UPDATE: Lenders, consumers test Chrysler sale

By Lyle Denniston
on Jun 7, 2009 at 12:09 am

UPDATE 6:15 a.m. Sunday

A group of consumer organizations early Sunday joined the Indiana benefit funds in urging the Court to block the Chrysler sale. The application can be found here.   The groups, led by the Center for Auto Safety, said they would file a petition for review by Tuesday.  Meanwhile, the Second Circuit Court has indicated it expects to issue on Monday one or more opinions explaining its approval of the sale.

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The historic legal and financial struggle over the survival of one of America’s Big Three automakers — Chrysler — reached the Supreme Court just minutes before midnight Saturday.  It is the first government rescue effort since last fall’s onset of a deep economic crisis to reach the Justices. For all of its legal complexity, this first challenge is at its core a simple complaint that the federal government has gone too far to manipulate the private marketplace, using powers not given to it by Congress.

Three Indiana public employee funds that provide benefits for teachers, police officers and others asked for a delay of the Chrysler deal in this application. (UPDATE: The 95-page appendix can be downloaded here.)

Their lawyers said an appeal will follow shortly, to be handled “on as expedited a schedule as the Court finds necessary.”

The funds protested to the Court that the Treasury has acted unconstitutionally in using “bailout” funds in a rescue of Chrysler, and that the deal robs small investors’ and debt holders to reward the government’s favorites — especially the autoworkers’ union — as well as the Treasury itself.

With a Monday afternoon deadline looming for the deal to close, the funds urged the Court to temporarily block the sale of nearly all of the Detroit automaker’s assets to a new company that will be a partnership between Chrysler and the Italian auto company, Fiat.  The Treasury and a Canadian government agency are putting up the money to pay for the transaction, in return for some of “New Chrysler” stock.

In a plea that will go first to Justice Ruth Bader Ginsburg, the three funds not only challenged the legality of the deal, but also sought to portray the Obama Administration as a heavy-handed banker who forced Chrysler into a deal it did not want, using authority the government does not have.

The funds’ specific plea was for delay of a bankruptcy court ruling that cleared the sale; they argued that the transaction should be kept on hold until the Supreme Court can hear and decide the funds’ wide-ranging legal attack on the so-called “Fiat Transaction.” That deal was approved by a bankruptcy judge May 31, and was cleared by the Second Circuit Court on Friday afternoon (see the post just below).  The Circuit Court acted so swiftly that it has not yet written an opinion to explain its approval.

If the deal does not go through by June 15, Fiat has the option of backing out of it.  Since the bankruptcy judge concluded that “the Fiat Transaction is the only option that is currently viable,” Chrysler might simply have to be broken up with whatever is left of it used to pay off billions in outstanding debts.

Justice Ginsburg, as Circuit Justice, has the authority to act first, at least if she decides on a temporary hold until the Court can consider it further.  She also could share it from the start with her colleagues.  While she could deny it on her own, it would take five notes to grant the delay for any time beyond a short span pending a further order of the Court.

If the Court does not delay the deal, the Indiana funds argued, “the Court will be deprived of the opportunity to decide critical, nationally significant legal issues relating to management of the economy by the United States Government.”

The government plan for the auto industry “is a matter of incredibly high profile and importance,” the application said. “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.”

If the deal is allowed to go through, it said, that will make the legal challenge a dead letter.

The Treasury and Chrysler have the right to file responses to the application, and probably will do so swiftly.  The Circuit Court stopped the Chrysler plan from going forward until 4 p.m. Monday, or the Supreme Court rejected any delay, whichever came first.