Stay No More

It's not news now but just to close the loop, the Supreme Court lifted the stay on the Chrysler-Fiat sale Tuesday. In a two page opinion, the Court per curiam held that the parties requesting the stay did not carry the burden of showing: 1) reasonable probability that four Justices will consider the issue sufficiently meritorious to grant certiorari or to note probable jurisdiction; 2) a fair prospect that the majority of the Court will conclude that the decision below was erroneous; and 3) a likelihood that irreparable harm will result from denial of the stay." My inner contracts professor notes that the petitioners can be compensated for their losses, if any, with damages-- hardly a strong case for irreparable harm.

The sentence that lingers in this perfunctory opinion is the last: "Our assessment of the stay factors here is based on the record and proceedings in this case alone."

And not in response to political pressure, or based on concern about how the outcome of this case might influence the bankruptcy proceeding now pending in In re GM.

The spin on SCOTUS blog is that the Court wrote this opinion with particular care. "By the time the full Court’s order emerged shortly after 7 p.m. Tuesday, it immediately was apparent that the Court had taken its time primarily to craft a legally precise order of four paragraphs. It very likely was composed largely in Justice Ginsburg’s chambers. She is noted for the highly refined, technical care with which she composed legal papers." (what a lovely thing to say about a person).

The Chrysler-Fiat deal closed today. Fiat Chief Executive Sergio Marchionne become CEO of Chrysler. Former Chrysler CEO, Bob Nardelli, packed up his desk and returned to Cerberus Capital Management, the former majority equity holder of Chrysler. Marchionne wrote to Chrysler employees: "There is no doubt in my mind that we will get the job done."

That may depend on how Americans (who are not obese or taller than 5'2") like the Fiat 500. You be the judge.

In re Chrysler Stayed

In a one sentence opinion, Justice Ginsberg stayed the order approving the sale of Chrysler assets brokered by the U.S. Treasury Department. The 2d Circuit affirmed the bankruptcy court order approving the sale Friday. It gave objecting creditors until 4:00 PM Monday to obtain a stay of the order from the Supreme Court. Justice Ginsburg, who is responsible for emergency matters from the 2d Circuit, entered the stay just before the last tick of the clock.

The objecting parties, Indiana State Pension Trusts holding Chrysler secured debt, have advanced two arguments for reversal of the bankruptcy court order approving the sale: 1) the sale to the Fiat SpA group is an improper and unfair sub rosa reorganization plan and the bankruptcy court exceeded its authority under 11 U.S.C. section 363 to order the sale; 2) the U.S. Treasury had no constitutional authority to use TARP funds allocated for the bailout of financial institutions to finance Chrysler-Fiat. On Sunday, a consumer group filed a brief in support of the pension trust investors. The consumers' group wants to stop the sale because its terms relieve Chrysler-Fiat of successor liability for old Chrysler consumers' product liability claims.

The U.S. government filed its brief with Justice Ginsburg today, arguing that the pension trust parties have no standing to complain about the sale. Chrysler is worth next to nothing without the Fiat deal and that the proposed sale yields a better return than the only other option, liquidation. As for the TARP money, the Solicitor General argues that the pension trust investors don't have standing to object to the government’s $8 billion injection of TARP money into the new Chrysler-Fiat. Whether Chrysler-Fiat is a "financial institution" eligible to receive TARP funds is not a question worthy of Supreme Court review. ("The relevant EESA [Emergency Economic Stabilization Act of 2008] provision was enacted only eight months ago and has not yet been construed by any federal court . . . .")

This could be one of those OK Corral moments in constitutional law. The pension trusts represented by Thomas Lauria of White & Case, are the last creditors standing alone against a barrage of pressure on senior lenders to get with the Chrysler-Fiat deal, or else. The Supreme Court may be the only law in town tough enough to stand up to President Obama, Treasury and auto industry czar Steven Rattner.

The gunfight at the OK Corral is said to have lasted about 30 seconds. The trial afterward took weeks. Whether the Earp brothers and Doc Holliday's actions were in self defense or murderous is still a good game for law students more than a century later. In the end, Judge Spicer ruled that "the tragic results accomplished in manner and form as they were, with all surrounding influences bearing upon resgestae of the affair, I cannot resist the conclusion that the defendants were fully justified in committing these homicides-that it is a necessary act, done in the discharge of an official duty."

