Beruflich Dokumente
Kultur Dokumente
)
In re ) Chapter 11
)
CHRYSLER, LLC, et al., ) Case No. 09-50002 (AJG)
) Jointly Administered
Debtors. )
)
The Indiana Pensioners,1 by and through their undersigned attorneys, submit this motion
to withdraw the reference made to the United States Bankruptcy Court (the “Motion”) with
respect to (i) the issues raised herein, (ii) the Debtors’ Sale Motion (as defined herein), and (iii)
the Motion to Convert Cases or Appoint a Chapter 11 Trustee and for Immediate Appointment of
1
The Indiana Pensioners are comprised of the Indiana State Teachers Retirement Fund and Indiana State Police
Pension Trust, pension funds which are fiduciaries for the investment of billions of dollars of retirement assets for
approximately 100,000 civil servants, including police officers, school teachers and their families, and the Indiana
Major Moves Construction Fund, an infrastructure construction fund, all of whom are holders of the Senior Debt (as
defined below).
I. SUMMARY OF ARGUMENT
1. The violation of federal law, including non-bankruptcy law, being directed by the
Executive Branch in this action under the guise of its Troubled Asset Relief Program (“TARP”)
is breathtaking. Adopting a raw “the ends justify the means” rationale, the Treasury Department
has taken constructive possession of Chrysler and is requiring it to adopt a sale plan in
bankruptcy that violates the most fundamental principles of creditor rights – that first tier secured
creditors have absolute priority, including over junior and unsecured creditors. Remarkably, the
Government has orchestrated a plan that pays the secured lenders only 29% of their claims, while
providing par recovery to certain unsecured creditors. This result, while perhaps reflecting a
political compromise, has no basis in the law. The Government’s action is not authorized by any
statute, including TARP, and violates the unambiguous provisions of the Emergency Economic
Stabilization Act (the “EESA”) and the Constitution of the United States. These critical issues
must be decided by the district court and withdrawal of the reference is therefore required.
the district court of cases or issues that would otherwise require a bankruptcy court judge to
engage in significant interpretation, as opposed to simple application, of federal laws apart from
the bankruptcy statutes.” City of New York v. Exxon Corp., 932 F.2d 1020, 1026 (2d Cir.
1991). That standard is readily met when novel issues or constitutional questions are raised.
Such issues are plainly raised by what the Government is attempting to do in this bankruptcy
proceeding, including through the pending Sale Motion and by the issues set forth in the
Trustee/Examiner Motion.
holders of “Senior Debt”) who hold liens on substantially all of the Debtors’ U.S. assets,
including their plants, equipment inventory and bank accounts, and approximately 65% of the
Debtors’ equity interests in their foreign subsidiaries (the “Collateral”). In clear violation of the
Indiana Pensioners’ rights, Debtors here have filed a Sale Motion which, if accomplished, would
invert the Bankruptcy Code’s well-established priority scheme and, inter alia, grant to unsecured
creditors a significant equity interest in a new entity, “New Chrysler,” notwithstanding that the
Senior Lenders have not been paid in full. Rather than pay the secured creditors as required, the
Debtors – at the Government’s direction – are essentially transferring the Collateral with any
value to New Chrysler and then divvying up the majority of that value among unsecured
creditors (the United Auto Workers (“UAW”)) and third parties (the US Treasury Department
and Fiat).
4. These truly extraordinary Government actions are not authorized by any statute,
much less by the TARP authority granted by Congress in October 2008 when the EESA was
enacted and under which the Government purports to be acting. Rather, TARP expressly
provides that the Treasury Department may only purchase the “troubled assets” of “financial
institution[s],” 12 U.S.C. § 5211(a)(1), which the statute then defines as “any institution,
including but not limited to, any bank, savings association, credit union, security broker or
dealer, or insurance company, established and regulated under the laws of the United States or
any State, territory or possession of the United States . . . and having significant operations in the
United States but excluding any central bank of, or institution owned by, a foreign government.”
2
The Indiana Pensioners are party to that certain First Lien Credit Agreement dated as of November 29, 2007 (as
may have been amended or supplemented) with Chrysler LLC (“Chrysler”), as borrower, certain of Chrysler’s
subsidiaries, as guarantors, and JP Morgan Chase Bank N.A., as administrative agent. Under this credit agreement,
the Lenders loaned Chrysler approximately $7 billion.
Government Lending and Insurance Facilities; Impact on Economy and Credit Availability:
Hearing Before the H. Comm. on Fin. Servs., 110th Cong. 19 (Nov. 18, 2008) (emphasis added)
(Exhibit A to the Declaration of Todd A. Gluckman in Support of the Motion to Withdraw the
6. Just a few weeks later, Congress considered but ultimately refused to enact
specific legislation designed to authorize the Executive Branch to bail out the auto industry
(including Chrysler) on December 12, 2008. Having failed to get the needed authorization, the
Treasury Department then adopted the present approach of misusing TARP instead.
