Illegal Takeover of Chrysler: Pension Funds Have Standing in Indiana State Police Pension Trust v. Chrysler, LLC

Earlier, I wrote about the Indiana pension funds’ challenge to the Obama Administration’s plan to effectively give Chrysler to the UAW Union, while cheating the pension funds that loaned it money (and ripping off taxpayers), and how that violates federal bankruptcy laws.

The government is now arguing that the pension funds don’t have legal standing to challenge the plan, since they can’t prove they will be worse off than if the Administration had just sat back and let Chrysler go bankrupt naturally. The government says that the pension funds might have received even less in such a bankruptcy than the pennies on the dollar they are slated to receive under the government’s plan, under which it intervened and injected billions in taxpayer money into Chrysler, and then engineered a sale of Chrysler’s valuable asserts to a new company mostly owned by the UAW that is part of planned merger with Italian carmaker Fiat. (The Administration has completely failed to do its homework before pushing for a merger with Fiat, which is alleged to have Enron-like accounting problems, and massive shady dealings that could haunt taxpayers and autoworkers alike in the future).

The government is wrong. The pension funds have standing even if their victory would leave them no better off, but would eliminate the unfair preference received by the UAW. For example, in Heckler v. Mathews (1984), the Supreme Court held that male reverse-discrimination plaintiffs had standing to challenge a federal government gender-preference that benefited women, even if the challenge would only result in benefits being taken away from the women, and would not result in men getting any additional benefits.

Moreover, the funds, as secured creditors, will be enormously adversely affected in future bankruptcies by the disturbing precedent set by the Chrysler bankruptcy, in which an unsecured creditor — the UAW — received far more than secured creditors — the Indiana state pension funds that loaned money to Chrysler under the solemn understanding that they would stand first in line in any bankruptcy. Losing this lawsuit will strip them of an enormous bargaining chip in future bankruptcies. The loss of a bargaining chip is sufficient grounds for standing, as the Supreme Court made clear in Clinton v. City of New York (1998), where it allowed farmers to challenge the line-item veto as a violation of the Constitution when it resulted in the President vetoing legislation that would have given a bargaining chip to use in potentially purchasing a potato processing plant. Bankruptcy law experts have noted the precedent set by the Chrysler bankruptcy will have a great impact on General Motors and other bankruptcies in the future. An inability to compete on fair terms in the future is grounds for standing. See Gratz v. Bollinger (2003) (student who alleged he would apply as a transfer student to a college if it would stop considering race in admissions had standing to challenge college’s race-conscious admissions policy). That is precisely what the pension funds allege.

Moreover, even if the Obama Administration’s unfair plan to give Chrysler to the UAW were blocked, it would just find alternative ways, fairer to the pension funds and less biased towards the UAW, to keep Chrysler going, through taxpayer funds if necessary. Letting Chrysler go out of existence would put UAW members out of work, and the Administration would be loath to let that happen, given that the UAW spent millions electing Obama, and made millions more in donations to the liberal lawmakers who now dominate Capitol Hill.

A federal appeals court has refused to block the Administration’s illegal auto bailout, which rips off taxpayers and pension funds to enrich the UAW union. The pension funds that challenged the bailout then appealed to the U.S. Supreme Court. The bailout violates the federal TARP statute by diverting financial-system bailout funds to a takeover of the auto industry. And the government’s reorganization plan for Chrysler violates federal bankruptcy laws by ripping off lenders to give the company to the UAW union.

(The bailouts have been counterproductive. 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. That endangers their long-run competitiveness. Indeed, the politicized auto bailouts resemble the failed British auto bailouts of the 1970s. If the automakers had ripped up their collective bargaining agreements in a regular bankruptcy, they would now be in a position to recover without taxpayer funds, since it was rising gas prices last year that pummeled their ability to sell the big cars that are their profit center, and gas prices have fallen enormously since their peak last year.)

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. (Congress rejected auto bailout legislation last year precisely because it lacked safeguards against the use of bailout money to prop up uncompetitively high UAW wages — exactly what the Obama Administration is using the money for now. 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 using the money for auto bailouts 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 was right to raise these important legal questions in court. Mourdock correctly 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, far less than the UAW is getting, even though the pension funds are secured lenders and the UAW is not. 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.

As a lawyer who has handled both constitutional cases, and bankruptcy-related cases, I think that Indiana’s position has merit, and that the Supreme Circuit should rule in favor of its appeal. The Supreme Court should grant review, since the issues are of overriding national importance, and since the Second Circuit Court of Appeal’s ruling refusing to block the government’s plan has created a circuit split by countenancing circumvention of the bankruptcy laws as long applied in circuits across the country.