Chrysler in Court at Start of Crunch Week for Automakers

Indiana's state treasurer argues that the Chrysler plan violates investor and creditor rights.

Chrysler faced a key court hearing on May 26 challenging its fast-track bankruptcy plan in a legal battle watched closely by General Motors at the start of a critical week for the U.S. auto industry. The challenge comes from Indiana's state treasurer on behalf of its pension funds, arguing that the Chrysler plan violates investor and creditor rights and seeks to take the case out of bankruptcy court for a full legal hearing.

The developments in Chrysler are critical for GM, which faced a deadline on May 26 for bondholders to make major concessions. GM is expected to file for bankruptcy protection ahead of a June 1 deadline. In the cases of both GM and Chrysler, a major legal question is whether holders of bonds and other forms of secured debt can be forced into bigger concessions than other stakeholders. For GM, bondholders would be required to exchange $27 billion in debt for 10% of the new company, while the United Auto Workers (UAEW) union would get a 39% stake for waiving $10 billion in claims, while the government could own a 50% share.

Some legal and financial analysts argue that the GM and Chrysler plans set a dangerous precedent by wiping out more debts from secured financial creditors, which should be given priority in bankruptcy.

Indiana Treasurer Richard Mourdock said that in the Chrysler case, "We cant allow our retired police officers and teachers to be ripped off by the federal government."

"The Indiana state funds suffered losses when the Obama administration overturned more than 100 years of established law by redefining 'secured creditors' to mean something less," he said.

Chrysler argued that satisfying the Indiana demands "would lead to the liquidation of Chrysler, resulting in the loss of more than 4,000 Chrysler jobs and 9,000 retiree pensions in Indiana alone." Additionally, Chrysler argued that a liquidation would mean its financial credits would get between zero and 18 cents on the dollar, compared with 29 cents in the proposed transaction.

If no action is taken by the district court, Chrysler's next step would be a hearing on May 27 in bankruptcy court where Judge Arthur Gonzalez was expected to decide on the sale of Chrysler's main assets.

The U.S. government brief called the Indiana effort "nothing more than a last-ditch, eleventh-hour effort by a dissident faction (of creditors ... to obstruct and impede core matters in Chrysler's chapter 11 cases from being heard in bankruptcy court, which is the proper forum for resolution of those matters."

GM last week reached a tentative deal with the UAW union on cost-saving concessions that still must be ratified by rank-and-file workers. Details were not released. The Canadian Auto Workers union ratified a similar cost-cutting plan on May 25.

Copyright Agence France-Presse, 2009

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