7. In addition to the fact that the Treasury Department lacks authority under TARP
to direct the makeover and bankruptcy strategy of Chrysler, it is also clear from the face of the
EESA that what the Government is doing by favoring certain unsecured creditors (i.e., the UAW
and trade creditors) to the detriment of others, including the Indiana Pensioners, is expressly
prohibited by the statute. The law provides that “[a]ny exercise of the authority of the Secretary
pursuant to this Act shall not impair the claims or defenses that would otherwise apply with
what the Treasury Secretary is attempting through the Sale Motion, whereby he seeks to pay
certain unsecured creditors – UAW Pensioners – vastly more than other similarly situated
unsecured creditors – the Indiana Pensioners. For these same reasons, what the Treasury
Branch under TARP do not include the extraordinary actions taken by the Government to date.
Whatever powers the Treasury Department may have under TARP, it does not have the power to
control the entire restructuring of a company to the detriment of the company’s secured creditors
and for the benefit of other interest groups so that certain broader policy and political objectives
may be achieved. One of the biggest ironies of the Government’s misuse of its TARP authority
here is that the very statute that was intended to free up lending in this country is being used to
improperly discriminate against, and thereby ultimately deter, the very people who are critical to
9. In light of the Government’s conduct, which has infected this proceeding and
caused the Debtors’ complete abdication of its own fiduciary duties to act in the best interests of
all creditors, the Indiana Pensioners have filed the Trustee/Examiner Motion and are thereby
seeking the appointment of independent parties who will act impartially, in the interests of all
10. The Trustee/Examiner Motion and the Sale Motion cannot be approved without
consideration of these issues, all of which are novel issues of federal law outside of the
Bankruptcy Code, and several of which raise constitutional challenges. This entire bankruptcy
these issues. Even the Government has recognized that its approach here is “extraordinary and
unprecedented.” Mandatory withdrawal of the reference to the district court is, therefore,
required.
II. BACKGROUND
11. On October 3, 2008, the EESA was enacted for the purpose of restoring liquidity
and stability to the American “financial system.” 12 U.S.C. § 5201(1). Under the EESA,
Congress created TARP, which granted the Secretary of the Treasury broad authority to purchase
authorized the Secretary of the Treasury “to purchase, and to make and fund commitments to
purchase, troubled assets from any financial institution, on such terms and conditions as are
determined by the Secretary, and in accordance with this Act and the polices and procedures
12. Shortly after the EESA was enacted, Treasury Secretary Paulson testified before
the House Financial Services Committee. He was specifically asked about his understanding of
what qualified as a financial institution under the EESA and whether TARP funds could be used
to bail out the automotive manufacturers. As noted above, he testified that automotive
manufacturers were not covered by TARP. See Oversight of Implementation of the Emergency
Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities;
Impact on Economy and Credit Availability: Hearing Before the H. Comm. on Fin. Servs., 110th
13. After enacting the EESA, there was growing frustration over Congress’s
willingness to bail out the financial industry while the automotive industry languished. The
House of Representatives took up that issue, and on December 10, 2008, passed the Auto
Industry Financing and Restructuring Act (the “Auto Act”), which provided for $14 billion in
loans to the automotive industry (and a mere fraction of the $700 billion authorized under
TARP). Auto Industry Financing and Restructuring Act, H.R. 7321, 110th Cong. § 10 (2008)
(Gluckman Decl., Exhibit B). One of the express purposes of the Auto Act was “to immediately
provide authority and facilities to restore liquidity and stability to the domestic automobile
industry in the United States.” Id. at § 2. Significantly, that legislation did not even specify
14. By the time the Auto Act reached the Senate, however, resistance had grown to
bailing out an industry seen by many as inefficient. The day after House passage, the Senate
rejected the Auto Act and abandoned efforts to authorize any Executive Branch agency to bail
out the automotive industry. “Bill Status,” H.R. 7321, 110th Cong., The Library of Congress
Thomas Online Database (Gluckman Decl., Exhibit C); David M. Herszenhorn & David E.
Sanger, “Senate Abandons Automaker Bailout Bid,” N.Y. Times, Dec. 12, 2008 (notes that the
Senate failed to even bring the bailout proposal to the floor for consideration) (Gluckman Decl.,
Exhibit D).
