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Analysis: Big hurdle for Chrysler challenge

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

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Analysis

With Justice Antonin Scalia leading the way, the Supreme Court has grown increasingly unwilling to leave the federal courthouse door open wide to legal challengers.  (The most recent example: the 5-4 ruling three months ago in Summers v. Earth Island Institute, 07-463, found here. Scalis’s most significant opinion on the issue remains Lujan v. Defenders of Wildlife, decided in 1992.)  This skepticism poses the most significant obstacle to the newly-filed challenge by lenders opposing the bankruptcy rescue plan for the automaker, Chrysler.

The part of the challenge that raises the issue with the highest visibility and the broadest impact — the legality of the U.S. Treasury’s use of economic recovery “bailout” funds to finance the deal — depends upon a group of Indiana worker benefit plans having a right to raise that question in court.  No court has yet ruled on whether the Treasury broke the law, because none has found it had jurisdiction to do so.

While the Indiana lenders were allowed to contest the plan for other reasons, they were denied “standing” by a bankruptcy court to object to Treasury’s decisive role.  They would not be hurt by the plan, the judge found, or at least not as much as they would be if Chrysler simply collapsed and went out of business.

In the formal appeal that the lenders will file shortly in the Supreme Court, following up their application for a postponement of the deal, a fundamental issue will be this one of “standing.” Because the Constitution’s Article III limits the federal courts to ruling on actual “Cases or Controversies,” a would-be court challengers must be able to show that there is a live dispute — that is, show that they would be hurt, that the other side is responsible for that harm, and that a court ruling in their favor would cure it. If they can’t make those points decisively, the court has no authority to hear their complaint.

The Indiana lenders’ pleas to the Supreme Court, filed just before midnight Saturday, are attempts to set the stage for the Supreme Court ro rule on two bankruptcy court rulings (both upheld Friday by the Second Circuit Court).  One of those decisions, of course, approved the Chrysler rescue plan.  The other was the decision that the Indiana funds had no “standing” to contest Treasury’s role, but only to challenge the parts of the plan that might affect them directly.  (The “standing” decision can be read here.)

U.S. Bankruptcy Judge Arthur J. Gonzalez ruled on May 31 that the Indiana benefit funds could not challenge the Treasury’s use of “bailout” (Troubled Asset Recovery Program) funds to pay for “old” Chrysler’s makeover into “New Chrysler.”

The judge decided that the funds had no right to contest the Treasury’s decision that an auto company was eligible for “bailout” money.  The funds contended that Congress intended that money to go only to buy troubled assets of financial institutions, and an auto company is not that.

The funds, the judge found, could not prove they were harmed by the way the Chrysler deal treats the collateral that stands behind the loans that the Indiana group and others provided to Chrysler.  The manager of that collateral, according to the judge, had the authority to decide the collateral’s fate and did not object to the deal, and all top-priority lenders were bound by that under an existing agreement.

Moreover, the judge said, even if the funds could show they had been hurt, the value of the collateral was no greater than the $2 billion that all of the top-priority lenders will share after the deal goes through.  In fact, the judge said, the collateral’s actual value might be worth no more than $800 million if Chrysler is forced to liquidate.

In a final blow to their “standing,” Judge Gonzalez concluded that, whether the Indiana groups were hurt or not, any injury they might suffer could not be laid at Treasury’s door.  The Treasury was, in this situation, only acting as another lender; actually, no other lender was available, the judge said.  The Indiana funds’ grievance was with the plan, not with the lender, the judge said; they would be protesting the plan even if the lender were a private entity.

Because the funds had no “standing” on this issue, the judge concluded, he had no authority to rule on Treasury’s role.  He remarked, though, that the Treasury basically had made a political decision, driven by the realities of the U.S. economy’s sharp decline that started last Fall and disrupted Chrysler’s own plan to restructure itself.

(The consumer groups that filed their own challenge in the Supreme Court are not contesting the Treasury role; they are protesting the way the plan would wipe out all possible future claims of people who could be injured or killed in accidents involving Chrysler-made vehicles.)

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