NEW YORK The future of Chrysler hangs in the balance as it heads to court Wednesday to ask a bankruptcy judge for permission to sell the bulk of its assets to a group headed by Italy s Fiat in hopes of saving itself from liquidation.
Attorneys for Chrysler LLC maintain that the deal with Fiat Group SpA is the company s only hope to avoid being sold off piece by piece, but the agreement remains controversial with more than 100 objections to the sale filed by the automaker s dealers, bondholders, former employees and others.
However, if the deal doesn t close by June 15, Fiat could back out.
Also Wednesday, rival U.S.-based automaker General Motors Corp. moved a step closer toward its own bankruptcy filing after a rebellion by its bondholders forced it to withdraw a plan to swap bond debt for company stock.
Detroit-based GM has until Monday to complete a government-ordered restructuring that includes debt reduction, labor cost cuts and plant closures. But a Chapter 11 reorganization is likely after the company said its offer to exchange $27 billion in unsecured debt for 10 percent of the company s stock had failed. GM has received $19.4 billion in federal loans.
The automaker said its board will meet to decide its next step.
Automakers worldwide are struggling as the global recession has reduced demand for new vehicles. But GM and Chrysler have been particularly hobbled by promises to cover the health and pension costs of tens of thousands of unionized retirees along with recent record-high gasoline prices that reduced demand for their low-mileage trucks and SUVs.
On Tuesday, Chrysler avoided a possible roadblock to its sale when a U.S. district judge ruled that a legal review of its bankruptcy proceedings wasn t needed before the sale hearing could take place.
Judge Thomas Griesa denied a withdrawal motion from attorneys representing a pair of Indiana state pension funds and a state construction fund. The funds had argued that a review was needed because of the unprecedented involvement of the Treasury Department in the case and its use of federal bailout funds for bankruptcy financing.
Chrysler released a statement late Tuesday saying that it was pleased with Griesa s decision and looked forward to Wednesday s hearing in bankruptcy court.
Last week, attorneys for the funds asked U.S. Judge Arthur Gonzalez, the bankruptcy judge overseeing Chrysler s case, to postpone the sale hearing in order to give the district court time to rule, but that motion was denied.
Chrysler attorney Thomas Cullen said during Tuesday s hearing that the agreement with Fiat represents the best deal Chrysler could get to save itself, noting that the company also looked to other automakers and its lenders for help but didn t get any.
The government was our bank of last resort, Cullen said. We desperately, desperately needed that financing or we would have needed to liquidate.
The funds also have filed a motion objecting to the sale, saying it puts the interests of other parties ahead of those of the funds and other secured debt holders.
Glenn Kurtz, an attorney for the funds, accused the government of trying to unfairly speed Chrysler through the bankruptcy process, pushing aside the rights of bondholders.
The rule of law should apply even if there are adverse social consequences, Kurtz told the court.
When Chrysler filed for bankruptcy on April 30, the government estimated the company would exit bankruptcy in 30 to 60 days. The automaker is nearing the end of the process and is expected to emerge from court protection closer to the 30-day timetable, said a person familiar with the matter. The person was not authorized to speak publicly on the matter and spoke on condition of anonymity.
Griesa noted that the funds will have the right to appeal Gonzalez s ruling on the sale motion if they don t like it. Kurtz said after Tuesday s hearing that he fully expects the sale motion to end up in district court.
The three funds, which include the Indiana State Teachers retirement Fund and Indiana State Police Pension Trust, along with the Indiana Major Moves Construction Fund, hold a combined $42.5 million of the total $6.9 billion in secured debt. They bought the bonds in July 2008 and paid 43 cents on the dollar, Kurtz told the court.
In the days leading up to its Chapter 11 filing, Chrysler reached an agreement with the majority of its bondholders in which they would receive a combined $2 billion in a deal worth 29 cents on the dollar. But some of the bondholders, including a group represented by Kurtz s firm White & Case, refused to support it, saying that as secured lenders they deserved more.
On the day Chrysler filed for bankruptcy protection, President Barack Obama singled out the lenders group as a reason why Chrysler was forced to file for bankruptcy protection, saying that they were seeking an unjustified taxpayer-funded bailout.
The group later dissolved after its members decided that it had become too small to be effective.