C. Treasury Department Determines to Use TARP Funds for the Automotive Industry
15. Within a week of Congress refusing to authorize the Executive Branch to bail out
the auto industry, and notwithstanding that TARP only applied to financial institutions, the
Treasury Department simply determined that it would nevertheless use TARP funds to aid the
auto manufacturers. The Treasury did so by reading out of the statutory definition altogether the
association, credit union, security broker or dealer, or insurance company”) – a “reading” which
would have obviated the need for the Administration to ask Congress for bailout authority as to
16. On December 19, 2008, Treasury Secretary Paulson explained his newfound
Gluckman Decl., Exhibit E (emphasis added). Thus, even the Treasury’s tortured reading was
based on the provision of credit and financing. None of the Debtors, however, provide credit or
financing. The entity that did so, Chrysler Finance, is not a Debtor and is not receiving TARP
funds here.
17. On December 31, 2008, the Treasury Department issued “Guidelines” for an
“Automotive Industry Financing Program” (“AIFP”), whereby it would provide financing to the
automotive industry with TARP funds “in accordance with the considerations mandated in the
These guidelines studiously avoid the term “financial” when referring to the automakers as
“institutions.”
18. On April 29, 2009, immediately prior to Chrysler declaring bankruptcy, the
current Secretary of the Treasury, Timothy F. Geithner, again avoiding the word financial, issued
therefore their “troubled assets” were “eligible to be purchased under the TARP.” Gluckman
Decl., Exhibit G.
19. Earlier this year, Chrysler’s board of directors, the members of which were
elected to make strategic business decisions for the company, determined that Chrysler should
continue as a stand-alone company. Chrysler Restructuring Plan for Long-Term Viability dated
February 17, 2009, at 13 (Gluckman Decl., Exhibit H). The Government decided otherwise. On
March 30, 2009, President Obama announced that the Government had determined that Chrysler
was not viable as a stand-alone company and informed the country that Chrysler would be given
30 days to reach an agreement with Fiat, its unions and its creditors under which Chrysler and
Fiat would combine to form a new entity. See Gluckman Decl., Exhibit I. In doing this, the
Government simply substituted its business judgment for that of Chrysler management and
20. Following the President’s announcement, Chrysler began working at the behest of
the President’s Auto Task Force and the Treasury Department to make the President’s strategic
vision a reality. Affidavit of Ronald Kolka in Support of First Day Pleadings dated April 30,
2009, ¶¶ 84-85 (“Kolka Aff.”), Gluckman Decl., Exhibit J. Chrysler thereafter ceased all serious
efforts to explore alternative ways to raise cash or sell assets. Chrysler made no attempt to sell
off any of its brands as going concerns, which could bring substantial sums. To the contrary, the
any entity other than Fiat. Master Transaction Agreement among Fiat S.p.A., New Cargo
Acquisition LLC, Chrysler LLC et al. dated April 30, 2009, at 14 (Gluckman Decl., Exhibit K).
the Senior Lenders and the UAW. Transcript of Hearing on First-Day Relief (“May 4 Hr’g
Tr.”), pp. 235: 14-24; 246: 4-6 (May 4, 2009) (Gluckman Decl., Exhibit L). Chrysler abdicated
21. Since then, Chrysler and the Government freely admit that the major business
decisions and the strategic vision driving this bankruptcy have come directly from the White
House and not the Chrysler board room. Indeed, the Government touts this fact: “we’ve
restructured this company; we’ve done this alliance with Fiat.” See Press Background Briefing
22. On April 30, 2009, Debtors filed a petition for relief under chapter 11 of Title 11
of the Bankruptcy Code. On the same day, the Government filed a “Statement of the United
States Department of the Treasury in Support of the Commencement of Chrysler LLC’s Chapter
11 Case” (the “Statement”). Gluckman Decl., Exhibit N. In its Statement, the Government
automotive industry through this difficult period.” Statement ¶ 1. The Government further
concedes that this entire bankruptcy case is “extraordinary and unprecedented.” Statement ¶ 12.
23. The Government’s Statement neither sets forth the statutory authority by which
the Treasury Department may dictate the restructuring of Chrysler, nor does it set forth the facts,
shown above, regarding the Treasury Department’s role in these cases. Instead, the Government
merely states, in an utterly conclusory fashion, that its authority to act here is provided by its
the sale of substantially all of Debtors’ assets, free and clear of all liens, claims, interests and
encumbrances (“Sale Motion”), which puts into place the Government’s objectives. Gluckman
Decl., Exhibit O. Pursuant to the Sale Motion, the Senior Lenders’ Collateral would be stripped,
and in return, the Lenders would be paid 29 cents on the dollar. The Collateral would then be
transferred to New Chrysler, where it would be worth significantly more than the money paid to
the Senior Lenders. Indeed, while the Senior Lenders’ unsecured deficiency claims would go
unpaid, unsecured trade debt would be paid in full. Kolka Aff. ¶ 90. Similarly, the union
pension plan, 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. May 4
Hr’g Tr. 234:3-235:6. One of the Debtors’ competitors, Fiat, is 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. Kolka Aff. ¶ 88. Fiat is not paying any cash for its stake in New Chrysler. Id. 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. Id. The only assets
to be left in the Debtors’ estate are those assets New Chrysler deems worthless. Even the
Debtors describe the sale as a sale of “substantially all” of the Debtors’ assets. Id. Thus, under
the plan mandated by the Treasury Department, the claims of the Indiana Pensioners as senior
lien creditors of Old Chrysler would be permanently impaired while inferior creditors of Old
25. Chrysler’s testimony in these proceedings confirms the extent to which the
Treasury Department’s conduct has infected these proceedings to the detriment of Chrysler’s
senior creditors. Chrysler’s Chief Financial Officer, Ronald Kolka, made this abundantly clear.
