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Illegal, Unfair Auto Bailout That Harms Retirees and Taxpayers Challenged in Chrysler Bankruptcy

The Indiana State Teachers' Retirement Fund is rightly challenging the diversion of tens of billions of dollars of federal TARP bank bailout money to pay for auto bailouts in the Chrysler bankruptcy case. That diversion violates the law. It is part of the government's unfair reorganization plan for Chrysler, which rips off pension funds to provide short-sighted, unsustainable preferential treatment for the UAW.

(The bailouts are doing no good. General Motors and Chrysler would actually have been better off if they had filed for bankruptcy last year, rather than taking federal money, since the bailouts have come with costly political strings attached, such as dropping opposition to costly CAFE regulations and other federal mandates, and bowing to political meddling in fundamental corporate decisionmaking, and have left the automakers with higher labor costs than if they had just ripped up their collective bargaining agreements in a standard bankruptcy, endangering their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s).

The Obama and Bush Administrations used money from the $700 billion financial system bailout for an auto industry bailout. To do that, they have seized on the fact that the bailout statute contains a broad definition of "financial institution," which the Administration claims includes virtually any institution, financial or not. The bailout statute defines "financial institutions" eligible for the bailout as "including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company." Never mind that Congress listed as examples of "financial institutions" only entities that were banks, insurance companies, or financial institutions, not automakers. During the debate over the auto bailout legislation, the Treasury Department admitted that automakers are not financial institutions covered by the bank bailout statute.

Legal scholars at the Heritage Foundation, former Labor Secretary Robert Reich and many other commentators have argued that this violates the financial bailout statute under the principle of statutory construction known as ejusdem generis, which says that when a term's definition includes examples that are all of a similar kind, it limits the meaning of the term to things similar in kind to such examples.

But if that's not so, and the bailout was just a big slush fund for the Administration to dispense with as it chooses, then the bailout law itself was unconstitutional, since it conferred unbridled discretion in the hands of the President to do whatever he wanted with it. The Supreme Court ruled in the Schechter Poultry case that giving the executive uncabined discretion violates the constitutional separation of powers between different branches of government, by giving the president essentially legislative powers. (An earlier version of the bailout law was even more clearly a violation of separation of powers, since it failed to provide for judicial review of the vast discretion it gave the president, unlike past delegations of power upheld in cases like the Amalgamated Meat Cutters case). The government's incredibly broad reading of the bank bailout statute should be rejected, since it violates the canon of constitutional doubt.

Indiana Treasurer Richard Mourdock is to be commended for raising these important legal questions in court. Mourdock rightly notes that the unfair plan for Chrysler pushed by the Administration violates the bankruptcy laws and rips off Indiana residents by leaving state employee pension funds and construction funds with a tiny fraction of what they are owed by Chrysler. By cheating Chrysler's lenders, the government's plan discourages lending, and sets a dangerous precedent that makes it harder for companies like Chrysler to raise money to create jobs in the future, as newspapers like USA Today have noted.

The federal government's poorly-conceived bailouts will also endanger Indiana jobs in the long run by leaving Chrysler and General Motors with uncompetitive work rules and compensation.

Earlier, a panel of the U.S. Court of Appeals for the Second Circuit, including Chief Judge Dennis Jacobs, and Judges Amalya Kearse and Robert Sack, entered a temporary stay of the bankruptcy judge's ruling rubberstamping the government's plans for Chrysler, in an appeal brought by the Indiana State Teachers' Retirement Fund. The case is In re Chrysler, LLC, Second Circuit Docket # 09-2311-mb.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana's position has merit, and that the Second Circuit should rule in favor of its appeal.