Indiana Pensioners' Motion To Move Chrysler Case To Federal Court

WHITE & CASE LLP 1155 Avenue of the Americas New York, New York 10036-2787 (212) 819-8200 Glenn M. Kurtz Wachovia Financial Center, Suite 4900 200 South Biscayne Blvd. Miami, Florida 33131 (305) 371-2700 Thomas E. Lauria (admitted pro hac vice) ATTORNEYS FOR THE INDIANA STATE TEACHERS RETIREMENT FUND, INDIANA STATE POLICE PENSION TRUST, AND INDIANA MAJOR MOVES CONSTRUCTION FUND

IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF NEW YORK

In re CHRYSLER, LLC, et al., Debtors.

) ) ) ) ) ) )

Chapter 11 Case No. 09-50002 (AJG) Jointly Administered

MOTION TO WITHDRAW THE REFERENCE 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

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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).

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an Examiner (the “Trustee/Examiner Motion”). In support, the Indiana Pensioners respectfully state and represent as follows: I. 1.

SUMMARY OF ARGUMENT

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. 2.

The mandatory withdrawal statute, 28 U.S.C. § 157(d), “require[s] withdrawal to

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.

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3.

The Indiana Pensioners are first lien secured creditors2 (“Senior Lenders” and

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.

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12 U.S.C. §§ 5202(5), 5211(a).

Chrysler is an automobile manufacturer, not a financial

institution, and therefore not covered by the purpose or provisions of TARP. 5.

This is precisely what Treasury Secretary Paulson told Congress in November

2008 when he testified before the House Financial Services Committee: But we certainly are not going to give money to plumbing contractors, and we are not going to give money to a lot of other people and institutions that are applying. We have had a very clear focus here right now. And again, I feel a great responsibility, even though the powers may be very broad, and appropriately so, I feel a great possibility to stick with what the purpose is. The purpose is stabilizing and strengthening our financial system. And I have said to you very clearly that I believe that the auto companies fall outside of that purpose. 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 Cong. 19 (Nov. 18, 2008) (emphasis added) (Exhibit A to the Declaration of Todd A. Gluckman in Support of the Motion to Withdraw the Reference (“Gluckman Decl.”)). 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

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respect to persons other than the Secretary.” 12 U.S.C. § 5229(b)(2). That is, however, precisely 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

Secretary is attempting to do constitutes a taking in violation of the Fifth Amendment to the United States Constitution. 8.

Finally, even as to a financial institution, the powers granted to the Executive

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 fully and properly functioning financial system – secured lenders. 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 creditors, and according to the law as written. 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

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proceeding is fundamentally predicated on, and cannot be decided without, consideration of 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. A.

BACKGROUND

The Troubled Asset Relief Program for Financial Institutions 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 “troubled assets” from “financial institution[s].” 12 U.S.C. § 5211(a)(1). Specifically, Congress 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 developed and published by the Secretary.” 12 U.S.C. § 5211(a)(1) (emphasis added). 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 Cong. 19 (Nov. 18, 2008) (Gluckman Decl., Exhibit A).

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B.

Congress Expressly Refused to Authorize a Bailout for the Automotive Industry 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 which Executive Branch agency would be authorized to undertake that bailout. 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

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word “financial” and the list of representative financial institutions (i.e., “any bank, savings 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 the auto industry. 16.

On December 19, 2008, Treasury Secretary Paulson explained his newfound

authority in a Determination which states: WHEREAS, such thrift and other holding companies engaged in the manufacturing of automotive vehicles and the provision of credit and financing in connection with the manufacturing and purchase of such vehicles are “financial institutions” for purposes of section 3(5) of the Act as they are “institution[s]” established and regulated under the laws of the United States and have significant operations in the United States. 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 EESA.”

Guidelines

for

Automotive

Industry

Financing

Program,

http://www.financialstability.gov/docs/AIFP/AIFP_guidelines.pdf. Gluckman Decl., Exhibit F. 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

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another Determination that automotive companies are “institutions” under TARP and that therefore their “troubled assets” were “eligible to be purchased under the TARP.” Gluckman Decl., Exhibit G. D.

The Treasury Department’s Unprecedented Takeover of Chrysler and this Bankruptcy 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 thereby began the process of taking over Chrysler. 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 Government-imposed agreement prohibited Chrysler from pursuing alternative transactions with 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).

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Nor did Chrysler participate in any of the negotiations with its two most important stakeholders, 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 that responsibility to the Treasury Department. See id. 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 on Auto Industry (April 30, 2009), www.whitehouse.gov/the_press_office/Background-Briefingon-Auto-Industry-4/30/2009 (Gluckman Decl., Exhibit M). 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 acknowledges that it has “implemented unprecedented programs to support the domestic 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 TARP authority found in the EESA. Statement ¶ 7, n. 5.

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24.

On May 3, 2009, the Debtors filed their Motion for entry of an order authorizing

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 Chrysler – such as UAW Pensioners – would receive substantial value. E.

