Supreme Court Clears The Way For Chrysler Fiat Marriage

Posted by: David Kiley on June 9, 2009

The U.S. Supreme Court on Tuesday denied a hearing to pension funds objecting to the White House-assisted reorganization of Chrysler that would transfer assets and management control of the troubled Detroit icon to Italian automaker Fiat. The move by the court thus clears the way for a newly constituted Chrysler to re-emerge from Chapter 11 bankruptcy.

The Italian carmaker, which manufactures Fiat, Alfa Romeo, and Lancia branded vehicles in Europe, is expected to complete its purchase of Chrysler assets on Wednesday. The deal gives Fiat 20% of the equity in Chrysler in exchange for sharing billions of dollars worth of technology and engineering assets with Chrysler. The company has an option to buy up to 35% of Chrysler down the road after taxpayer loans are repaid.

Chrysler entered Chapter 11 last month with the help of Federal loans granted by the White House auto industry task force and the U.S. Treasury out of the Troubled Asset Relief Program funding from Congress.

While the automaker got major concessions from the United Auto Workers and large banks holding billions in secured debt, a group of Indiana pension funds holding about $42 million of the automaker’s debt objected to their treatment doled out in the bankruptcy process and challenged the legality of the process. Last Friday, the appellate court upheld the decision by the New York bankruptcy judge approving Chrysler’s reorganization plan with Fiat.

In denying a hearing of the case, the Supreme Court issued a brief, unsigned opinion explaining its action. To obtain a delay, or stay, of the deal, a plaintiff must convince at least four of the nine justices that the issue raised is serious enough to warrant hearing a full appeal and that a majority of the court will conclude the lower court decision was wrong. “The applicants have not carried that burden,” the court said.

Indiana Treasurer Richard Mourdock, who led the cause of the pension funds, expressed disappointment with the decision and said options seem limited for opponents of the sale. “Obviously the Supreme Court of the land is the supreme court of the land,” Mourdock said. “The United States government has, I continue to believe, acted egregiously by taking away the traditional rights held by secured creditors.”

The White House issued a statement applauding the decision: “The Chrysler-Fiat alliance can now go forward, allowing Chrysler to re-emerge as a competitive and viable automaker.

President Obama last month predicted a swift re-emergence for Chrysler, and the bankruptcy court obliged. Many bankruptcy experts have said in the last month, though, that the White House bent the bankruptcy laws in order to fast-track Chrysler’s reorganization.

Specifically, the United Auto Workers, an unsecured creditor to whom the company owed $8 billion in health care payments, is getting $4 billion in cash and 55% of the equity in the company. The secured creditors—banks and pension funds—were forced to take a 75% “cram-down” on what they were owed. Secured creditors most often do much better in Chapter 11 proceedings because they are first in line if the assets of a company are liquidated for cash.

The Supreme Court acted the same day that the bankruptcy court judge in New York approved Chrysler’s plan to sever franchise contracts with 789 dealers in a move to lower its distribution costs and cut underperforming dealers.

With the future of the company set, now comes the hard part. Fiat must integrate vehicle development and manufacturing between the Italian company and Chrysler. That will involve adapting some existing Fiat cars to the U.S. market before the companies have the opportunity to develop unique vehicles from scratch.

Fiat CEO Sergio Marchionne also will serve as CEO of the newly formed U.S. company. Though he has been silent on many of the specifics, sources familiar with the planning work say that there is a strong likelihood that the Chrysler brand of cars and SUVs will be eliminated and replaced by Fiat, and sold alongside Dodge and Jeep vehicles in combined dealerships that will carry all three brands.

“Bringing the companies together in the middle of a global recession, when auto sales have been battered so, will be a very difficult task,” said John Casesa, managing partner at Casesa Shapiro Group, a New York investment and advisory firm that specializes in the auto industry.