in the negotiations with the first lien lenders as to how they would be treated under the Fiat sale,
he stated unequivocally that neither he nor the company had any involvement in these
negotiations. See May 4 Hr’g Tr. pp. 245: 13-25; 246: 1-16, Gluckman Decl., Ex. L. According
to Mr. Kolka: “The two billion dollar offer I first heard about it when we read it in, I believe it’s
the Wall Street Journal.” May 4 Hr’g Tr., p. 246: 8-9. The Debtors’ financial advisor likewise
confirmed that Chrysler's involvement in negotiations with creditors like the first lien lenders
ceased after early 2009. Transcript of May 5 Proceedings, p. 153: 6-8 (Gluckman Decl., Exhibit
P).
26. Another critical agreement was with the UAW. When asked about the
negotiations with UAW and their 55% equity share in New Chrysler, Mr. Kolka made clear that
neither he nor Chrysler were involved in these negotiations either; rather these negotiations
involved only the “U.S. Treasury, the UAW, and Fiat.” May 4 Hr’g Tr. p. 235: 14-24. Mr.
Kolka further stated that he first learned of the UAW’s 55% equity share when “[i]t was
proposed by the Auto Task Force in one of our meetings.” May 4 Hr’g Tr. p. 236: 1-3. The
Task Force did not ask Mr. Kolka for his opinion regarding the UAW’s 55% equity share in New
Chrysler. May 4 Hr’g Tr. p. 246: 4-6. Finally, neither Mr. Kolka nor Chrysler have any
understanding as to whether the Treasury Department would make the DIP available if Chrysler
does not agree that 55% of New Chrysler should go to the UAW. May 4 Hr’g Tr. p. 249: 2-19.
Mr. Kolka was similarly completely uninformed about the going concern value of his company.
fact, the Debtors have not bothered to value New Chrysler or ask the Government for its
valuation, if it has one. May 4 Hr’g Tr. pp. 234: 3-25; 235: 1-21.
28. In sum, the Government negotiated every part of the Chrysler-Fiat transaction –
29. On May 19, 2009, the Indiana Pensioners also filed the Trustee/Examiner Motion
(Gluckman Decl., Exhibit Q). By this motion, they seek either the conversion of the case to a
and 1104 of the Bankruptcy Code. In addition, the motion seeks the immediate appointment of
an examiner to investigate both the Debtors’ failure to meet its fiduciary duties and the full
extent to which the United States Government has exceeded its statutory and constitutional
authority by dominating and controlling both the Debtors’ business and the bankruptcy process.
30. The Indiana Pensioners have objected to the Sale Motion because the proposed
sale of substantially all of the Debtors’ assets under section 363 of the Bankruptcy Code (the
“363 sale”) violates federal statutory and hence constitutional law and otherwise also cannot be
approved under the Bankruptcy Code. The 363 sale constitutes an illegal sub rosa plan of
reorganization because it attempts to side step the protections of the chapter 11 confirmation
process and instead use section 363 to reorganize the Debtors’ estates and favor certain junior
creditors at the expense of the Senior Lenders. Indeed, the proposed 363 sale and allocation of
proceeds in violation of the priority scheme established by the Bankruptcy Code also constitutes
an unconstitutional taking of the Indiana Pensioners’ property rights. Moreover, the 363 sale
cannot be approved because the Debtors proposed to transfer the Collateral free and clear of the
Specifically, the Debtors can neither show (i) that all of the Senior Lenders have consented to the
release of their liens on the Collateral, nor (ii) that the proceeds of the 363 sale will exceed the
face value of the Senior Debt. Finally, the facts stated in the Sale Motion (and the supporting
declarations) do not support any finding that (i) the New Chrysler is a purchaser in “good faith”
under section 363(m) of the Bankruptcy Code, or (ii) would vitiate the relief provided by section
III. ARGUMENT
31. The federal bankruptcy jurisdiction statute vests bankruptcy jurisdiction in the
federal district courts in the first instance. 28 U.S.C. § 1334. Under 28 U.S.C. § 157(a), each
district court may provide that all matters directly and indirectly involving a case under the
Bankruptcy Code be referred to the district court’s bankruptcy judges. In this district, all
bankruptcy cases are automatically referred to the bankruptcy court. See S.D.N.Y. Order of
Reference, Administrative Order M-61, signed on July 10, 1984 and entered on July 11, 1984.