Rule of Law RIP

Andrew Grossman, Heritage Foundation Senior Legal Analyst testified before the House Judiciary Committee yesterday at a hearing on Ramifications of Auto Industry Initiatives. Grossman made three points. 1. The Bush and Obama administrations have harmed the US auto industry by intervention meant to save it; 2. The Obama administration has abused its power to sidestep the rule of law, particularly bankruptcy law; and 3. These acts will prolong our current recession unless Congress reverses them.

Grossman's third point follows from the first two. If you mess with the stability of contract and property rights, nothing good can come of that.

Grossman said: "Lenders know how to deal with bankruptcy--it's a well understood risk of doing business. But the tough measures employed by the Obama Administration to cram down debt on behalf of the automakers were unprecedented and will naturally make lenders reluctant to do business with these companies, for fear they could suffer the same fate. . . . Impaired access to debt and capital will stymie future restructuring, investment, and growth, reducing the likelihood that either company will fully rebound and, beyond that, prosper."

And on and on in the downward spiral toward oblivion.

Chrysler Rejects 789 Dealers

As part of its bankruptcy case, Chrysler rejected one quarter of its dealership agreements under 11 U.S.C. sec. 365. Check to see if your hometown dealership is on the cut list. 2392 American Chrysler, Jeep and Dodge dealers will survive the sale to Fiat.

Here's what the axed dealerships heard in Chrysler's press release: “The unprecedented decline in the industry has had a significant impact on our sales and forced us to reduce production levels to better match the needs of the market. With the downsizing of operations after the sale and reduction of plants and production, similar reductions must be made to the size of the dealer body. We appreciate the support of our dealers and regret this painful action. We wish market conditions made it possible to keep everyone.”

In other words, "It's not you, it's me."

In re Chrysler, LLC

Chrysler filed for relief under chaper 11 of the Bankruptcy Code on Thursday in the Bankruptcy Court of the Southern District of New York. Judge Arthur Gonzales is presiding. The filing became necessary after hedge fund creditors holding approximately 30 percent of Chrysler's total debt refused to sign on to the Treasury Department brokered workout by the April 30 deadline. Look at the the petition or go to the SDNY Bankruptcy Court and review the petition and first day motions. (You'll need a Pacer account for the second link). For readers who speak the language, Bankruptcy Litigation Blog has the word on the legal risks and rewards of a section 363 sale and links to affidavits filed with first day motions by Chrysler insiders and disgruntled creditors' experts.

Yes Alison, Jones Day represents Chrysler. The chapter 11 petition signed by Jones Day NY partner and bankruptcy mega celeb Corinne Ball explains that Chyrsler shut down its manufacturing facilities and will remain idle until the bankruptcy case concludes with a court-approved deal with Fiat and Chrysler creditors as outlined by Treasury. She warned that failure to move quickly through bankruptcy would mean liquidation for Chrysler and “the end of an iconic, 83-year-old American car company,” not to mention the loss of jobs for 38,500 people.

The first hearing in the case was this morning. Reuters reports that the courtroom was packed and very hot. Judge Gonzales halted the proceeding briefly when a Dewey & LeBoeuf associate standing with bankruptcy lawyer Martin Bienenstock (for Chrysler Financial) collapsed. Once the paramedics hauled her out, Judge Gonzales decided six motions in an hour.

Stick a Fork in Chrysler

The New York Times reported today that the U.S. Treasury Department is preparing a chapter 11 bankruptcy petition for the automaker Chrysler. The Times puts the filing date as early as next week.

The Treasury Department extended a $4 billion federal loan to Chrysler in January. Chrysler needs more cash but the Treasury tap is closed until it meets the governnment's terms. Chrysler has until April 30 to work out a deal with Fiat in which Fiat takes an equity position in Chrysler and Chrysler gets access to Fiat's small-car know how and distribution network.

Treasury and Chrysler are pushing Chrysler's lenders (most of whom have taken bailout money for their own balance sheets) to reduce the $6.9 billion in debt Chrysler owes them by 85%, or down to $1 billion. Recent but not up to the minute news reports note that creditors have counteroffered to take a 40% write down of debt and receive an equity position in the restructured company provided that Fiat puts up about $1 billion in new capital. Meanwhile, Chrysler is working on a deal with the UAW over the fate of union members' pensions and health benefits.

Why is Treasury so keen for a Chrysler bankruptcy? Chrysler's creditors hold security interests in the company's assets and Treasury currently stands behind them in the repayment line. Treasury wants any additional government loans to Chrysler to be first in line for repayment. In a chapter 11 case, the bankruptcy court can grant Treasury, as post-petition lender, first priority repayment rights over creditors' objection. That's a sweet deal for U.S. taxpayers.