Analysis of December 14, 2009 US Supreme Court Decision Regarding Chrysler Sale.

ANALYSIS OF US SUPREME COURT’S RULING in POLICE PENSION TRUST, ET AL. V. CHRYSLER LLC, ET AL by Leo Donofrio, Esq.

While today’s ruling by the US Supreme Court is bad for the Indiana Pension Fund, it does not adversely affect our clients (a group of former Chrysler dealers lead by James Anderer) in any way.  Our clients were never part of that appeal and the legal issues raised by the Indiana Pension Fund are vastly different from the issues we will raise.  This decision today is somewhat helpful to our case in that by vacating the lower court’s judgment, the US Supreme Court has stripped the prior Court of Appeals ruling of having any precedential effect on our clients.

The US Supreme Court has wisely ordered the 2d Circuit Court of Appeals to vacate its judgment below and therefore any precedent that might have been set as to the Indiana Pension Fund’s lack of standing to challenge the use of TARP funds has been set aside by the US Supreme Court.  This was a very wise choice by the SCOTUS.  Had they simply denied certiorari without vacating the 2d Circuit’s ruling, precedent would have been set.  But since that ruling has been vacated, the TARP issue is still very much fair game.

The TARP issue is not related to our pending filing in the Bankruptcy Court, but it will be part of our Quo Warranto action in the DC District Court.

The SCOTUS today gave guidance on this issue by making reference to its prior decision in – United States v. Munsingwear, Inc., 340 U.S. 36 (1950), wherein it was held:

The established practice of the Court in dealing with a civil case from a court in the federal system which has become moot while on its way here or pending our decision on the merits is to reverse or vacate the judgment below and remand with a direction to dismiss. [Footnote 2] That was said in Duke Power Co. v. Greenwood County, 299 U. S. 259, 299 U. S. 267, to be “the duty of the appellate court”.

That procedure clears the path for future relitigation of the issues between the parties and eliminates a judgment review of which was prevented through happenstance. When that procedure is followed, the rights of all parties are preserved; none is prejudiced by a decision which in the statutory scheme was only preliminary.

So, the first paragraph above sums up today’s SCOTUS action perfectly.  They vacated the Court of Appeals decision and remanded with an instruction to dismiss the appeal for mootness.  The second paragraph above explains the rationale.

MOOTNESS ISSUE

I anticipate a plethora of improper interpretations on this mootness issue in relation to our clients’ rights.  So it’s important to explain what the Indiana Pension Fund was asking the upper courts to do.  It was essentially asking that the sale of Chrysler (Old Car Co) to Fiat (New Car Co) be invalidated.

But the Indiana Pension Fund failed to provide the upper courts with a legal argument worthy of circumventing Section 363(m) of the Bankruptcy Code which states:

(363m) The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

This section provides that even if there is a reversal on appeal of an authorization for this kind of sale (known as a 363 transaction), unless the purchaser can be shown to not have acted in good faith, the validity of the sale cannot be reversed.  This provision protects a good faith purchaser from having the deal ripped out from under him.

The Indiana Pension Fund has not challenged the sale on appeal by alleging that Fiat purchased Chrysler in bad faith.  The following is from the Indiana Pension Fund’s petition for certiorari to the US Supreme Court:

The Indiana Pensioners acknowledge that in the absence of a finding of bad faith, section 363(m) of the Bankruptcy Code proscribes undoing the sale of Chrysler’s assets, and do not now seek such relief.

So, the Indiana Pension Fund waived its right to argue that Fiat purchased in bad faith and they got slammed to the mat today as a result.  As to this issue, the Bankruptcy Court originally stated:

Further, there are no allegations regarding Fiat’s conduct in this transaction that would raise any issue as to the purchaser’s good faith. Thus, New Chrysler is a good faith purchaser pursuant to § 363(m) of the Bankruptcy Code.

The sale was authorized by Judge Gonzalez in the Bankruptcy Court for the Southern District of New York on June 1, 2009.  And the protections of 363(m) – as to the purchaser – kicked in at that precise moment.  The statute indicates that the mootness issue relates back to the date the sale was authorized (not the date the sale closed).

