A few of Chrysler’s secured creditors have found a backbone and decided to fight the Executive Branch’s unconstitutional actions of turning one of the most basic principles of the Bankruptcy Code on its head – the absolute priority rule.  The Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust, and the Indiana Major Moves Construction Fund (collectively, the “Indiana Funds”) have filed a Motion seeking the appointment of a Trustee so that “an independent, disinterested person [can make] business decisions that are in the best interest of [the debtors’] estates…  The basis of the Indiana Funds’ motion is that the Treasury Department is causing Chrysler to ignore “fundamental principles of bankruptcy law by allocating distributions according to the government’s political agenda rather than the creditors’ legal priority.  The motion, among other things, alleges that the government has no authority to take the actions it has in these cases under any statute, including, but not limited to, TARP (i.e., the Troubled Asset Relief Program) or EESA (i.e., the Emergency Economic Stabilization Act).

Back to the beginning:  TARP was suppose to be for financial institutions, but after Congress failed to pass legislation to assist the auto industry, the Treasury Department (Paulson) stated that the auto companies could be considered financial institutions under TARP.  This semantics game provided Chrysler $4B on a junior secured basis – junior to the senior secured creditors (“Senior Secured Creditor”), who are owed a whopping $6.9B (the Indiana Funds are part of the senior secured creditors group – owed roughly $43 million of the outstanding $6.9B).  The Government’s $4B loan was at 5% interest with a December 30, 2011 maturity date, with an option to accelerate the entire amount due if Chrysler failed to put together a restructuring plan acceptable to the Obama Administration by February 17, 2009. 

On February 17, 2009, Chrysler submitted to the Government a restructuring plan  that sought to restructure as a stand-alone US entity by restructuring its debts, raising additional capital and completing an alliance with Fiat.  Upon reviewing the business judgment of Chrysler’s management, the Obama Administration said that Chrysler’s restructuring plan was not viable, and that Chrysler would have 1 month (30 days) to reach an agreement with the Senior Secured Creditors, the Treasury Department, VEBA, the unions, other creditors, and Fiat.  After this point, the President’s Auto Task Force took over certain negotiations for Chrysler with the Senior Secured Creditors and the union. 

President Obama also characterized the Senior Secured Creditors as speculators who were unwilling to make sacrifices; however, as the Indiana Funds’ motion makes clear, the Indiana Fund only invests in first lien secured debt, which, under the UCC, is suppose to be among the safest forms of investment.  Also, the Indiana Funds’ were willing to take a 50% haircut – much more than what the unions were willing to accept. 

Understandably, the Indiana Funds view the Chrysler situation as unfair because they are victims of breaches of fiduciary duty by Chrysler’s management, and abuse of power by the Executive Branch to further its political agenda.  And they are right to do so – and the other Senior Secured Creditors should be just as angry as the Indiana Funds.  The actions of the Government raise too many questions, such as, how can the Treasury Department and unions, which are unsecured, get anything before the Senior Secured Creditors are paid in full?  Indeed, how can the union get more than the Senior Secured Debtors?  How will a plan with these terms be confirmed without the consent of the Senior Secured Creditors (it can and shouldn’t)?  Can the Government change, and should it be able to change, the laws for its own purpose to achieve a political end?  How can capitalism endure if the legal framework can be altered at the whim of the Government?  The questions can go on and on, but it will certainly be interesting to see how either the Court rules on Indiana Funds’ motion – certainly the ruling may help answer some of these questions.