Chrysler's Debtors Have a Point

The Supreme Court delayed Chrysler’s reemergence from bankruptcy Monday by issuing a stay (see Court Adds Uncertainty to Chrysler Reorganization). According to the Associated Press:

Chrysler’s five weeks of breakneck-speed bankruptcy proceedings came to a screeching — but possibly temporary — halt Monday, when a Supreme Court justice delayed its sale of assets to Italy’s Fiat.

The move could derail the government’s ambitious plan for the U.S. automaker to blaze a path to profitability without the burden of many of its debts.

Justice Ruth Bader Ginsburg issued a stay…

This is a story that I have been following for some time (see Legal Issues Affecting Chrysler, Anything but Surgical or Lessons for GM for background). Back then I discussed the group of Non-TARP lenders who were opposed to the deal. Their claim was that the sale to Fiat neither respected their rights as senior creditors nor made them whole. Unfortunately, their opposition quickly faded, as it became clear to them that they were not only swimming upstream, but that the cost of opposition was more than they were willing to tolerate.

Although the group of dissident lenders disbanded, a group of Indiana pension and construction funds continued the fight. As explained by the AP:

…the Indiana funds, represented by the same law firm as the dissident debtholders, filed their own objection and eventually appealed to the 2nd U.S. Circuit Court of Appeals and the Supreme Court. They claim the sale unfairly favors Chrysler’s unsecured stakeholders such as the union ahead of secured debtholders like themselves.

The funds also are challenging the constitutionality of the Treasury Department’s use of money from the Troubled Asset Relief Program to supply Chrysler’s bankruptcy protection financing. They say the government did so without congressional authority.

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

The Indiana funds are not likely to prevail. As was the case with the group of dissident lenders, the Indiana funds are in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup (C) and JP Morgan (JPM)). They also hold less than 1% of the total debt.

That notwithstanding, they still do have a point, and are raising valid concerns. The issues they raise not only go to the root of creditor rights, but more importantly, raise fundamental questions about the rule of law. And to borrow from William J. Bernstein, “A law that does not apply equally to all citizens, the ruler included, is no law at all.”

So good for the Indiana funds pension and construction funds (and their legal representatives) who, despite the odds, fight not only for their own rights, but also for the rights of all citizens in a vibrant democracy.

Disclosure: No positions

Comments

[a. palmer jr.:]

I didn't realize that it was what percent you were in for you to be recognized as a debtor. It now looks like the courts don't even want to follow the law. What recourse do we have in the future if our courts don't want to go by the law. We already knew they didn't want to uphold the immigration laws, now the bankruptcy laws. Pretty soon, I guess, it'll be every man for himself in this country!

Jun 11 12:19 AM