Debtors Have Abdicated Their Fiduciary Duties Owed to Secured Creditors 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.

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For example, when Mr. Kolka was asked whether he or anyone at Chrysler had any involvement 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. May 4 Hr’g Tr. pp. 250: 12-25; 251: 1-23.

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27.

Remarkably, no one at the Debtors even knows the value of the UAW’s 55%. In

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 –

Chrysler management played virtually no role. F.

The Trustee/Examiner Motion 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 Chapter 7 bankruptcy or the appointment of a chapter 11 trustee, as required by Sections 1112 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. G.

The Indiana Pensioners’ Objection to the Sale Motion 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

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Senior Lenders’ liens without satisfying sections 363(f)(2) or 363(f)(3) of the Bankruptcy Code. 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 363(n) of the Bankruptcy Code. III. A.

ARGUMENT

Test For Mandatory Withdrawal 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 district court. FED. R. BANKR. P. 5011; LOCAL BANKR. R. 5011-1. 33.

Withdrawal of proceedings referred to the bankruptcy court is mandatory under

§ 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

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judge to engage in significant interpretation, as opposed to simple application, of federal laws 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 find securities law to be dispositive). 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, withdrawal of the reference was mandatory). 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

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correct as this matter raises serious constitutional and statutory issues of first impression that must be considered by the district court. 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, 585 (1952).

As cautioned by Justice Jackson in Youngstown, in language that is equally

applicable here: That comprehensive and undefined presidential powers hold both practical advantages and grave dangers for the country will impress anyone who has served as legal adviser to a President in time of transition and public anxiety. * * * The opinions of judges, no less than executives and publicists, often suffer the infirmity of confusing the issue of a power’s validity with the cause it is invoked to promote, of confounding the permanent executive office with its temporary occupant. The tendency is strong enough to emphasize transient results upon policies – such as wages or stabilization – and lose sight of enduring consequences upon the balanced structure of our Republic. 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 legislation.” THE FEDERALIST No. 44 (James Madison). 39.

Here, the Treasury Department relies on TARP. TARP, however, limits the

spending to purchases of “troubled assets” of “financial institution[s]” only. 5211(a)(1).

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12 U.S.C. §

40.

Chrysler is an automotive company, and plainly not a financial institution. The

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: (A)

Lending, exchanging, transferring, investing for others, or safeguarding money or securities.

(B)

Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State.

(C)

Providing financial, investment, or economic advisory services, including advising an investment company (as defined in section 3 of the Investment Company Act of 1940 [15 U.S.C.A. § 80a-3]).

(D)

Issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly.

(E)

Underwriting, dealing in, or making a market in securities.

(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).

(G)

Engaging, in the United States, in any activity that—

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(i)

a bank holding company may engage in outside of the United States; and

(ii)

the Board has determined, under regulations prescribed or interpretations issued pursuant to subsection (c)(13) of this section (as in effect on the day before November 12, 1999) to be usual in connection with the transaction of banking or other financial operations abroad.

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12 U.S.C. § 1843(k)(4).3 Again, making and selling cars obviously does not qualify. 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 deposit and share insurance). 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 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 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).

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Department) never received Congressional authorization to bail out auto manufacturers as it is 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

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C.

The Sale Motion Violates The Plain Language Of The EESA and Is An Unconstitutional Taking 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 than the Secretary.” 12 U.S.C. § 5229(b)(2). 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 (including on any unsecured deficiency claims). 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).

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receive substantial value from the estate, the Treasury Department is causing the Debtors to 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 by the Treasury Department. 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 Lenders’ Collateral to New Chrysler for the benefit of inferior creditors. 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)

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(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). 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 Treasury Department’s demands. 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 thenappraised 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

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proceedings for up to five years during which time the debtor could use the property by paying a rent set by the court, which payments would be for the benefit of all creditors, with a purchase option at the end of that period. Id. at 575-76. 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 business in the future.” Id. at 582. 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).

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control meanwhile the property during the period of default.” Id. at 595.6 That is precisely what the Treasury Department would have Chrysler do here. 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.”

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impairs the Senior Lenders’ rights, the statute also does not permit the Treasury Department to 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 reorganizations under the bankruptcy laws); 11 U.S.C. § 1163 (detailing authority of Transportation Secretary in railroad bankruptcy proceeding). 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.

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FDIC, 338 F. Supp. 2d 71, 79-81 (D.D.C. 2004) (noting broad FDIC powers under section 1821, but finding that “none of these broad powers encompasses the right to reclassify deposits without authorization…”).

TARP contains no reference – or even hint – of Treasury Department

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 nonbankruptcy federal law, including one that must be decided by the District Court in relation to the Trustee/Examiner Motion. E.

This Proceeding Also Violates the EESA’s Conflict of Interest Rules 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 the terms of that program.” 31 C.F.R. § 31.214.

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61.

Here one of the Government’s key legal advisors is Simpson, Thacher & Bartlett

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 an improper conflict of interest that also infects these proceedings. * 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

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