OBAMA, TARP AND THE INDIANA PENSIONERS

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Barack Obama's plan for a 30-60 day "surgical" bankruptcy for Chrysler L.L.C. and a dozen or so affiliates requires forcing secured debt holders to accept less than thirty cents on the dollar for their claims. It's also predicated on a "Section 363" auction of Chrysler's assets on May 27, 2009, to FIAT or some other mythical savior who is willing to out bid FIAT and pony up a couple of billion.

But standing in the way may be:

The Indiana State Teachers Retirement Fund, Indiana State Police Pension Trust, and Indiana Major Move Construction, pension funds, which are fiduciaries for the investment of retirement assets for approximately 100,000 civil servants, including firemen, policeman, school teachers and their families (collectively, the “Indiana Pensioners.")

They've secured a top-ten international law firm and filed an interesting objection to the fast track sale of the assets.

Of interest to conservative is their broadside at the Obama Administration's authority to assume "constructive control" of Chrysler and destroy the rights of the secured creditors -- namely the "Indiana Pensioners."

Less than a week after having failed to obtain congressional authority to provide financing to Chrysler, the Treasury Department remarkably declared Chrysler, an automobile company, a “financial institution,” so that the Treasury Department could access TARP Funds. That complete reversal of its prior admission is plainly without merit.

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[T]he government took a security interest in Chrysler’s assets which was junior in priority to the existing liens of the Indiana Pensioners.

Although the maturity date of the loan was December 30, 2011, the government had the right to accelerate the entire amount due if Chrysler failed to submit a estructuring plan, or “viability plan,” acceptable to the government by February 17, 2009 (after the inauguration of a new president).

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This loan agreement left Chrysler at the mercy of the Treasury Department in a number of ways. First, the amount of the loan was not nearly enough to fund a meaningful restructuring. The $4 billion was simply an interim lifeline that would postpone Chrysler’s collapse until after the new administration took office in January, 2009. Second, the Treasury Department would have complete discretion to determine whether Chrysler’s viability plan was satisfactory. If the government chose to reject the plan, it would have the right to call the full amount of the loan. Third, even if Chrysler put forth a reasonable viability plan, the government made no commitment to provide the additional funds necessary to allow Chrysler to implement its plan.
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[On March 30, 2009, President Obama] The President informed the country that the government would give Chrysler thirty days to reach an agreement with Fiat, its unions, and its creditors (including the Senior Secured Lenders) under which Chrysler and Fiat would combine to form a new entity. . . . Also, the President required Chrysler to restructure itself in a way that enabled it to gain access to Fiat’s technology, thus enabling Chrysler to produce the type of smaller cars the government wants manufactured, satisfy the demands of unsecured creditors such as the VEBA trust and union laborers, and provide some of Chrysler’s equity to the government – all components of a political agenda imposed on Chrysler’s management. . . . In doing so, the President reversed the business judgment of Chrysler’s management, which had determined a stand-alone reorganization was in the best interests of Chrysler’s stakeholders.

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On April 30, 2009, the Debtors commenced these Chapter 11 cases. As with its
other major business decisions, the timing of the filing and the venue were made by the government. (See Press Background Briefing on Auto Industry (April 30, 2009),
www.whitehouse.gov/the_press_office/Background-Briefing-on-Auto-Industry-4/30/2009
(emphasis supplied)) Even though the cases were filed under chapter 11 of the Bankruptcy Code, it is very clear that the Debtors have no intention (or even possibility) of reorganizing these estates. Instead, the Debtors have filed the Sale Motion seeking approval to sell substantially all of their assets, free and clear of liens, to a newly formed company created for thepurpose of this transaction (“New Chrysler”). . . .

The purpose of this transaction is to transfer value from the Senior Secured Lenders’ collateral to junior Chrysler stakeholders without regard to the well established legal priority of creditor claims. For example, though the Senior Secured Lenders will recover only 29% of their secured claim, Chrysler’s unsecured creditors, including labor-related obligations, will receive over $20 billion over time. Robert Manzo, the Debtors’ Chief Restructuring Officer testified that over $20 billion in liabilities would be assumed and paid out by New Chrysler with respect to worker and retiree healthcare and other benefits, prepetition auto parts and service supplier invoices, warranty and parts obligations, and pension obligations. . . . In particular, the VEBA trust (which has an unsecured claim of
approximately $10 billion), will receive a new note with a value of $4.5 billion as well as 55% of the equity interest in New Chrysler. . . . Fiat, one of the Debtors’ foreign competitors, is slated to receive 20% of New Chrysler (with the right to acquire a total of 51%) in exchange for granting access to its “small car” technology. . . .Fiat is not paying any cash for its stake in New Chrysler. . . .The Treasury Department, a creditor with liens on the collateral that are still junior to those of the Senior Creditors, is slated to receive an 8% equity interest in New Chrysler.