32. Notwithstanding the automatic reference, the district court may withdraw the
reference upon the filing of a motion by a party or on its own motion. 28 U.S.C. § 157(d).
Motions for withdrawal of the reference are filed with the bankruptcy court, but are heard by the
§ 157(d) if the district court “determines that resolution of the proceeding requires consideration
of both title 11 and other laws of the United States regulating organizations or activities affecting
interstate commerce.” 28 U.S.C. § 157(d). See also City of New York v. Exxon Corp., 932 F.2d
1020, 1026 (2d Cir. 1991) (“cases or issues that would otherwise require a bankruptcy court
apart from the bankruptcy statutes.”); Enron Power Mktg., Inc. v. California Power Exch. Corp.,
No. 04 Civ. 8177(RCC), 2004 WL 2711101, *2 (S.D.N.Y. Nov. 23, 2004) (quoting Shugrue v.
Air Line Pilots Ass’n Int’l (In re Ionosphere Clubs, Inc.), 922 F.2d 984, 995 (2d Cir. 1990)).
34. In determining whether withdrawal of the reference is mandatory, the Court “need
not evaluate the merits of the parties’ positions”; it is sufficient to note that resolving the issue
necessitates substantial interpretation of federal law. Bear, Stearns Sec. Corp. v. Gredd, No. 01
CIV 4379 NRB, 2001 WL 840187, at *4 (S.D.N.Y. July 25, 2001) (where a party asserted a
conflict between bankruptcy and securities laws, interpretation of the federal securities regime
was required and withdrawal was mandatory, regardless of whether the court would ultimately
35. “Where matters of first impression are concerned, the burden of establishing a
right to mandatory withdrawal is more easily met.” Bear, Stearns, 2001 WL 84017, at *2, citing
Mishkin v. Ageloff, 220 B.R. 784, 796 (S.D.N.Y. 1998); see also In re Manhattan Inv. Fund Ltd.,
343 B.R. 63, 67 (S.D.N.Y. 2006). Likewise, where, as here, a proceeding raises novel or
significant constitutional questions, resolution by the district court is mandatory. See, e.g., In re
Chateaugay Corp., 108 B.R. 27, 28-29 (S.D.N.Y. 1989) (where petitioner’s objections and
counterclaims in the proof of claims process directly challenged the constitutionality of several
ERISA provisions, and other arguments raised substantial novel issues of interpretation,
36. Here, the Government itself has effectively conceded in its Statement that this
standard has been met: “this is an extraordinary and unprecedented case.” Statement ¶ 12
(Gluckman Decl., Exhibit N). As set forth below, it is clear that the Government’s statement is
B. TARP Does Not Provide the Treasury Department with Authority to Bail Out
Chrysler
37. It is axiomatic that the Executive Branch’s authority must derive either from an
act of Congress or from the Constitution itself. Youngstown Sheet & Tube Co., 343 U.S. 579,
applicable here:
* * *
38. It is this very infirmity that the Government apparently seeks to exploit in this
case. The assault on the contract rights of the senior lenders here is of particular concern. As
James Madison wrote in the Federalist Papers in 1788, “laws impairing the obligation of contract
are contrary to the first principles of the social compact, and to every principle of sound
39. Here, the Treasury Department relies on TARP. TARP, however, limits the
5211(a)(1).
EESA expressly lists the types of entities that are financial institutions as “any bank, savings
association, credit union, security broker or dealer, or insurance company,” clearly not
encompassing automakers. Another federal statute, the Bank Holding Company Act (“BHCA”),
further illustrates the definition of financial institution, defining the activities that are “financial
in nature” as including:
(F) Engaging in any activity that the Board has determined, by order or
regulation that is in effect on November 12, 1999, to be so closely related
to banking or managing or controlling banks as to be a proper incident
thereto (subject to the same terms and conditions contained in such order
or regulation, unless modified by the Board).
