Appeals court to hear appeal of Chrysler sale; dealer terminations delayed 1 day

6/3/2009

NEW YORK A federal appeals court late Tuesday halted Chrysler's sale of the bulk of its assets to Italy's Fiat pending an appeal by a trio of Indiana state pension and construction funds.

The U.S. Court of Appeals for the Second Circuit will hear arguments in the case Friday afternoon in New York, according to the Indiana treasurer's office. Chrysler LLC had hoped to close the sale by the end of week, pending regulatory approval.

"We are pleased the Court of Appeals has agreed to hear our arguments," Indiana Treasurer Richard Mourdock said in a statement. "As we have stated from the beginning, Indiana retirees and Indiana taxpayers have suffered losses because of unprecedented and illegal acts of the federal government."

Chrysler has maintained that the deal with Fiat Group SpA is its only hope of avoiding selling itself off piece by piece. If the sale doesn't close by June 15, Fiat has the option of pulling out of the deal.

But the funds, which include the Indiana State Police Pension Fund, the Indiana Teacher's Retirement Fund, and the state's Major Moves Construction Fund, claimed that the deal as structured unfairly favors the interests of the company's unsecured stakeholders ahead of those of secured debtholders such as themselves.

They also challenged the constitutionality of the federal Treasury Department's use of Troubled Asset Relief Program, or TARP, funds to supply Chrysler's bankruptcy protection financing.

Late Sunday, U.S. Judge Arthur Gonzalez, the bankruptcy judge overseeing Chrysler's case, issued a ruling approving the sale following three marathon days of testimony and arguments. Gonzalez also ruled that the funds do not have standing to challenge the use of TARP money because they will receive their fair share of the $2 billion set aside for secured debtholders, which is more than they would have received if Chrysler had liquidated.

Under the terms of the agreement, a United Auto Workers union retiree health care trust will receive a 55 percent stake in the new company, while Fiat will get a 20 percent stake that can increase to 35 percent. The remaining 10 percent of the company will be owned by the U.S. and Canadian governments.

In the days leading up to Chrysler's Chapter 11 filing, the automaker struck a deal with the majority of secured lenders to give them $2 billion in cash, or 29 cents on the dollar, to erase the $6.9 billion in debt. But some of the debtholders balked and the automaker was forced to file for bankruptcy protection on April 30.

The Indiana funds hold $42.5 million, or about 1 percent, of Chrysler's total $6.9 billion in secured debt. They bought the debt in July 2008 for 43 cents on the dollar.

Separately on Wednesday, a hearing on Chrysler's request to terminate the franchises of 789, or about 25 percent, of its dealers as part of its restructuring plan was pushed back by a day to Thursday. The list of targeted dealerships includes 47 in Ohio.