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Following the sale the Debtors will cease to function as a going concern and will be left with only those assets New Chrysler deems essentially worthless. The Debtors describe the sale as of “substantially all” of their assets.

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The Debtors did not play any role in negotiating the capital structure of New Chrysler and did not decide what any of its stakeholders would receive as part of the transaction. . . . The Debtors abdicated each of these critical management decisions to the Treasury Department, whose only legally cognizable interest in these cases is that of a third-lien lender.

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Unlike any other bankruptcy in history, Chrysler’s bankruptcy was announced by
the President of the United States. President Obama’s announcement made clear that he had made the decision to put Chrysler into bankruptcy. He blamed this decision on certain Senior Secured Lenders that had not received TARP Funds and, therefore, had not bowed to government’s pressure to accept an unfair 29 cents recovery where unsecured creditors were receiving all recoveries. The President branded those Senior Secured Lenders with fiduciary duties to their own investors as “speculators” who were unwilling to make “sacrifices.”

(www.whitehouse.gov/the_press_office/remarks-by-the-president-on-the-Auto-Industry
4/30/2009, . . ..) He accused these lenders of refusing to compromise and instead seeking “an unjustified taxpayer-funded bailout.” . . .. This was not true.

First, the Senior Secured Lenders not accepting the unfair deal are not
“speculators.” They invested in first-lien secured debt, which is (or at least should be) a conservative investment. Second, certain of the Senior Secured Lenders did offer to compromise. They offered to accept a 50% reduction of their debt, even though they might receive a better recovery in chapter 7 liquidation. Their offer was in stark contrast to other Chrysler stakeholders, whose “compromise” will enable them to receive a much larger recovery then they are entitled to receive under the Bankruptcy Code. Finally, the Indiana Pensioners have never sought a government bailout. Indeed, they are among the few Chrysler stakeholders that can make that statement. Unlike Chrysler and the TARP banks, who accepted billions of taxpayer dollars, the Indiana Pensioners have never received a dime of bailout money from the government. To the contrary, it was the government that was taking from them. Under the government’s plan, billions of dollars of collateral belonging to the Senior Secured Lenders will be taken away and given to unsecured and junior lien creditors and (ironically) Fiat, a foreign automaker. Because certain of Senior Secured Lenders asked to be paid for their interests in that collateral, they were vilified.

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TARP also contains express language prohibiting the impairment of the Senior
Lenders’ rights, which is being attempted through the guise of the 363 sale. Section 119(b)(2) of the EESA provides that “[a]ny exercise of the authority of the Secretary pursuant to this chapter shall not impair the claims or defenses that would otherwise apply with respect to persons other than the Secretary.” 12 U.S.C. § 5229(b)(2).

[I]f the Debtors are successful obtaining approval of the section 363 sale, the estate will receive $2 billion, which would be distributed to the SeniorLenders, representing 29% on their secured debt. Meanwhile, New Chrysler would receive
billions of dollars in new loans based on the very same Collateral which would allow New Chrysler to repay or assume many of the Debtors’ former unsecured creditors at or close to par – and at a higher recovery rate than paid to the Senior Lenders or than those creditors would have received under a chapter 11 plan. As such, the Debtors’ plan is to use section 363 to strip itself of the assets pledged to the Senior Lenders and put those assets to the benefit of unsecured creditors instead of the Secured Lenders even though the Senior Lenders will not have been paid in full (including on any unsecured deficiency claims).

By mandating a treatment of the Debtors’ assets that precludes any unsecured
deficiency claims of the Senior Debt from being paid while allowing inferior creditors to receive substantial value from the estate, the Treasury Department also is causing the Debtors to ignore the priority rules embodied in the Bankruptcy Code as applied by the Supreme Court in Bank of America Nat’l Trust & Sav. Ass’n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999).

There, the court held that a debtor could not refuse to consider alternative plan structures where the plan proposed permitted debtor’s pre-bankruptcy equity holders, over the objection of a senior secured class of creditors, to contribute new capital and receive ownership interests in the reorganized entity while the senior creditor’s unsecured deficiency claims went unpaid. As noted above, that is exactly what is being mandated here by the proposed 363 sale transaction being scripted by the Treasury Department.

