Chrysler Bankruptcy Opponents Appeal to the US Supreme Court
By Chris Haak
Last week, the US Bankruptcy Court approved the sale of the desirable parts of Chrysler’s assets to a new holding company controlled by Italy’s Fiat SpA, the US Government, and the UAW, over the objections of some secured debtholders, including a group of Indiana pension funds. The objection raised by the secured lenders was that typically, secured debtholders are paid first in bankruptcy proceedings, and if any assets remain, unsecured debtors – such as the UAW’s VEBA healthcare fund – pick up the pieces. Chrysler’s bankruptcy judge, Arthur Gonzalez, has not followed that pattern.
Judge Gonzalez, expecting opposition to his decision to approve the sale quickly, allowed the pension funds to appeal directly to a US appeals court (skipping the normal next level of appeal in the name of expediency). The appeals court accepted the case and a three-judge panel issued an oral opinion that found the sale legal, but stayed the sale until Monday (today) at 4:00 p.m. to allow appeal to the US Supreme Court.
On late Saturday night, as expected, a group of Indiana pension funds submitted a request to US Supreme Court Justice Ruth Bader Ginsburg to issue a stay to allow the full Court to review some of the legal questions posed in this situation. Supreme Court Justices are permitted to decide on their own whether to issue a stay, or may punt the decision to the full court, which means that five of the nine justices would have to approve it. As of right now (8:15 a.m. EST), Justice Ginsberg has not yet ruled on the stay.
The pension funds certainly to bring a good point to the table; I’m obviously not an attorney, but one of the fundamental concepts I saw in business law classes I’ve taken was the order of payment priority in bankruptcy proceedings. However, there is the high likelihood that the decisions made by the bankruptcy court will result in the preservation of more of Chrysler than other alternatives. Were the pension funds to get a better deal, it would mean that other entities are getting a worse deal, and that would likely tear apart the whole thing. Fiat has the right to walk away from the transaction if it’s not closed by June 15 – just one week from today.
Glancing through the appeal document (available here as a PDF), the first thing that struck me was the humor (likely unintentional) of listing all Chrysler, Dodge, and Jeep vehicle model names as “akas:” Chrysler LLC, aka Chrysler Aspen, aka Chrysler Town & Country, aka Chrysler 300, aka Chrysler Sebring, aka Chrysler PT Cruiser, aka Dodge, aka Dodge Avenger, aka Dodge Caliber, aka Dodge Challenger, aka Dodge Dakota, aka Dodge Durango, aka Dodge Grand Caravan, aka Dodge Journey, aka Dodge Nitro, aka Dodge Ram, aka Dodge Sprinter, aka Dodge Viper, aka Jeep, aka Jeep Commander, aka Jeep Compass, aka Jeep Grand Cherokee, aka Jeep Liberty, aka Jeep Patriot, aka Jeep Wrangler, aka Moper (sic), aka Plymouth, aka Dodge Charger.
Quite the cast of characters, isn’t it? I wonder if they forgot the Dodge Charger until the end, because every other model name is alphabetically listed aside from Moper (I’ve heard of Mopar before, but never Moper – is that the entity that hangs its head, gloomy and dejected, if it loses its appeal before the Supreme Court, or is it an obvious typo on a document sent to the Supreme Court that is supposed to represent the name of Chrysler’s parts arm?)
Skimming over the filing’s pages, the pension funds are making the same arguments against the transaction that we’ve heard before: it’s a seizure of private property by the government, the lenders who agreed to the terms did so because they’re TARP recipients, it’s harmful to teachers and police officers in Indiana.
It makes for a compelling story, and on the face, it sounds like they have a solid case (and perhaps they do; as I said, I’m no attorney, and pretty darn far from a Supreme Court Justic). However, BusinessWeek reported at the end of last weekthat the Indiana pension funds didn’t purchase Chrysler’s debt anywhere near face value. While they would certainly lose money, they’re not getting pennies on the dollar for their investment. They bought the debt in 2008 when Chrysler’s perlious financial situation was already well-known, and if the funds’ investment managers weren’t aware of it, they weren’t doing their job very well. (If someone had asked me in mid-2008 if Chrysler debt was a solid investment, I’d have said no.) Proving the distressed value of the bonds was the fact that Indiana paid, on average $0.43 on the dollar for the bonds. They paid about $17 million for a face value of $42 million of Chrysler’s overall $7 billion in secured debt. (The Indiana pension funds are holding less than 1% of Chrysler’s previously-outstanding debt).
The Indiana Pensioners’ lead attorney, Thomas Lauria, said that his clients didn’t buy speculative investments. Any investment that is supposed to show a return over 100% (as in $0.43 back up to $1.00) sounds too good to be true to me. To me, this sounds like a case of Indiana’s investment managers trying to cover their poor investment decisions on some overly-risky investments.
(Psst, hey Indiana, wanna buy a bridge?)
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