A group of Chrysler creditors objected on May 4 to the struggling automaker's bid for a quick restructuring, calling it an illegal bid by the government that violates constitutional property rights.
The objections set up a showdown that challenges the effort led by the U.S. government to save Chrysler through a "surgical" bankruptcy reorganization that clears away key debts and creates a new firm in partnership with Italy's Fiat.
A court filing by a committee of lenders urged U.S .Bankruptcy Court Judge Arthur Gonzalez to reject the Chrysler effort to sell the key assets of the automaker to a group including Fiat.
Under the plan proposed by Chrysler with the support of the U.S. Treasury, the lenders would get $2 billion in place of the $6.9 billion in outstanding loans. The creditors said these claims should get priority under law, but that the reorganization plan entails paying off billions of dollars in other debts in full, contrary to the bankruptcy code. The reorganization is essentially a sale of the main assets of Chrysler to a new entity that would leave the old Chrysler with little.
The court filing called the deal "fatally flawed" and said Chrysler would be worth as much as $27 billion under the proposed plan because it "improperly transfers value from senior creditors to junior creditors."
"That the Treasury Department would take these unconstitutional actions to help the United States address difficult economic times is not an answer," the statement said. It said the constitution "commands that, however great the nation's need, private property shall not be thus taken even for a wholly public use without just compensation."
But Chrysler lawyers said in an earlier filing that there is no other way to preserve any value for the number three automaker. "Absent immediate action, the debtors will lose the only opportunity available to them to preserve their business as a going concern and to avoid the economic devastation that will occur if Chrysler's business, and Chrysler's suppliers and dealers, are forced to shut down," said the Chrysler filing.
The Chrysler lawyers said the plan supported by the U.S. and Canadian government "must be closed in just a few weeks" and that without this the company's "prospects can deteriorate."
The objections were from a group of around 20 lenders that have not received aid under the government's Troubled Asset Relief Program (TARP), calling themselves the "Committee of Chrysler Non-TARP Lenders." They include investment funds from unions, pension and retirement plans and school endowments which have secured loans of around one billion dollars to Chrysler and broke away from other banks that agreed to a government "haircut" on the $6.9 billion in loans.
Under a plan announced on April 30 by President Barack Obama, Chrysler aims for a "surgical" bankruptcy to wipe out a portion of its debts, allowing the creation of a new firm tied to Fiat to put the Detroit firm on the road to profitability. The new firm would be majority owned by the United Auto Workers union with small stakes by the US and Canadian governments, which would contribute some $10.5 billion to the venture. Fiat would eventually be able to boost its stake to 51% after repaying the loans. The plan aims to complete the bankruptcy process within 30 to 60 days.
Copyright Agence France-Presse, 2009
