Friday, June 5, 2009

Chrysler Appeals Court Refuses to Block Sale to Fiat

Posted on Bloomberg by Tiffany Kary and David Glovin:

A federal appeals court refused to block Chrysler LLC’s planned sale of its best assets to a group led by Italy’s Fiat SpA, prompting a group of creditors opposing the transaction to appeal to the U.S. Supreme Court.

A three-judge panel of the court delayed the Chrysler sale until 4 p.m. June 8 -- or until the Supreme Court says the sale shouldn’t be delayed. The judges affirmed the decision of the U.S. bankruptcy court, which said the only alternative to the sale was liquidation of the company. The appeals court will issue an opinion later, explaining their ruling.

The ruling may allow the new Chrysler to save 38,500 jobs and more at its suppliers, as well as permitting the carmaker to transfer its Jeep, Chrysler and Dodge brands to a new company stripped of most debt so it can be competitive in world markets. It may also benefit General Motors Corp., which plans a similar quick spinoff of its assets, for the same reasons.

“The affirmance does set a precedent that the structure of this quick sale is acceptable, and that will help GM and discourage appeals,” said Seton Hall University bankruptcy law professor Stephen Lubben in an interview after the hearing.

A creditor bid for Supreme Court intervention would likely go first to Justice Ruth Bader Ginsburg, who handles emergency matters from the New York-based federal appeals court that ruled today. She could act on her own or refer the request to the full nine-member court.

Monday Deadline

The votes of at least four of the nine justices are required for the court to consider the appeal. If the Supreme Court doesn’t act by 4 p.m. on Monday, Chrysler and Fiat will be able to close the deal.

The sale would be financed by the U.S. and Canadian governments, which would take equity in the new Chrysler along with Fiat and a worker health-care fund.

“The alternative to the approval of the sale is liquidation,” U.S. Circuit Judge Amalya Kearse said during today’s hearing.

Thomas Lauria, a lawyer representing the Indiana pension funds, who rank as secured creditors, said the decision to approve the sale by bankruptcy judge Arthur Gonzalez puts the concept of secured debt “at great peril.”

Dennis Jacobs, the chief judge on the panel, asked Lauria what the bankruptcy court should have done.

“The motion should have been denied,” Lauria said.

“There were no other bidders” Kearse told him. “It seems the bankruptcy court had no alternative.”

Building the Company

Lawyers representing consumer and asbestos victims of Chrysler also argued against the terms of the sale in a courtroom filled with hundreds of spectators. In rebuttal, Chrysler’s attorneys and representatives of the U.S. Treasury sought to persuade the panel that the sale conforms to U.S. bankruptcy and other laws.

Chrysler, based in Auburn Hills, Michigan, was set to complete the sale today at noon before the appeals court froze that plan so it could hear the case.

“Chrysler is pleased with the Court’s decision and appreciates the Court’s recognition of the need for a swift conclusion to the process, so that we can start building the new car company,” said Fredric Spar of Kekst & Co., a spokesman for Chrysler.

Indiana pension funds and other creditors appealed a ruling by the judge in charge of Chrysler’s bankruptcy case, who approved the sale. He found Chrysler had satisfied conditions to use a quick-sale provision of the bankruptcy code rather than have to go through the usual, lengthy process of asset sales, including hearings, evidence presentation and valuation trials.

GM Bondholders

Bondholders of Detroit-based GM are objecting to its plan for a similar spinoff, which company officials want to complete within 60 days.

The Indiana funds, holding $42.5 million of $6.9 billion in Chrysler secured loans, failed to convince Gonzalez that the carmaker’s spinoff plan is illegal on several grounds.

Companies can use the U.S. bankruptcy code’s Section 363 to seize a fleeting opportunity to sell assets without the usual procedures. Gonzalez said in a May 31 decision that this was such a case, citing the small window of time Fiat has insisted upon for the sale.

In bankruptcy court, the funds had also argued that the use of $2 billion in loans from the Troubled Assets Relief Program to finance the deal was illegal because the law was only intended to help financial institutions, not manufacturers.

Extraordinary Powers

Chrysler and General Motors have taken about $25 billion in bailout loans and want about $40 billion more to complete their reorganizations.

The funds had also argued unsuccessfully that the asset deal, given its distribution of equity stakes to various parties, was a stealth reorganization plan, which is not allowed by Section 363. The deal proposes that the U.S. Treasury own 9.9 percent of the new Chrysler, the Canadian government 2.5 percent, a workers health-care trust almost 68 percent and Fiat 20 percent. Later Fiat has an option to increase its stake to 51 percent.

The funds are holdouts in a creditor group that threw more than 90 percent support behind Chrysler’s plan to become a more competitive carmaker.

Chrysler’s secured lenders, including the Indiana funds, will get $2 billion from the U.S. government if the transaction goes through and as little as $800 million in a liquidation, Gonzalez said in his 47-page ruling.

The case is In re Chrysler LLC, 09-50002, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The appellate case is In re. Chrysler LLC, 09-2311-bk, U.S. Court of Appeals for the Second Circuit (Manhattan).

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