcy, in which case the everything liquidated and the government gets its money back.

[Count Chocula]

Actually, I'm relieved at this ruling. It shows that at least some body in the government is reading and applying the black and white letter of bankruptcy law, which will help investor confidence that they won't be f*cked without lube if they purchase preferred bonds. And, this could help the balance sheet of hundreds of other state and municipal pension funds, which also hold corporate bonds.

It would also be nice if Grassley or (shudder) Paul sponsored a challenge to the Fed's violation of their charter, as J referenced. But let's take it one step at a time.

[MKSheppard]

FFFUUUCK.

Link

Ending more than three days of intense, round-the-clock and high-stakes legal maneuvering in the Supreme Court, the Justices on Tuesday evening without dissent removed a legal obstacle to sale of the troubled auto industry giant, Chrysler.

Insisting that it was denying a postponement “in this case alone,” the two-page order said the challengers had not met their burden of showing that a delay was justified. The reference to this case alone perhaps was a signal that the Court did not want its order to appear to give advance clearance for any other government rescue plan — such as that to save another auto company, General Motors.

The order allows a closing of the deal by no later than next Monday, because it lifts a temporary stay that Justice Ruth Bader Ginsburg had issued on Monday; she did so, apparently, only to give the Court time to ponder the issue.

Presumably, the closing could occur before next Monday, since that was the “end date” only in the Chrysler agreement.

The Court said nothing about the biggest issue lurking in the case: the legality of using federal “bailout” money to pay for the rescue of an auto manufacturer. In fact, the order stressed that “a denial of a stay is not a decision on the merits of the underlying legal issues.”

Justice Ginsburg opted to share the postponement question with her colleagues, and the Court appeared to be unanimous in letting the sale occur with a massive infusion of money from the U.S. government, plus a contribution from the Canadian government, to keep Chrysler from what they said was imminent collapse.

With the company losing an estimated $100 million a day, with tens of thousands of workers’ jobs said to be in jeopardy, and with no other rescuer on the horizon, the defenders of the plan pleaded with the Justices to act swiftly, and they did, only about three hours after all of the legal papers were in hand.

As a result of the order, and the underlying transaction it allows, “old” Chrysler will now cease to exist, to be succeeded by “New Chrysler” — a Delaware-based but global firm with the Detroit company wedded to the Italian auto firm, Fiat, known to be a specialist in small, fuel-efficient auto technology.

Investors who loaned Chrysler billions, of which the company still owed $6.9 billion, will now get to split up $2 billion in a government-financed purchase by the new company. In return for putting up nearly $12 billion in public funds, the U.S. and Canadian goernments get a share of ownership in New Chrysler, along with other new owners, including a health care benefit fund for Chrysler’s retired workers. Fiat gets a one-fifth block of ownership, but cannot seek a controlling share until the governments are paid back.

The Court had been drawn into the sharp controversy, focused on a host of legal issues ranging from basic constitutional questions to discrete, technical questions of bankruptcy law, after the Second Circuit Court last Friday had cleared the “Fiat Transaction,” as it has come to be called, at least by lawyers. (The Second Circuit Court still has not issued an opinion explaining its action.)

The first papers filed in the Supreme Court arrived just minutes before midnight Saturday, and there had been a steady flow of legal documents reaching the courthouse on Capitol Hill every day since. Justice Ginsburg set off a wave of speculation, some of it well wide of the mark, by issuing a brief order Monday afternoon temporarily staying the transaction. Suggestions in several quarters that her delay might have meant that the Court was signaling that it might hear the challengers’ case and decide it proved to be entirely without foundation.


By the time the full Court’s order emerged shortly after 7 p.m. Tuesday, it immediately was apparent that the Court had taken its time primarily to craft a legally precise order of four paragraphs. It very likely was composed largely in Justice Ginsburg’s chambers. She is noted for the highly refined, technical care with which she composed legal papers.

Mostly in paraphrase, here is what those paragraphs said:

First, the three delay requests filed by three Indiana teacher, police and construction worker benefit plans (08A1096), by a variety of consumers groups (08A1099), and by Patricia Pascale, a widow suing for her husband’s asbestos-related death (08A1100), were denied, and Ginsburg’s temporary order was lifted.

Second, stressing that it was not ruling on the merits of these challenges, the Court listed the factors that govern whether a stay, or delay, would be granted. Among those are whether four Justices would agree to hear the case on the merits, whether there was “a fair prospect” the Court would overturn the lower court ruling (here, a decision of a bankruptcy judge in New York), and whether “irreparable harm” would result if no stay were granted. This paragraph added that, “in a close case,” the opposing rights and needs of each side would be balanced against each other.

Third, the Court stressed that no one had a right to a delay, since that was a matter of “judicial discretion.” It added that the party seeking the stay had the burden of justifying it, and concluded: “The applicants have not carried that burden.”

Finally, it stressed that the matter was one to be examined on the basis of a particular case, requiring “individualized judgments in each case.” It closed with this: “Our assessment of the stay factors here is based on the record and proceedings in this case alone.”

[KrauserKrauser]

Hearing that ruling pissed me the fuck off. Either the Supreme Court got its ass kicked by the Legislative and Executive branhes and decided to shit on their own credibility or they are in on the scam as well.

I would hope that they would be able to see through the "GET THIS DONE OR DOOOOOOM Mk3 now with added Union pressure!" and actually do their job and uphold bankruptcy laws but they decided not to.

Piss poor job on their parts. Hopefully they get some more lawsuits that can give them another chance to make a sane ruling and give Obama/UAW/Congress & Co. the slap in the face they so urgently deserve.

[Glocksman]

As a Hoosier, I can tell you that while attempt to force the liquidation of Chrysler may have boosted Mourdock's status among the GOP right, it's decreased it among the large number of people in this state who are either employed directly by Chrysler or work for a Chrysler supplier.

The irony is that a lot of those blue collar workers are among the most reliable Republican votes in this state.
We'll see if there's any fallout from this the next time Mourdock runs for re-election.