Chrysler, GM bankruptcies hinge on appeals court

A hearing before a three-judge panel of the 2nd Circuit Court of Appeals today will be absolutely crucial to the success of not only Chrysler’s restructuring process but likely GM’s also. The court will hear an appeal by a trio of Indiana state pension funds seeking to stop the sale of Chrysler to Fiat and thus scuttle the entire restructuring plan worked out over the last 30 days in court.

The case is being heard by the appeals court directly, without a district court ruling. A separate federal district court did deny the Indiana pension funds an injunction to stop the sale, but he also instructed them that any challenge to the bankruptcy proceedings should be filed with the U.S. Bankruptcy Court overseeing the restructuring.

When bankruptcy Judge Arthur Gonzalez denied their motions to delay the sale, the pension funds then appealed the ruling. Ordinarily that appeal would be heard by a district court but Chrysler requested that the appeal be heard directly by the appeals court in order to speed up the process and Judge Gonzalez agreed to allow the appeal to bypass the district court.

Automotive News explains the arguments being made by the Indiana pension funds:

The Indiana pension funds have objected to the sale saying it violates laws about the priority of repayment in bankruptcy by favoring more junior creditors over senior secured creditors. The funds argue that Chrysler’s plan to distribute stock in the “New Chrysler” to the union and the government, while paying senior lenders only 29 cents on the dollar, is an illegal “sub rosa” reorganization plan, which ordinarily would not be permitted under the bankruptcy code.

The funds also claim that the U.S. Treasury did not have authority to offer funds to the automakers under the Troubled Asset Relief Program.

The second argument is unlikely to succeed because the court is likely to rule that the plaintiffs do not have legal standing to challenge the use of TARP funds. It’s the first argument that is more problematic because the initial allegation is admittedly true, the restructuring plan does pay out more to some unsecured creditors, like the UAW’s healthcare trust fund, than to some secured creditors like the Indiana pension funds.

The question, then, rests on whether doing so violates the law or not. Bankruptcy law gives judges overseeing the proceedings wide latitude to do what is necessary to return the company filing bankruptcy to viability, and those who filed briefs against the pension funds have argued that the current plan is only viable option for the company. They also argue that delaying the sale could destroy that viability because Fiat can pull out of the deal if it is not closed by June 15.

The outcome of today’s hearing could be the key turning point. A ruling on behalf of the Indiana pension funds could destroy the entire restructuring plan and send Chrysler into liquidation rather than restructuring. And because GM plans to follow essentially the same plan in their bankruptcy, their plans for restructuring will likely be thrown into disarray as well.