41. That TARP was aimed at financial institutions – that is, the types of already-
regulated institutions listed in the TARP definition of “financial institution,” and not auto
manufacturers – is also confirmed by the other sections of the EESA, which expand previously
authorized statutory mandates for the Federal Reserve, FDIC and Treasury Department. See 12
U.S.C. §§ 5233 (EESA § 126 regarding FDIC authority), 5235 (EESA § 129 regarding the
Federal Reserve’s loan authority), 5236 (EESA § 131 regarding the Treasury Department’s
authority as to the Exchange Stabilization Fund), and 5241 (regarding an increase in FDIC
42. In his testimony before Congress on November 18, 2008, Treasury Secretary
Paulson unequivocally stated “that the auto companies fall outside that purpose [of TARP].” See
Government Lending and Insurance Facilities; Impact on Economy and Credit Availability:
Hearing Before the H. Comm. on Fin. Servs., 110th Cong. 19 (Nov. 18, 2008) (Gluckman Decl.,
Exhibit A).
43. The House of Representatives further reiterated this inescapable conclusion when
it attempted to authorize the Executive Branch to bail out the automotive manufacturing industry
after enacting TARP, an act that would have been unnecessary if TARP were already available
for such purpose. The Auto Act passed by the House of Representatives attempted, and failed, to
authorize the Executive Branch to do what the Treasury Department is attempting to do here.
But that legislation failed in the Senate and the Executive Branch (including the Treasury
3
The BHCA also includes certain other categories of activity that are considered “financial in nature,” which relate
to certain types of potential acquisitions by bank holding companies and do not affect the analysis here. See 12
U.S.C. § 1843(k)(4)(H)-(I).
attempting to do here.
44. The Treasury Department now ignores the statutory language, intent, purpose and
its own prior statements and the failed auto bailout bill, proceeding on the remarkable position
that TARP funds can be used to purchase assets of “any institution” that is “established and
regulated under the laws of the United States and have significant operations in the United
States.” See Gluckman Decl., Exhibit G. The Treasury Department has simply, and improperly,
read out of the definition of “financial institution” the word “financial” as well as the list of
representative financial institutions that confirms the limits on the scope of TARP. 12 U.S.C. §
5202(5). The Treasury Department’s “interpretation” eviscerates the clear Congressional intent
of TARP and is squarely at odds with well-settled principles of statutory construction concerning
the definition of “financial institution” as set forth in the EESA. If the phrase “any institution”
were to be interpreted to mean literally any institution of any nature, regardless of whether it was
financial in nature, the qualifier “financial” and the listing of types of financial institutions that
follows would be utterly meaningless and effectively written out of the statute. See Leocal v.
Ashcroft, 543 U.S. 1, 12 (2004) (“we must give effect to every word of a statute wherever
possible”).4
4
In Hibbs v. Winn, 542 U.S. 88, 101 (2004), the Supreme Court examined whether the term “assessment” in the
phrase “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law” was so broad as to
signify the entire taxing plan. In rejecting that view, the Court explained:
We do not focus on the word “assessment” in isolation, however. Instead, we
follow “the cardinal rule that statutory language must be read in context [since]
a phrase gathers meaning from the words around it.” General Dynamics Land
Sys., Inc. v. Cline, 540 U.S. 581, 596 (2004) (internal quotation marks omitted).
In § 1341 and tax law generally, an assessment is closely tied to the collection of
a tax, i.e., the assessment is the official recording of liability that triggers levy
and collection efforts.
The rule against superfluities complements the principle that courts are to
interpret the words of a statute in context. See 2A N. Singer, Statutes and
Statutory Construction § 46.06, pp. 181-186 (rev. 6th ed. 2000) (“A statute
45. TARP also contains express language prohibiting the impairment of the Senior
Lenders’ rights, which is being attempted through the guise of the proposed 363 sale. Section
119(b)(2) 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
46. As discussed above, if the Debtors successfully obtain approval of the 363 sale
sought by the Sale Motion, the estate will receive $2 billion, which would be distributed to the
Senior Lenders, representing 29% on their secured debt. Meanwhile, New Chrysler will receive
billions of dollars in new loans based on the very same Collateral, which would allow New
Chrysler to repay 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
47. By mandating a treatment of the Debtors’ assets that precludes any unsecured
deficiency claims of the Senior Lenders from being paid while allowing inferior creditors to
should be construed as that effect is given to all its provisions, so that no part
will be inoperative or superfluous, void or insignificant . . .” (footnotes
omitted)). If, as the Director asserts, the term “assessment,” by itself, signified
“[t]he entire plan or scheme fixed upon for charging or taxing,” Brief for
Petitioner 12 (quoting Webster’s New International Dictionary of the English
Language 166 (2d ed. 1934)), the TIA would not need the words “levy” or
“collection”; the term “assessment,” along, would do all the necessary work.
Hibbs, 542 U.S. at 101; see also Rapanos v. United States, 547 U.S. 715, 731-32 (2006) (noting that the qualifier
“navigable” in the term “navigable waters” is not devoid of significance).
ignore the priority rules embodied in the Bankruptcy Code as applied by the Supreme Court in
Bank of Am. Nat’l Trust & Sav. Ass’n v. 203 North LaSalle Street P’ship, 526 U.S. 434 (1999).
