U.S. Supreme Court orders Chrysler sale lawsuit tossed
- The U.S. Supreme Court on Monday ordered the dismissal of an appeal by three Indiana pension funds challenging the sale of Chrysler LLC this year.
The lawsuit by three pension funds challenged how Chrysler was sold to Italian carmaker Fiat SpA.
The sale closed June 10, one day after the high court rejected an emergency request from the pension funds to stop the deal, which the U.S. Treasury Department and the Canadian government helped broker.
Two pension funds for Indiana public employees and a construction fund objected to allowing struggling Chrysler to rapidly sell its assets without going through a reorganization process aimed at protecting debtors. They said the sale left Chrysler’s secured lenders hanging.
The U.S. Treasury orchestrated a sale under Section 363 of the Bankruptcy Code, which allowed debtors to avoid having to fully compensate a group of first lien priority creditors.
The first lien priority creditors in Chrysler’s case included two public pension funds invested on behalf of approximately 100,000 retired Indiana teachers and police officers.
“On its face, this deal smacks of the sort of insider favoritism that the bankruptcy code was designed to prevent,” attorneys for the funds said in court papers. They added that the deal “was nothing more than a way for the government to pick winners and losers from among Chrysler’s claimants.”
The deal was upheld by the U.S. Bankruptcy Court for the Southern District of New York and the 2nd U.S. Circuit Court of Appeals in New York.
In their order Monday, the U.S. Supreme Court justices set aside the appeals court ruling and send the case back for the court to dismiss., saying that the case is moot because the Chrysler sales has gone forward.
The case is Indiana State Police Pension Trust v. Chrysler LLC, 09-285.
So, the Indiana Pension Fund waived its right to argue that Fiat purchased in bad faith and they got slammed to the mat today as a result. As to this issue, the Bankruptcy Court originally stated:
Further, there are no allegations regarding Fiats conduct in this transaction that would raise any issue as to the purchasers good faith. Thus, New Chrysler is a good faith purchaser pursuant to § 363(m) of the Bankruptcy Code.
The sale was authorized by Judge Gonzalez in the Bankruptcy Court for the Southern District of New York on June 1, 2009. And the protections of 363(m) as to the purchaser kicked in at that precise moment.
The statute indicates that the mootness issue relates back to the date the sale was authorized (not the date the sale closed).
Therefore, even if authority for the sale could have been reversed on the grounds of illegal use of TARP funds or a finding that Old Chrysler acted in bad faith, absent a showing that Fiat acted in bad faith or that the sale had been stayed pending appeal the sale could not be invalidated due to the protections of 363(m).
Hence, appealing the sale was held to be moot because the SCOTUS interpreted that the relief sought by the Indiana Pension Fund could not be accomplished without invalidating the sale.
I will explain this in more detail below. But first we need to examine the original stay issued by the 2d Circuit Court of Appeals and thereafter extended by SCOTUS because this is what will puzzle many commentators the most.
THE STAY ISSUE
The Indiana Pension Fund appealed to the 2d Circuit Court of Appeals and a stay pending appeal was issued by that court on June 2d, 2009. Therefore, at first glance it appears that 363(m) would not render a successful appeal moot in this case since the statute makes an exception that sale authorizations can be held invalid on appeal if the original sale authorization had been stayed pending appeal.
But, on June 1st 2009, Judge Gonzalez did not stay his sale authorization pending appeal. It was only stayed on June 2d by the Court of Appeals.
Therefore, by the time the Indiana Pension Fund came to the 2d Circuit Court of Appeals on June 2d, 2009, according to 363(m), the issue as presented by the Indiana Pension Fund was moot because it did not allege that the purchaser (Fiat) acted in bad faith.
This is why the SCOTUS remanded the case back to the 2d Circuit Court of Appeals with an instruction to vacate their original judgment and dismiss the appeal as being moot.
It doesnt matter that back on June 2d the Court of Appeals issued a stay and that the stay was extended by SCOTUS for a few days. After proper briefing on the issue and time to study the law, SCOTUS correctly determined that in order for an appeal such as this to not be moot under 363(m) absent a bad faith purchaser the court issuing authorization for the sale would have been required to also stay their own sale authorization at the time such authorization was issued, which did not happen here.
Judge Gonzalez did not order the sale stayed pending appeal on June 1st.
The Indiana Pension Fund understood the power of 363(m) and tried a novel effort to circumvent it in their SCOTUS brief by arguing that the relief they requested wouldnt amount to an invalidation of the sale.
But it appears that the SCOTUS did not agree the incredible relief requested could be granted without unwinding the sale.
The Indiana Pension Fund was asking that VEBA (United Auto Workers Union et. al.) return to the estate a $4.6 billion dollar note and common stock.
But this would have effectively changed the entire sale drastically and it appears that SCOTUS saw this as an invalidation of the sale.
Such invalidation is not authorized under 363(m). VEBA is now a 55 percent owner of New Chrysler and any attempt to circumvent their deal would have negative effects on the purchaser in that VEBA would have to begin negotiations with all parties again and the sale would certainly be invalidated by effect notwithstanding the lack of a court order stating as much.
So, I agree with SCOTUS that the relief requested by the Indiana Pension Fund would have amounted to an invalidation of the sale.
However, the Indiana Pension Fund was correct to point out that legal precedent exists for other aspects of the sale proceeds to be redistributed upon a proper showing of cause.
Relief associated to the direct cash payment of $2 billion dollars to Chryslers first lien lenders would not have an effect on the validity of the sale as that money and its distribution has nothing to do with the purchaser (Fiat/New Chrysler) and does not concern the assets purchased.
Unwinding that distribution is not protected by 363(m). Regardless, the Indiana Pensioners have already been given their share of those funds at 29 cents on the dollar.
I do not wish to reveal our litigation strategy going forward.
Our clients were not part of the Indiana Pension Fund appeal and the issues we will raise are vastly different and pertain to other sections of the Bankruptcy Code and applicable case law not mentioned in this analysis.
We also believe that the Indiana Pension Fund failed to identify a nexus of bad faith necessary to their case not being moot. We do not plan on making the same mistake.
Leo C. Donofrio for the Law Office of Pidgeon and Donofrio
December 14, 2009, 1:56PM
I am praying for Leo every night and will continue to pray.
Good Donofrio update.