(NOTE: The documents filed in the Supreme Court to challenge the Chrysler sale are linked in this post, below.)

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The case of In re Chrysler LLC, Debtor has the potential to produce the most significant Supreme Court ruling on the government’s power to deal with economic crisis since the Court struck down major parts of President Franklin Roosevelt’s New Deal, in Schechter Poultry Corp. v. U.S. in 1935 and U.S. v. Butler in 1936.  But the Supreme Court will not actually rule on any of the basic legal challenges unless it first puts the Chrysler sale on hold, and then agrees to hear and decide the case itself.  It has no legal obligation to do either. Two challenges have now been filed. (UPDATE: A third challenge has been filed. Its claims are discussed at the close of this post.)

The key points of the Indiana benefit funds’ objection to the Chrysler sale are:

* Without a court-ordered stay, the Chrysler sale will close promptly, leaving no one to challenge its illegality.

* Without a court-ordered stay and without Supreme Court review, the legality of the Treasury’s role will never have been decided by any court.

* The Chrysler sale plan — “the fastest reorganization on record” — is flatly illegal under federal bankruptcy law.  Its approval by courts raises issues “of immediate and enduring national significance.”

* The Treasury had no authority to use “bailout” funds to rescue an auto company.  Doing so violated both the Constitution and federal economic recovery law.

* An automobile manufacturer is not a “financial institution” and thus was not eligible for “bailout” funds.

* The benefit funds as “absolute priority” lenders had “standing” to challenge Treasury’s maneuver because of the impairment of their collateral.

* The Treasury rebuffed all efforts by Chrysler to save itself, preferring and stubbornly insisting upon the Treasury’s own plan.  There were alternatives that would better protect lenders and other stakeholders.

* Priority lenders’ interests were sacrificed to those of favored stakeholders whose claims had no security behind them (such as the autoworkers’ union).

* The Treasury violated bankruptcy law by devising a “de facto” reorganization without following the proper procedures for such a legal restructuring.

* The bankruptcy judge wrongly cut short the timetable for the court case testing the validity of the Chrysler sale.

* The $2 billion cash payment to be divided among first-tier lenders is far short of the value of their collateral, which is being wiped out.

* The investment banks that helped develop the Chrysler plan had a conflict of interest because they themselves had received federal “bailout” funds.  Thus, their analysis of the value of the lenders’ collateral was not to be trusted.

* A court-ordered delay is justified because there is a fair chance the Supreme Court will grant review, the Indiana lenders will be seriously harmed if the deal goes through, and the balance of fairness is on their side.

The key points of the consumer organizations’ challenge to the sale terms are:

* The plan illegally wipes out future claims for individuals who will be injured or killed in accidents involving cars and trucks designed and sold by the “old” Chrysler.

* The deal wipes out those claims because the sale would go through free and clear of any of “old” Chrysler’s past or future obligations.

* Such individuals had no notice that the deal for Chrysler would would wipe out their future claims, and no real chance to protest it in court.  Due process does not allow binding people whose injuries and claims have yet to develop.

The key points of a widow’s challenge to the sale terms are:

* The deal illegally wipes out existing and future claims by those claiming injury or death from exposure to asbestos while working on auto brakes with asbestos components.  The scuttling of product liability claims includes a widow’s lawsuit for wrongful death of her husband from lung cancer.

* A special bankruptcy law passed by Congress in 1994 controls the fate of asbestos claims; its provisions were not followed in the Chrysler transaction.

* The decision of the bankruptcy court and the Second Circuit in this case conflict with a 2005 ruling of the Third Circuit Court holding that the special provisions for asbestos claims control asbestos claims.

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