For more information, see the article in the New York Times.

The full Supreme Court Tuesday decided not to hear the merits of a challenge to the sale of Chrysler assets to a group comprised of Fiat, the US, Canada and the Chrysler Auto Worker Union Retirement Trust.  The unanimous court, in a two-page-opinion, lifted the temporary stay granted by Justice Ruth Bader Ginsberg on Monday, and stated that the challengers had not met their burden of proof that their grievances merited the court’s attention.

A group of Indiana pension funds and consumer groups who opposed the sale of Chrysler had filed an emergency motion with the U.S. Supreme Court, asking that the sale be “stayed” or put on hold while they continue their attempts to block it.  The pension funds owned a small portion of Chrysler’s secured debt and claimed the sale was unfair to secured lenders. Under the sale, the pension funds will receive just 29 cents on the dollar, less than unsecured creditors like the United Auto Workers Union.  The consumer groups contend that the sale doesn’t sufficiently address warranties of existing Chrysler, Dodge and Jeep products. 

After the ruling, Chrysler issued a statement saying the sale will close “very shortly.” The New York Times reports the deal is scheduled to close at 9 a.m. today.  Fiat shares were up as much as 3 percent early Wednesday morning. 

Also Tuesday, the Bankruptcy Court approved Chrysler’s motion to terminate 789 dealer franchises immediately, which Chrysler contends would significantly cut costs.  Scores of dealers had opposed the closings. 

The Wall Street Journal calls the Supreme Court decision a victory for the Obama administration:

The high court’s move marks a victory for the Obama administration and its ambitious plan to remake the American auto industry by pushing both Chrysler and General Motors Corp. through quick and painful restructurings under Chapter 11 bankruptcy.

But the order is a setback for a group of Indiana pension funds and others who maintained the government’s heavy-handed treatment of creditors in the case could chill private lending to distressed firms and alter the rules of bankruptcy reorganizations.

The Court’s decision appears not to provide advance clearance for any other government rescue plan — such as the similar administration-backed bankruptcy of General Motors.  It also does not rule on the constitutionality of using federal bailout funds to rescue a private company.

Now that the Bankruptcy Court has approved the sale of Chrysler’s assets to a consortium of buyers lead by Italian carmaker Fiat, the next major issue is which Dealer Agreements will be assumed and which ones will be rejected. 

On May 17, Chrysler filed a motion (the “Rejection Motion”) in the Bankruptcy Court seeking authority to reject almost 800 Dealership Agreements.  Under the Bankruptcy Code, Chrysler can review dealer agreements on a dealer-by-dealer basis, to consider if it makes sense in its “business judgment” to continue with current pending contracts, such as dealer agreements.  If, in Chrysler’s business judgment, a contract has more burdens than benefits, it is allowed to reject that contract.  A rejection of a contract is a breach of that contract, but the other party to the contract is only left with filing a claim in the bankruptcy case.  

For all of the dealer agreements that Chrysler does not reject, they will, as part of the sale of assets to Fiat, et. al., assume the agreements and assign them to the new owners.  This means the contract remains in effect, and is binding on the dealer, and the new owners of Chrysler. 

Car dealers whose agreements are rejected (the “Affected Dealers”) are at risk of losing everything, severely affecting local jobs and economies.  If the Court approves Chrysler’s Rejection Motion (the hearing on this motion is this week), Affected Dealers will no longer be able to sell their new inventory with manufacturer warranties, offer rebates or incentives, or use the Chrysler, Jeep or Dodge trademarks on their dealerships. Many will essentially become used car lots, with new vehicles being sold as used. The dealers who sold exclusively Chrysler, Dodge or Jeep products (rather than selling Jeep and Nissan, for example), many at Chrysler’s insistence, will be the hardest hit.

Affected Dealers have filed 197 responses to the Rejection Motion, including objections, statements, briefs, letters and separately filed declarations.

Generally, these responses argued that the rejections violate certain antitrust laws; the rejections were based upon bad faith, discrimination or other improper considerations; Chrysler failed to satisfy the traditional business judgment rule for various reasons, such as cost analysis; the Court should consider the harm to the Affected Dealers from rejection (and deny the rejection because of it) rather than relying solely upon the Chryslers business judgment; and the Affected Dealers are not getting their day in court and are not getting due process .  Chrysler filed a response to the objections, claiming that the issues raised by the Affected Dealers are inconsequential, because it is Chrysler’s “business judgment” that counts and, even if flawed, it must prevail, unless there is “bad faith, whim, or caprice.” Chrysler further urges the Court that it should not “balance the equities” between the losses by the dealers, and Chrysler’s need to reject franchise agreements.

Affected Dealers did have the opportunity to enter into an “accommodation” with Chrysler in which Chrysler promised to try to help dealers redistribute the existing inventory, parts and special tools/equipment.  Nothing specific, is promised, however, and dealers still would still have to accept substantial discounts on vehicles.

Evidence on these issues was taken yesterday.  If necessary, oral argument on the motion will be today.

Meanwhile, the Senate Committee on Commerce, Science and Transportation is reviewing Chrysler’s decision to close 789 dealerships and GM’s decision to close 1,100 dealerships.  According to the Washington Post:

Because the federal government is slated to own most of General Motors and 8 percent of Chrysler, some of the senators said they have a responsibility, as major shareholders do, to review company decisions.