Supreme Court steps aside on Chrysler-Fiat deal but questions remain

The legal issues raised in the case against the deal are likely to arise again with General Motors.


The US Supreme Court action Tuesday that cleared the way for the reorganization deal between Chrysler and Italian automaker Fiat did not resolve any of the potentially significant legal issues raised against the deal.

Instead, the high court went out of its way to emphasize that its decision simply lifted the temporary stay entered on Monday.

"A denial of a stay is not a decision on the merits of the underlying legal issues," the court said in an unsigned two-page order. It added: "Our assessment of the stay factors here is based on the record and proceedings in this case alone."

Groups objecting to the Chrysler-Fiat alliance raised questions about using government bailout money and bankruptcy laws to speed completion of the deal.

The Supreme Court action lets stand the decision of a bankruptcy judge and a three-judge appeals court panel. But it does not signal an endorsement by the court of the legal reasoning in those decisions.

Nonetheless, an Obama administration official hailed the action as an important legal victory. "We are gratified that not a single court that reviewed this matter, including the US Supreme Court, found any fault whatsoever with the handling of this matter by either Chrysler or the US government," the official said.

Despite this statement, some of the same issues are likely to emerge in future challenges to the Obama administration's intervention in the private sector in the ongoing economic crisis, including expected future involvement with General Motors.

The legal fight against the Chrysler bailout began when a group of pension and construction funds in Indiana as well as several consumer groups took issue with aspects of the special arrangements.

Lawyers for the pension funds argued that the US Treasury Department was illegally diverting money from the Troubled Asset Relief Program (TARP) to Chrysler to facilitate the Fiat deal. They argued that the Emergency Economic Stabilization Act of 2008 (EESA), which set up TARP, earmarked those funds for financial institutions – not car companies.

They added that Treasury officials were misusing bankruptcy laws in a "sham" that favored the United Auto Workers union and cheated secured creditors out of favorable treatment.

"The Chrysler and General Motors bankruptcies involve almost $100 billion in assets, and the government, without any specific approval from Congress, is using the bankruptcy system to re-order private property rights on a scale and in a way that America has never before seen," wrote Indiana Solicitor General Thomas Fisher in his appeal to the Supreme Court.

US Solicitor General Elena Kagan urged the high court not to take up the objectors' cases. "Here, only two outcomes are possible," she wrote. "Either the sale will go forward, in which case New Chrysler will be able to restart the production lines – or Chrysler will be liquidated."

Liquidation would have severe effects on the US and Canadian economies, she said. "More than 38,000 Chrysler employees would lose their jobs; 23 manufacturing facilities and 20 parts depots will be shuttered; more than 3,000 Chrysler dealers would suffer significant and possibly fatal harm to their businesses; and billions of dollars in health and pension benefits for current and former Chrysler wokers would be wiped out," Ms. Kagan said.

On the use of TARP funds in the auto industry, Kagan said that the Treasury Department had interpreted the EESA to grant them flexibility to apply TARP funds to other industries beyond financial companies.

While the fund was established to bailout financial firms, she noted that the law's definition of "financial company" is broad enough to include any company with significant operations in the US.

Specifically the law identifies: "any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company…"

Consumer advocate groups also objected to the proposed deal. In a brief, they urged the Supreme Court to examine part of the Chrysler-Fiat deal that would release New Chrysler from pending or future product liability claims for any injuries caused by vehicles sold to consumers prior to completion of the deal.

Their brief raised the issue of whether US bankruptcy law could be used to extinguish future product liability claims – "claims which have not yet accrued because the injuries on which they will be based have not yet occurred."

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