Jerome York, the former vice chairman of Chrysler who has advised financier Kirk Kerkorian in his investments in Chrysler, General Motors, and Ford, said he doesn’t know if Fiat will be successful. But he predicted it would do a “better job with Chrysler than Daimler did.” Daimler-Benz acquired Chrysler in 1998 and sold most of its interests to private equity firm Cerberus Capital Management in 2007. “Daimler did just a god-awful job” of managing the acquisition, said York.

Reader Comments

dnha14

June 9, 2009 11:54 PM

The old Chrysler treated their customers like garbage and I swore after a Caravan and two Jeeps, that I would never deal with them again. Now that they have been reorganized along with the "Fix It Again Tony" Motors and screwed the bond holders in favor of the corrupt unions, I will probably turn off the road to a side street instead of actually passing a Chrysler dealership. Oh, and what they did to their long time dealers will never be forgiven. A company with the morals of Satan. They will not survive.

Mike

June 9, 2009 11:57 PM

The US Government did not abide by the laws according to many. All the US Supreme Court stated it seems is the people harmed did not prove their case so they cannot get an injunction. It does not clear the government from any wrong doing. Unfortunately no one seems to care as expediency is more important the justice. The generation of "have it now" has really come to term and the time for wise debate and thoughtful policy are gone. A very sad state of affairs.

No matter what the company calls the new new cars or the brands they keep alive I will never buy any of their products. I don't care what Obama says about the company - it is tainted on-going government interference and by people in government who have no real clue about economics. They are only interested in speed and not good decisions in order to placate the masses who are getting more and more upset with the reality that their government can't create jobs only the people can.

Paul

June 10, 2009 12:00 AM

Thank goodness, now Chrysler is on the road to recovery and some jobs are saved.

Durteger

June 10, 2009 12:01 AM

If an Italian owned organisation can take over an US automaker why can't say a British company take over a US airline (or vice versa).

What's so special about the aviation industry that archaic restrictive practices manage to cripple the industry resulting in zero profits over the last 80 years.

EVR

June 10, 2009 12:07 AM

The Indiana Pension Funds' ill-founded attempt to insulate themselves from bad investment decisons was correctly rejected by the U.S. Supreme Court. A ruling to the contrary would have opened the door for every type of investor, whether an individual, pension fund or otherwise to seek judicial redress for their respective bad investment decisions which is not a proper issue for the Supreme Court to review.

steve

June 10, 2009 12:07 AM

Writing retroactive laws ,while ignoring those that already exist will be sure to restore confidence in the american system. The american indians know first hand "how good the word and agreements of the government are", now for those in doubt we can show not much has changed.

makes me warm and fuzzy

Andrea Lydon

June 10, 2009 12:32 AM

Angry. The long term consequences of the Obama administration's blatent union pandering are enormous. It sucks the capital out of the word 'capitalism'. This is a sad day for our country. I saw a bumper sticker today that struck a chord - "Tell me, how's that hope and change working for you?"

greg

June 10, 2009 12:47 AM

now even car companies can get married but still gays cannot?!?!

bootcut

June 10, 2009 1:19 AM

The decision by the Supreme court should be a warning to all investors that labor union trumps secured credit status. Don't invest in any company with a union.

Jack Norris

June 10, 2009 1:57 AM

Heads I lose, tails you win. At least with common stock, I know the rules going in.

Changing the rules in the middle of the game is not nice and in some venues would earn you a trip to the ER.

gary walker

June 10, 2009 2:10 AM

fiat 30 years ago meant-- fix it again tony-- a poor quality car . the alfa romeo was a high quality car at that time seems fiat would be a poor car company to be hooked up to unless they have changed

Garret Cohen

June 10, 2009 1:27 PM

Total b.s. if you ask me. The law is very clear hear, Bond holders have first dibbs.

Jay Walters

June 11, 2009 12:28 AM

The only difference between Barack Obama and Robert Mugabe is that BHO has been in office only 5 months.

This is absolutely frightening. What the SCOTUS has done is give BHO carte blanche to seize anyone's property and give to to politically favored groups with impunity. I fully expect that there will be no election in 2012. We have entered a dictatorship.

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