The Supreme Court delayed Chrysler’s reemergence from bankruptcy yesterday by issuing a stay (see Court Adds Uncertainty to Chrysler Reorganization). According to the Associated Press:

Chrysler’s five weeks of breakneck-speed bankruptcy proceedings came to a screeching — but possibly temporary — halt Monday, when a Supreme Court justice delayed its sale of assets to Italy’s Fiat.

The move could derail the government’s ambitious plan for the U.S. automaker to blaze a path to profitability without the burden of many of its debts.

Justice Ruth Bader Ginsburg issued a stay…

This is a story that I have been following for some time (see Legal Issues Affecting Chrysler, Anything but Surgical or Lessons for GM for background). Back then I discussed the group of Non-TARP lenders who were opposed to the deal. Their claim was that the sale to Fiat neither respected their rights as senior creditors nor made them whole. Unfortunately, their opposition quickly faded, as it became clear to them that they were not only swimming upstream, but that the cost of opposition was more than they were willing to tolerate.

Although the group of dissident lenders disbanded, a group of Indiana pension and construction funds continued the fight. As explained by the AP:

…the Indiana funds, represented by the same law firm as the dissident debtholders, filed their own objection and eventually appealed to the 2nd U.S. Circuit Court of Appeals and the Supreme Court. They claim the sale unfairly favors Chrysler’s unsecured stakeholders such as the union ahead of secured debtholders like themselves.

The funds also are challenging the constitutionality of the Treasury Department’s use of money from the Troubled Asset Relief Program to supply Chrysler’s bankruptcy protection financing. They say the government did so without congressional authority.

The funds hold about $42.5 million, or less than 1 percent, of Chrysler’s $6.9 billion in secured debt. They bought it in July 2008 for 43 cents on the dollar.

The Indiana funds are not likely to prevail. As was the case with the group of dissident lenders, the Indiana funds are in the minority among their own class of creditors (the total group of first lien holders including the likes of Citigroup and JP Morgan). They also hold less than 1% of the total debt.

That notwithstanding, they still do have a point, and are raising valid concerns. The issues they raise not only go to the root of creditor rights, but more importantly, raise fundamental questions about the rule of law. And to borrow from William J. Bernstein, “A law that does not apply equally to all citizens, the ruler included, is no law at all.”

So good for the Indiana pension and construction funds (and their legal representatives) who, despite the odds, fight not only for their own rights, but also for the rights of all citizens in a vibrant democracy.

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UPDATE: 6/9/2009 at 9pm

Actually, yes so fast. Nearly 24 hours after Supreme Court Justice Ginsberg issued her stay, the Supreme Court vacated the stay effectively clearing the sale to Fiat (see Court Clears Chrysler Sale). According to the SCOTUS blog:

Justice Ginsburg set off a wave of speculation, some of it well wide of the mark, by issuing a brief order Monday afternoon temporarily staying the transaction.  Suggestions in several quarters that her delay might have meant that the Court was signaling that it might hear the challengers’ case and decide it proved to be entirely without foundation.

MY COMMENT: That’s a bummer. I still believe that the challengers (in particular, the Indiana funds) had a point, especially with respect to the issue of constitutionality. And, in fact, even in its statement, the Supreme Court recognized that:

a denial of a stay is not a decision on the merits of the underlying legal issues.

To summarize the SCOTUS post:

First, the three delay requests filed by three Indiana teacher, police and construction worker benefit plans (08A1096), by a variety of consumers groups (08A1099), and by Patricia Pascale, a widow suing for her husband’s asbestos-related death (08A1100), were denied, and Ginsburg’s temporary order was lifted.

Second, stressing that it was not ruling on the merits of these challenges, the Court listed the factors that govern whether a stay, or delay, would be granted.   Among those are whether four Justices would agree to hear the case on the merits, whether there was “a fair prospect” the Court would overturn the lower court ruling (here, a decision of a bankruptcy judge in New York), and whether “irreparable harm” would result if no stay were granted.  This paragraph added that, “in a close case,” the opposing rights and needs of each side would be balanced against each other.

Third, the Court stressed that no one had a right to a delay, since that was a matter of “judicial discretion.” It added that the party seeking the stay had the burden of justifying it, and concluded: “The applicants have not carried that burden.”

Finally, it stressed that the matter was one to be examined on the basis of a particular case, requiring “individualized judgments in each case.” It closed with this: “Our assessment of the stay factors here is based on the record and proceedings in this case alone.”

Although I thought that it was an absolute long shot that the high court would overturn the decision coming out of the lower court, I never expected a decision to come this quickly.

But there you have it. Hello Fiat-Chrysler.

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