Monday, June 08, 2009

Government Fiat, Purchase by Fiat

Supreme Court Justice Ruth Bader Ginsburg issued a stay on the sale of Chrysler to Fiat. This is an extraordinary move. Last Friday the Court of Appeals out of the 11th circuit, I believe it was the 11th circuit, from the District Court of New York, granted Chrysler's efforts to sell to Fiat. Last Friday the Court of Appeals gave the state of Indiana pension fund until Monday at 4 PM to ask the US Supreme Court for an emergency stay. The US Supreme court granted the stay. In one sentence Justice Ginsburg stated that the stay would be in effect until further order of either her or the court. This is wild news.

From a quick reading of the story, Indiana complains about Chrysler's bankruptcy on two points. First the bankruptcy court changed the rules or the statute, so that bondholders are not considered priority creditors. The second issue raised by Indiana, is that the TARP legislation was not meant to be applied to automobile manufacturers. Justice Ginsburg apparently believed that there was some merit to these arguments. This has the potential to be a major defeat for the Obama administration.

Regarding the TARP legislation, Congress passed this bill expressly stating that this was only to be used for ailing financial institutions. As the Indiana director of pensions has pointed out, later Congress attempted to pass a bailout bill for the automobile manufacturers. The obvious question is, if Congress had thought that the TARP legislation was intended to help automobile manufacturers, why would it have attempted to pass legislation dealing with automobile manufacturers? In essence, Indiana is arguing that the TARP money being used to bail out Chrysler is unlawful.

It is a compelling point. If the Supreme Court takes up the case and decides that the TARP money was appropriated unlawfully, this would undo both Chrysler and GM bankruptcies. The very issue is whether the rule of law should be applied even during emergencies, or whether we have made an executive government that is allowed to appropriate funds and interfere with the economy based upon nothing more than fiat. It just occurs to me that there is an interesting double entendre here, Government fiat versus purchase by Fiat.

My guess is the more likely outcome will be that the Supreme Court will evade the issue. There are plenty of reasons that it might do so. It may decline to determine the constitutionality of the TARP legislation because it may instead choose to address the bankruptcy code. If it decides to address the bankruptcy code, it could narrowly rule that the pension fund is entitled to priority status. That still would be a blow to the bankruptcy workout for Chrysler. It would also be a blow to the GM bankruptcy. But it would leave in effect the TARP legislation, and how the executive branch has been implementing it, without meeting the issue head on. Of course, the Supreme Court might decline to do anything at all. All we have at this moment is a temporary order issued by a sitting US Supreme Court justice. The entire panel may discuss it and decided to decline certiorari.

In any event, there are a lot of nervous lawyers on behalf of the government right now. And I daresay Fiat may be taking a second look at its decision to purchase the Chrysler assets. Also waiting in the wings, there is a lawsuit or two or maybe several, that challenge Chrysler's ability to negate dealer contracts. These are interesting times. It really boils down to a political issue. Does the executive branch have carte blanche authority to meddle with the rule of law.

BTW, I dictated this while driving on my commute, using Dragon NaturallySpeaking 10, Professional version, and a Panasonic digital recorder. It works suprisingly well.

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