Funds to present case over Chrysler

By Nicole Bullock in New York and Bernard Simon in Toronto

Published: June 3 2009 20:17 | Last updated: June 3 2009 20:17

A group of Indiana pension funds fighting Chrysler’s restructuring will present arguments to a federal appeals court on Friday, potentially scuttling the carmaker’s plan to finalise an alliance with Italy’s Fiat on the same day.

The funds, which hold $42m of Chrysler’s $6.9bn secured debt, contend that their claims have been unlawfully subordinated, and that the US government has played an improper role in the restructuring.

They also maintain that the government has misused funds from the troubled asset relief programme (Tarp) to bail out carmakers.

This week, a New York bankruptcy judge approved the sale of most of Chrysler’s assets to Fiat, the US and Canadian governments, and the United Auto Workers union. The judge said the transaction could close on Friday afternoon. But the closing now hinges on the appeal hearing.

If the appeal is denied, the pension funds intend to take their case to the US Supreme Court, the Indiana state treasurer’s office said.

Under pressure from the Obama administration, most of Chrysler’s other secured creditors have accepted the carmaker’s $2bn offer to settle their claims, equal to 29 cents on the dollar. But several have expressed support for the Indiana funds.

On the other hand, the funds have come under political pressure to back down. Chrysler employs thousands of workers in Indiana.

Fiat can walk away if the deal is not finalised by June 15, although there is a 30-day grace period for regulatory approvals.

Fiat would initially have a 20 per cent equity stake, although this could rise above 50 per cent as Chrysler pays back its government loans. The Italian carmaker would provide technology for a new line-up of small cars, and use its international dealer network to help Chrysler diversify beyond North America.

Chrysler’s bankruptcy proceedings are being widely watched as a test case for its larger and more complex rival, General Motors.

Chrysler’s plants have been closed since it filed for Chapter 11 protection on April 30. The company said this week that it plans to reopen most of them by the end of June.

In a drive to boost sales, Chrysler launched a fresh round of incentives on Wednesday, offering interest-free financing or cash discounts of up to $4,000 on some 2009 models. Current Chrysler, Dodge and Jeep owners are also eligible for $1,000 in “loyalty cash payments”.

Copyright The Financial Times Limited 2009