Chrysler deal hits Supreme roadblock

The future of the U.S. auto industry, and bankruptcy law as currently practiced, are suddenly thrown into question.

By Andrew Leonard

Published June 8, 2009 8:48PM (EDT)

Setting up a potential confrontation between the Supreme Court and the Obama administration's attempt to restructure Chrysler and General Motors through government-orchestrated bankruptcies, on Monday afternoon Justice Ruth Bader Ginsburg granted a stay on the sale of Chrysler to Fiat that had been sought by a group of Indiana pension funds.

This is a high-stakes game. Chrysler and the U.S. government have been arguing that any delay risks blowing apart the deal and forcing the immediate liquidation for Chrysler. But the pension funds contend that the reorganization illegally subordinates the rights of secured creditors to Chrysler's workers, and that the U.S. government illegally bailed out the car companies with TARP funds specifically designated for the financial industry.

According to the Wall Street Journal, "The high court, in a brief order, said it will extend a temporary stay put in place by an appeals court until it has the chance to receive and review routine appeals from groups opposed to the sale."

SCOTUSblog, which has become a must-read news source blog for Supreme Court watchers, says that "the action has almost no legal significance," that Ginsburg's order

simply gives her or the full Court more time to ponder whether to postpone the sale further, or allow it to go forward.

It would have taken the votes of five members of the Court to grant a full postponement. Ginsburg's brief, unexplained order said only that the bankruptcy court's decisions approving the sale were "stayed pending further order" by her or the Court.

But the action potentially has huge significance. Up until this point, the Obama administration and Chrysler have encountered virtually no obstruction from either the bankruptcy court, district court or appellate court judges in moving ahead with its plans. But if the Supreme Court decides to take the case, the entire course, not just of the White House's strategy to save the U.S. auto industry, but also of bankruptcy law as currently practiced, could be altered.

Because despite what the Indiana pensions funds are claiming, what the Obama administration has proposed falls well within the tradition of bankruptcy law as it has been practiced over the last decade. A mechanism known as a Section 363 "sale" allows a fast-moving reorganization that often does not end up with creditors getting what they feel they are entitled to by law. Stephen Lubben, a bankruptcy expert who has been following this whole saga minute by minute at the blog Credit Slips and who has consistently argued that he thinks the "the appellants bankruptcy-law arguments are not particularly compelling," argues that if the Supremes agree with the Indiana pension fund argument, many Chapter 11 reorganizations (whether assisted by government funding or not) would perforce become Chapter 7 liquidations.

That might not be a development that society needs. Chapter 7 liquidations are by their very nature destructive. The damage done by forcing Chrysler and quite probably GM into a liquidation would not be helpful to a struggling economy.

UPDATE: Via e-mail, Lubben says, "My initial take is this is simply about preserving the status quo for a while, so the Justice can address this without the circuit's stay expiring."

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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