Therefore, even if authority for the sale could have been reversed on the grounds of illegal use of TARP funds or a finding that Old Chrysler acted in bad faith, absent a showing that Fiat acted in bad faith – or that the sale had been stayed pending appeal – the sale could not be invalidated due to the protections of 363(m).  Hence, appealing the sale was held to be moot because the SCOTUS interpreted that the relief sought by the Indiana Pension Fund could not be accomplished without invalidating the sale.  I will explain this in more detail below.  But first we need to examine the original stay issued by the 2d Circuit Court of Appeals and thereafter extended by SCOTUS because this is what will puzzle many commentators the most.

THE STAY ISSUE

The Indiana Pension Fund appealed to the 2d Circuit Court of Appeals and a stay pending appeal was issued by that court on June 2d, 2009.  Therefore, at first glance it appears that 363(m) would not render a successful appeal moot in this case since the statute makes an exception that sale authorizations can be held invalid on appeal if the original sale authorization had been stayed pending appeal.  But, on June 1st 2009, Judge Gonzalez did not stay his sale authorization pending appeal.  It was only stayed on June 2d by the Court of Appeals.

Therefore, by the time the Indiana Pension Fund came to the 2d Circuit Court of Appeals on June 2d, 2009, according to 363(m), the issue as presented by the Indiana Pension Fund was moot because it did not allege that the purchaser (Fiat) acted in bad faith.

This is why the SCOTUS remanded the case back to the 2d Circuit Court of Appeals with an instruction to vacate their original judgment and dismiss the appeal as being moot.  It doesn’t matter that back on June 2d the Court of Appeals issued a stay and that the stay was extended by SCOTUS for a few days.  After proper briefing on the issue and time to study the law, SCOTUS correctly determined that in order for an appeal such as this to not be moot under 363(m) – absent a bad faith purchaser – the court issuing authorization for the sale would have been required to also stay their own sale authorization at the time such authorization was issued, which did not happen here.  Judge Gonzalez did not order the sale stayed pending appeal on June 1st.

The Indiana Pension Fund understood the power of 363(m) and tried a novel effort to circumvent it in their SCOTUS brief by arguing that the relief they requested wouldn’t amount to an invalidation of the sale.  But it appears that the SCOTUS did not agree the incredible relief requested could be granted without unwinding the sale.

The Indiana Pension Fund was asking that VEBA (United Auto Workers Union  et. al.) return to the estate a $4.6 billion dollar note and common stock.  But this would have effectively changed the entire sale drastically and it appears that SCOTUS saw this as an invalidation of the sale.  Such invalidation is not authorized under 363(m).  VEBA is now a 55 percent owner of New Chrysler and any attempt to circumvent their deal would have negative effects on the purchaser in that VEBA would have to begin negotiations with all parties again and the sale would certainly be invalidated by effect notwithstanding the lack of a court order stating as much.

So, I agree with SCOTUS that the relief requested by the Indiana Pension Fund would have amounted to an invalidation of the sale.  However, the Indiana Pension Fund was correct to point out that legal precedent exists for other aspects of the sale proceeds to be redistributed upon a proper showing of cause.   Relief associated to the direct cash payment of $2 billion dollars to Chrysler’s first lien lenders would not have an effect on the validity of the sale as that money and its distribution has nothing to do with the purchaser (Fiat/New Chrysler) and does not concern the assets purchased.  Unwinding that distribution is not protected by 363(m).  Regardless, the Indiana Pensioners have already been given their share of those funds at 29 cents on the dollar.

I do not wish to reveal our litigation strategy going forward.  Our clients were not part of the Indiana Pension Fund appeal and the issues we will raise are vastly different and pertain to other sections of the Bankruptcy Code and applicable case law not mentioned in this analysis.  We also believe that the Indiana Pension Fund failed to identify a nexus of bad faith necessary to their case not being moot.  We do not plan on making the same mistake.

Leo C. Donofrio for the Law Office of Pidgeon and Donofrio

December 14, 2009, 1:56PM

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P.S.  Today’s SCOTUS ruling needed to be explained.  Therefore, I have opened the blog up for this limited purpose.  I do not anticipate publishing again until other court decisions are issued.

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