There, the court held that a debtor could not refuse to consider alternative plan structures where
the proposed plan 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 creditors’ unsecured deficiency claims went unpaid. As
noted above, that is exactly what is being mandated here by the proposed 363 sale being scripted
48. Accordingly, in the Sale Motion (and the Objections thereto), the Court will have
to determine whether the Treasury Department has exceeded its authority under TARP and/or
otherwise used TARP to achieve an unconstitutional end by seeking to move all of the Senior
49. 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)
and therefore a fiduciary), rev’d on jurisdictional grounds, 369 F.2d 513 (7th Cir. 1966).
50. Here, the Government has taken control of 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).
51. The full extent to which the Treasury Department has exceeded its authority under
the EESA by embarking on a calculated strategy to dominate these proceedings and impair the
Indiana Pensioners’ claims as against the Debtors’ estate is an issue of first impression and an
issue of non-bankruptcy federal law that must be decided by the District Court in relation to the
Trustee/Examiner Motion, which would prevent the Debtors from following through on the
52. The Supreme Court long ago recognized that a secured creditor’s interest in
specific property is protected in bankruptcy under the Fifth Amendment. Louisville Joint Stock
Land Bank v. Radford, 295 U.S. 555, 589, 594 (1935). That case involved a Depression-era
statute that was intended to help bankrupt farmers avoid losing their land in mortgage
foreclosure. But rather than mandate some form of moratorium, which had been upheld, see
Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934), the statute in Radford took a
unique approach to the bankruptcy process. The bankrupt debtor could achieve a release of the
security interests either (i) with the lender’s consent, purchasing the property at its then-
appraised value by making deferred payments for two to six years at statutorily-set interest rates;
or (ii) if the lender refused the purchase option, by having the bankruptcy court stay the
rent set by the court, which payments would be for the benefit of all creditors, with a purchase
53. Justice Brandeis noted that the “essence of a mortgage” is the right of the secured
party “to insist upon full payment before giving up his security [i.e., the property pledged].” Id.
at 580. In invalidating the statute, the Court noted that no bankruptcy law had ever “sought to
compel the holder of a mortgage to surrender to the bankrupt either the possession of the
mortgaged property or the title, so long as any part of the debt thereby secured remained unpaid.”
Id. at 581-82. Commenting on the law allowing the debtor to repay less than the full amount
owing and keep the property, the Court also noted that no prior law had “attempted to enlarge the
rights or privileges of the mortgagor as against the mortgagee” including by going beyond
reducing the debtor’s liabilities to “supply [the debtor] with capital with which to engage in
54. Holding that secured creditors could not be treated this way, the Court stated that
“[t]he bankruptcy power . . . is subject to the Fifth Amendment,” and that the pernicious aspect
of this law was its “taking of substantive rights in specific property acquired by the bank prior to
the act.” Id. at 589-90.5 Thus, 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
5
The legislative history relating to adequate protection under section 363 echoes this commitment under the Fifth
Amendment to protecting the value of property pledged to secured creditors. See S. Rep. No. 95-989, at 49, 53,
reprinted in 1978 U.S.C.C.A.N. 5787, 5835, 5839 (citing Radford and finding that “the purpose of the section is to
insure that the secured creditor receives the value for which he bargained”); H.R. Rep. No. 95-595, at 339, reprinted
in 1978 U.S.C.C.A.N. 5963, 6295 (to similar effect).
55. 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 those assets may be put in New Chrysler and used to the benefit of
unsecured creditors in this proceeding, who will then be paid much more than the Senior Lenders
– which Lenders will realize nothing on their unsecured deficiency claims. Radford 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.” Id. at 602.
56. As above, whether the Treasury Department has directed these proceedings so as
to work a taking of the Indiana Pensioners’ property interests, likewise requires consideration of
federal law outside of the bankruptcy context – namely, how the U.S. Constitution limits the
Treasury Department’s actions here. As above, these issues require mandatory withdrawal.
