June 5 (Bloomberg) — Today was supposed to be the day that Chrysler LLC sold itself to Fiat and embarked on a new, government-designed chance at survival. Instead, its lawyers are arguing in a federal appeals court this afternoon to please, please let the sale go through.
It probably will. No matter what the law says, it’s hard to picture a three-judge appellate panel throwing itself into the path of a speeding train carrying the futures of Chrysler and General Motors Corp. and, with them, a segment of the ailing U.S. economy.
However messy, derailment is what the law seems to demand. But that’s not what these judges are likely to order.
“Circumstances have conspired to force them to find a way to approve the sale,” says Daniel Glosband, a bankruptcy lawyer with Goodwin Procter in Boston.
The package the White House hammered together to convert big, old, dying Chrysler into a smaller, healthier car company looks a lot like a massive violation of bankruptcy law. A few dissident creditors, namely three Indiana pension funds that banded together, remain defiant enough to say so.
The Chrysler plan “seeks to extinguish the property rights of secured lenders, trampling the most fundamental of creditor rights in disregard of over 100 years of bankruptcy jurisprudence,” the funds argued in bankruptcy court papers.
Their share is tiny, to be sure. Out of $6.9 billion in senior secured loans, the Indiana funds have $42 million. They paid 43 cents on the dollar, and would get roughly 29 cents after the sale.
The Gall
What galls them is that the United Auto Workers’ retiree health care trust fund, the most prominent of the unsecured creditors, would own 55 percent of the new company and get a $4.5 billion note for its $10.5 billion unsecured claim.
Putting unsecured creditors ahead of secured lenders isn’t how bankruptcy law is supposed to work.
Plus, the government has no business giving Chrysler money meant only for financial institutions under the Troubled Asset Relief Program, the funds say.
They say the sale is really reorganization in disguise, which is illegal under bankruptcy law. By claiming it’s a sale, Chrysler avoids months of court scrutiny and legal wrangling over how much to give each creditor. They slip past rules that reorganization requires.
“If there ever was a stealth reorganization plan, this is it,” David Skeel, law professor the University of Pennsylvania, told Bloomberg Radio.
Heated Debate
It looks like a sub rosa reorganization to me, too, but bankruptcy experts hotly debate the point in blogs and in news interviews.
U.S. Bankruptcy Judge Arthur Gonzalez this week declared it a bona fide sale, a fair deal for creditors and the best possible result under dire circumstances.
As for using TARP funds to save a car company, Gonzalez didn’t rule on that, saying the Indiana funds had no legal authority to raise the issue in the first place.
It would have been almost impossible for him to turn down the Chrysler-Fiat deal. If you think the Second Circuit Court of Appeals feels pressure to give Chrysler what it wants, imagine the stress on a sole bankruptcy judge.
The Obama administration decided Chrysler and, behind it, General Motors, are too American to fail, no matter how poorly they’ve been run. It’s pumped billions into the companies while structuring this quick sale and dragging most secured creditors into agreement. If the sale doesn’t go through this very minute, or at least by June 15, Fiat can walk away, leaving liquidation as the only option, Chrysler and its partners in the deal declare.
Contrived Emergency
But the urgency is largely self-inflicted. The government, as financier-in-chief, created the emergency in fashioning the sale the way it did.
It’s a common tactic for debtors to declare themselves in imminent danger of total demise while demanding a rushed sale to avoid reorganization, says Glosband, the Boston bankruptcy lawyer. Judges usually see through it.
If Chrysler gets away with it, and he predicts it will, the precedent will ripple through bankruptcy courts for years to come.
“It basically circumvents the bankruptcy code provisions that deal with how you address the rights of all the different constituencies in the case,” says Glosband.
Those rules are there to make the process fair. But in this case, the Obama administration played the lead role in figuring out who gets what, and providing the finances to make it work before the matter ever got to court.
Fast Moving
After today’s argument in New York, the Second Circuit judges could rule as soon as this weekend. That’s extraordinary speed for a federal appellate court.
“If Chrysler wins,” says Stephen Lubben, bankruptcy law professor at Seton Hall University, “it takes the wind out of a lot of objections likely to be filed with GM.”
Lubben considers that a fine result, as he believes the Chrysler sale’s legit.
But those who argue Chrysler can’t win if the courts follow law worry that when judges let big cases bend the rules, they erode the rule of law for everyone.
(Ann Woolner is a columnist for Bloomberg News. The opinions expressed are her own.)
Chrysler Speeds Past Legal Limits to Live – Ann Woolner, Bloomberg
In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. 
