Indiana Funds May Not Be Done with Chrysler
The Indiana pension funds that went all the way to the Supreme Court to try to stop the sale of
to Italy's Fiat Auto ( (FIA.MI)) might be back again. Indiana Treasurer Richard Mourdock is mulling a legal motion to get the nation's highest court to rule whether the sale—which was finalized in bankruptcy court on June 10—was valid.
The funds hope that the court will either overturn the sale or force the new Chrysler—which is owned by Fiat, the United Auto Workers, and the federal government—to pay secured creditors such as the Indiana pension plans some more money. Legal experts say it's a long shot, since a federal appeals court and Supreme Court Justice Ruth Bader Ginsberg already denied their efforts during the bankruptcy process.
Still, while it's hard to imagine the sale of Chrysler being overturned, Indiana's persistence shows what can happen now that the government is so deeply involved in Big Business. People like Mourdock cry foul and fight not only to recover more money, but to prove a point.
Driven by Principle Mourdock, who has already spent $2 million of Indiana's money in a failed fight to recover more cash, admits that he is also motivated by principle. Mourdock argues the government rushed the sale of Chrysler and used its influence to manipulate bankruptcy proceedings. He is also personally opposed to government ownership of business. "John Wayne never needed a bailout," Mourdock says. "Is it about money? Is it about principle? Is it about the law? Yes. It's about more than Chrysler and Indiana. When we see the law has no meaning, it sets a bad precedent."
He maintains that the fight was about getting more cash for the pension funds, which bought the Chrysler debt at a discount rate of 43¢ on the dollar last year. Since the funds paid $18.3 million, they only needed $6 million more to break even.
The Treasurer says he was torn between his own constituents. Pensioners benefiting from those three funds wanted him to pursue a better settlement on the Chrysler debt.
Pro Bono Help If Mourdock decides to file the motion, the pension plans' hired counsel, aggressive Florida attorney Tom Lauria, will work pro bono. But the state's Solicitor General would also work on the case. That could be problematic since some of Mourdock's own constituents oppose his fight. Had Indiana stopped the sale and the carmaker was liquidated, some of the state's 7,000 Chrysler jobs would have been at risk. Those voters let him hear it. "They thought I was trying to attack their jobs," Mourdock says.
That's the tightrope Mourdock walks. While some constituents want him to drop the fight, he and Lauria may keep going. They argue that the government wielded heavy influence to get the majority of other secured creditors to take 29¢ on the dollar when unsecured creditors—namely a health-care trust for retired UAW members—got paid much more. Secured creditors normally take precedence in bankruptcy. But in this case, Chrysler and the Treasury Dept. argued that a quick bankruptcy was needed to finalize the sale to Fiat and keep the stigma of bankruptcy from further hurting car sales. So they used a process called a "363 sale" to sell the Chrysler assets they wanted to keep to Fiat, the UAW's retiree health-care trust, and the government.
Mourdock says that if the sale wasn't rushed, another buyer could have emerged and paid more. Or at the least the secured creditors could have gotten more and the government and UAW would have been paid less. But that, too, would have been tough to come by. Treasury officials said that there were no other buyers. In court documents, Chrysler said the company talked with several other carmakers, including General Motors ( (GM)) and Renault-Nissan, about a sale or partnership but could not find a deal. Fiat was the only carmaker willing to join up with Chrysler.
No Smoking Gun In this case, the vast majority of secured creditors agreed to accept 29¢ on the dollar. When that happens, bankruptcy court can make all of the creditors take that deal, which is commonly referred to as a "cram down."
Lauria and Mourdock both complained that the big banks that accepted the deal—namely JPMorgan Chase ( (JPM)), Citigroup ( (C)), and Goldman Sachs ( (GS))—had also received money from the Treasury Dept.'s Troubled Asset Relief Program (TARP), just like Chrysler did. So they were willing to help out Treasury with Chrysler. "Why did the TARP banks go from 100% to 29%?" asks Mourdock. "The U.S. government told those banks that they would be taken care of in other ways."
Treasury denies the claim. Mourdock admits he has no smoking gun that proves such collusion. And so far, judges in federal bankruptcy court, appeals court, and Justice Ginsberg all have denied Indiana's efforts to stop the sale.
Lack of Congressional Consultation Lauria says Justice Ginsberg denied the review without ruling on the merits of the case. So he wants to get a review. He plans to push the issue on three points. His first point is that the UAW and federal government are two of the purchasers of Chrysler, but they have conflicts of interest because they were also creditors before the bankruptcy started. So the sale could be overturned on those grounds. His second complaint is that if the court believes they are still legitimate buyers, then he wants the court to revisit how much every creditor got paid.
And last, Lauria still wants the Supreme Court to rule on whether the Treasury Dept. could loan to carmakers using TARP without consent from Congress. TARP was originally set up for banks. If not, then the government couldn't own a piece of Chrysler and the whole deal would have to be reconstructed.
Given the repeated rejections in court, experts say it is unlikely that the Indiana pension funds would get any more than the $12.3 million on the $42 million in debt that they hold. Chrysler is supposed to pay $2 billion, which will be distributed among the secured creditors in exchange for their debt. Even if the Supreme Court agrees with Lauria, the court order cannot take any assets away from the new company now that the sale is completed, says Lynn Lopucki, professor of law at the University of California at Los Angeles. "If they win, it does not affect the sale," Lopucki says. "The court can take the case and rule on it. But the sale has gone through. They can't get any more value."
Wants a Supreme Hearing Having lost every round so far, Mourdock has to decide whether he has a shot at winning and if his constituents want him to keep fighting. Lauria says that if the Supreme Court will just listen, he will win, based on a fair interpretation of the law. "I would not expect any funds affected by this ripoff to pay additional sums to make a point of law that would not yield potential benefit to those funds," he wrote in an e-mail. "I'm still obligated to do the best I can for the people I represent."
Return to the Auto Bailout Special Report Table of Contents