D. The EESA And TARP Do Not Authorize The Takeover of Chrysler Or Its
Bankruptcy
57. In addition to the fact that TARP funds cannot be used to purchase the troubled
assets of car manufacturers, rather than financial institutions, and that their use here improperly
6
Tellingly, in Wright v. Union Central Life Ins. Co., 311 U.S. 273, 278 (1940), the Court upheld the revised
version of the statute at issue in Radford based on safeguards “to protect the rights of secured creditors, throughout
the proceedings, to the extent of the value of the [pledged] property.”
take effective possession of Chrysler, impose new management and dictate the terms of its
continued operations and ultimate survival. See Youngstown, 343 U.S. at 588-89. There is no
statutory authority for the Treasury Department’s actions in effectively causing the marshaling
and sale of the Debtors’ assets by way of a particular sale process so as to ensure that the Senior
Lenders’ rights as first lien secured lenders are paid only 29 cents on the dollar and their
unsecured deficiency claims left unpaid while also ensuring that other unsecured creditors who
have no secured status are paid in full or receive a substantial portion of the equity in New
Chrysler. This may be the type of authority that the Treasury Department or its sub-agencies
may exercise with respect to financial institutions, but those powers come with specific
Congressional authorization and are expressly limited by the scope of the enabling statutes in
question. The very specificity of those statutes shows that Congress knows how to cloak an
agency with such powers – something Congress never did in the EESA or TARP. See, e.g., 12
U.S.C. § 1821(d)(2) (powers of FDIC with respect to failed depositary institutions); 45 U.S.C.
701, et seq. (“Railroad Reorganization Act”) (establishing detailed procedures for railroad
58. Absent such express statutory authority, even the federal banking regulators do
not have unlimited power in marshaling assets and classifying creditors. See, e.g., Wheeler v.
Greene, 280 U.S. 49 (1929) (Federal Farm Loan Bank as receiver had no authority under statute
to maintain suit to enforce stockholders’ liability); Sharpe v. FDIC, 126 F.3d 1147, 1155 (9th
Cir. 1997) (FDIC exceeded statutorily granted powers in attempting to record a reconveyance of
the debtor's deed of trust for which it did not pay full consideration); Adagio Inv. Holding Ltd. v.
but finding that “none of these broad powers encompasses the right to reclassify deposits without
authority to direct the course of a chapter 11 proceeding as to a private company like Chrysler.
59. The Treasury’s authority under section 106 of the EESA, while broad, does not
allow for the “extraordinary and unprecedented” conduct by the Government here. The
Treasury’s lack of authority to direct these proceedings and manipulate the conduct of the
Debtors’ actions under the EESA is also an issue of first impression and an issue of non-
bankruptcy federal law, including one that must be decided by the District Court in relation to
60. The EESA also provides that in acting the Treasury Department must avoid
conflicts of interest, and must issue regulations designed to manage or prohibit conflicts. 12
U.S.C. § 5218. The relevant regulations relating to the EESA and TARP are found in 31 C.F.R.
Part 31. There, the Treasury Department defined a conflict of interest, inter alia, as “a situation
in which [a] retained entity has an interest or relationship that could cause a reasonable person
with knowledge of the relevant facts to question the retained entity’s objectivity or judgment to
perform under the arrangement.” 31 C.F.R. § 31.201. It also prohibited concurrent conflicts of
interest: “[i]f [a] retained entity advises Treasury with respect to a program for the purchase of
troubled assets, the retained entity, management officials performing work under the
arrangement, and key individuals shall not, during the term of the arrangement, sell or offer to
sell, or act on behalf of anyone with respect to a sale or offer to sell, any assets to Treasury under
LLP (“STB”). Starting in October 2008, and continuing through the present, STB entered into
two contracts with the Treasury Department to provide it with a broad range of legal advice with
regard to the implementation of TARP, including “guidance in the development of equity and
debt investments and co-investment programs instituted pursuant to the Emergency Economic
Stabilization Act of 2008.” See Gluckman Decl., Exhibit R. In this proceeding, however, STB
is now representing the agent for all the Senior Lenders who has acted to solicit consents for the
very actions being pursued by the Treasury Department which violate the EESA. See May 4
Hr’g Tr. 28: 5-6, 15-20 (“JPMorgan is the first lien administrative agent. . . . [A]t the company’s
request in concluding negotiations over the amount by which the required lenders would agree to
liquidate the collateral in this case in the context of a sale to Fiat, the agent solicited written
consents from each of the holders of the first lien debt”). Neither the Government nor the
Debtors has provided any explanation as to why this overlapping representation does not create
* * *
62. The interpretation of TARP, how the U.S. Constitution and the EESA limit the
Treasury Department’s ability to run Chrysler and direct these proceedings, whether the Treasury
has violated the conflict of interest rules of EESA such that it should not be permitted to proceed
to dictate the course of Chrysler’s restructuring, and whether the TARP savings clause has been
violated are issues of first impression that require consideration of federal law outside of the
bankruptcy context. As such, it is a classic case for mandatory withdrawal for the 363 Sale
Motion and the Trustee/Examiner Motion. See Educ. Credit Mgmt. Corp. v. Barnes, 259 B.R.
328, 330 (S.D. Ind. 2001) (mandatory withdrawal of the reference in a constitutional challenge to