Chrysler sale affirmed by U.S. appeals court, but stay order extended until Monday

By Rebecca Melvin

New York, June 5 - A U.S. appeals court affirmed a lower court's decision to allow Chrysler LLC to transfer most of its assets to a new entity involving funding from the U.S. and Canadian governments, and participation by Fiat SpA and the United Auto Workers.

The U.S. Court of Appeals for the second circuit, based in New York, also extended a stay that keeps the deal on hold until 4 p.m. ET on Monday or until the stay is denied by the U.S. Supreme Court.

The group of Indiana funds, which objected to the sale and appealed the bankruptcy court's sale order, will try to further appeal, counsel for the funds, Thomas Lauria of White & Case, told Prospect News Friday after a fast-paced, two-hour hearing.

It wasn't known if the U.S. Supreme Court would agree to hear the appeal, but "it will be a busy weekend," Lauria said.

And the first step may be to extend the stay to allow more time for a hearing to be scheduled.

The appeals decision was made by a panel of three judges, who didn't make any statements supporting their ruling, but who had asked numerous questions of both supporters and objectors to the sale plan during the hearing of arguments.

Chrysler counsel Thomas Cullen of Jones Day told the court that the Fiat transaction was the only bid available and that since all Chrysler plants are shuttered and wasting assets, it was important to allow the sale to go through as soon as possible since Fiat can walk away from the deal if does not close by June 15.

The court said it doubted the Italian automaker would walk away from a deal under which it could potentially end up with 51% of a Big Three U.S. automaker for no money.

Other proponents of the plan, such as the United Auto Workers, said that the sale creates value in which the secured lenders of pre-petition, or old Chrysler, aren't eligible to participate.

The UAW, which had pre-petition claims of $10 billion, has a trust covering retiree medical benefits that will receive 55% of the stock of the new company and a $4.587 billion note.

"The objectors are entitled to the value of their collateral. The elephant in the room is that the collateral is not worth as much when there is no funding to operate it," the UAW counsel said.

An attorney representing the U.S. government, and defending the good faith negotiations of the U.S. government, asked the appeals court to uphold the lower court's decision for which "no countervailing facts have been put forward to under cut his ruling."

Previous ruling

Judge Arthur J. Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York approved the transaction last Sunday, following a three-day evidentiary hearing.

Counsel for an asbestos victim said it is improper to enter an order without successor liability.

The Indiana funds, or Indiana pensioners as they call themselves, argued the government lenders are doing something for public policy and it doesn't comport with existing law. Such a transaction "puts too much pressure on the bankruptcy court" and "too much uncertainty in the financial markets," Lauria said.

What is the message when the deal is controlled by a group that just doesn't want to pay the secured lenders? Lauria asked.

"There are rules that need to be followed. The door should not be opened."

The Indiana pensioners believe that contrary to the section under the bankruptcy code under which the sale is going forward, Chrysler is a going-concern transaction that shouldn't use a liquidation valuation.

They also said that the Chrysler valuation expert, Robert Manzo of Capstone Advisory Group, was not a credible expert since he is going to be the recipient of a $10 million success fee, which is the lion's share of a $17 million total fee going to Capstone.

When an attorney representing the interests of Canada, which supports the plan, outlined the tens of thousands of jobs that would be lost in Canada if Chrysler liquidated, the court stated: "The notion that this is a terrible crisis and we have to do anything necessary is a scary notion."

Auburn Hills, Mich.-based Chrysler filed for Chapter 11 bankruptcy on April 30. At that time, it employed about 55,000 hourly and salaried workers, of which 38,500 workers are U.S. based. A collective bargaining agreement covers about 70%, or 27,600, of the U.S. workforce. In addition, Chrysler pays for health care and related benefits to over 106,000 retirees.

Chrysler's Chapter 11 case number is 09-50002.

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