Not only do the Government’s actions far exceed its statutory authority, they also subject the Government to potential lender liability and equitable subordination actions. “[A] creditor will be held to an insider standard where it is found that it dominated and controlled the debtor.” Official Comm. Of Unsecured Creditors of the Debtors v. Austin Fin. Servs. (in re KDI
Holdings, Inc.), 277 B.R. 493, 511 (Bankr. S.D.N.Y. 1990). When such a creditor
overwhelmingly dominates the debtor, there is a merger of identity and the creditor will be held to a fiduciary standard. Id. at 512; see also Schubert v. Lucent Techs., Inc. (In re Winstar Commc’ns, Inc.), 554 F.3rd 382, 411-12 (3d Cir. 2009) (finding “egregious” conduct where the creditor had exerted such influence and control as to qualify as an “insider” acting to the detriment of other creditors); In re Process-Manz Press Inc., 236 F. Supp. 333 (N.D. Ill. 1964) (upholding the Referee’s ruling that the claimant was “in substance the owner” of the bankrupt
and therefore a fiduciary), rev’d on jurisdictional grounds, 369 F.2d 513 (7th Cir. 1966).

Here, the Government has taken control over Chrysler’s business, and has used
that control to impose its own plan of reorganization at the expense of other creditors. This would normally subject a party to liability. See, e.g., Melamed v. Lake County Nat’l Bank, 727 F.2d 1399 (6th Cir. 1984) (finding that lender’s actions to “salvage” the corporate borrower were sufficient to state a claim of tortious interference with the debtor’s business relationships).

The Supreme Court long ago recognized that a secured creditor’s interest in
specific property is protected in bankruptcy under the Fifth Amendment.

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Congress could not pass a law that could be used to deny to secured creditors their rights to realize upon the specific property pledged to them or “the right to control meanwhile the property during the period of default.” . . . That is precisely what the Treasury Department would have Chrysler do here.

The Treasury Department is demanding that the Collateral be stripped away from
the Secured Lenders’ liens – thereby impairing the rights of the Secured Lenders to realize upon those assets – so that it may be put in New Chrysler. The plan is then to use those assets to benefit unsecured creditors in this proceeding, who will then recover substantially more than theSecured Lenders, who also will realize nothing on their unsecured deficiency claims. [Louisville Joint Land Bank v. Radford, 295 U.S. 555, 589, 594 (1935)]specifically disallowed this type of procedure as antithetical to the idea of a lien on property.

That the Treasury Department would do this to help the United States address difficult economic times is not an answer. Indeed, the same justification was expressly rejected in Radford, where Justice Brandeis noted that a statute which violated secured creditors’ rights, but which was passed for sound public purposes relating to the Great Depression, could not be saved because “the Fifth Amendment commands that, however great the nation’s need, private property shall
not be thus taken even for a wholly public use without just compensation.”

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In this case, the Court is being asked to determine whether the proposed sale is
appropriate. The fate of the U.S. automotive industry is high on the national agenda and is being closely monitored by the public. In recent months, high ranking members of the Executive Branch have dedicated substantial time and resources in an effort to rescue this troubled industry.Although the level of public interest and the federal government’s involvement make this case unusual, these circumstances do not change the absolute rights of the Senior Secured Lenders to the protections provided by the Bankruptcy Code.

. . . Nevertheless, apparently ignoring the plain letter of the law, the Debtors and the Government have asked the Court to approve the Sale Motion, which seeks to alter the very priority established by the Bankruptcy Code. The transaction that the Debtors and the Government seek to implement is designed primarily to benefit junior creditors whose claims theExecutive Branch seeks to elevate in contradiction of the law. The system of checks and balances put in place by the United States Constitution should not be influenced or disturbed by
the Executive Branch’s priorities.

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Here, the Executive Branch has effectively “turned off” the constitutional property rights of the Indiana Pensioners. This “denial of constitutionally protected rights demands judicial protection” . . . .

The Indiana Pensioners’ 42 page brief contains much more “inside bankruptcy” argument.

However, what ought to be alarming to Constitutionalists is the fundamental abuses of due process and the rule of law in this hurried “taking” of vested property rights from the Indiana Pensioners and their discounted transfer to FIAT, the U.A.W. and the U.A.W.-controlled VEBA.

Barack Obama pledged to uphold the Constitution. However He and his Treasury Department are allegedly doing their dead level best to ignore it in the rushed Chrysler bankruptcy.

The bankruptcy court has thus far shut down procedural maneuvering by the Indiana Pensioners, but substantive consideration of the objection remains.