Judge Arthur J. Gonzalez presided over hearings May 20, 2009, in this mega bankruptcy case. There were 21 matters on the agenda, as well as an emergency motion, that were heard or adjourned to a later date, in approximately two and a half hours of hearings (click here for a link to the audio file provided by the Clerk of the U.S. Bankruptcy Court for the Southern District of New York; it may take a moment to load before playing). In addition to issuing orders authorizing the Debtors’ retention of various professionals and approving interim compensation procedures for professionals, the court entered the following orders.

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The significant contested arguments were heard in two segments. The first segment concerned three motions that were heard and considered together: the Union Pacific Railway Company’s motion to alter or amend an order confirming protections of sections 362, 365 and 525 of the Bankruptcy Code, the Norfolk Southern Railway’s similarly titled motion and Bridgestone Americas Tire Operations’ motion to set aside the performance order or, in the alternative, grant assurance of reciprocal performance.

The three movants argued that while each continues to perform their respective obligations under their executory contracts they have no assurance of future payment by the Debtors and their continuing performance will result in the accrual of administrative expenses. In the meantime, the Debtors are sending out notices of assumption and assignment of executory contracts and have several months after the sale to conclude the assumption and assignment process. There is no assurance that the movants’ respective contracts will be assumed or that they will be paid.

Judge Gonzalez had one overriding concern: was Chrysler LLC in default under the terms of the contracts? Because Chrysler had not yet missed a payment, the Debtor was not in default under any of the executory contracts. Judge Gonzalez denied the request for modification and/or adequate assurance on the basis that the requests were premature.

The second contested argument concerned the emergency motion of the Indiana Pensioners for Stay of Proceedings pending Determination to Withdraw the Reference. The Indiana Pensioners are first lien creditors who are part of the class of secured creditors with liens on all the Debtors’ U.S. assets and 65 percent of Debtors’ equity interests in foreign subsidiaries. In their motion, the movants asserted that the prearranged deal brokered by the Executive Branch of the U.S. government sets the Bankruptcy Code’s absolute priority scheme on its head: the UAW and other unsecured creditors will receive 50 percent of the equity in the New Chrysler LLC while the secured creditors such as the Indiana Pensioners will not be fully repaid as required by the Bankruptcy Code. The movants argued that the accelerated timetable of the sale process was imposed by the U.S. government upon the Debtor and has tainted the Bankruptcy Court proceedings. If the proceedings continue in the Bankruptcy Court, the transaction as it is now outlined will result in an unconstitutional taking of property of the secured lenders and a transfer of that property to unsecured creditors in violation of the absolute priority rule.

Initially, Judge Gonzalez questioned whether the Indiana Pensioners had standing to raise the constitutional arguments to challenge the U.S. government’s role in the sale transaction. He then heard arguments from different constituencies and denied the stay of the bankruptcy proceedings. During the arguments, Judge Gonzalez reasoned that the Indiana Pensioners’ argument concerning the unconstitutionality of the sale procedures was premature and that those objections could be made during the sale hearing, currently scheduled for May 27, 2009.

In his order, Judge Gonzalez ruled that the movants did not carry their burden in establishing that they would suffer irreparable harm without the imposition of the stay. Furthermore, the movants did not establish the value of their claim against the estate nor the value of the collateral and failed to show that the absence of a stay would cause monetary loss. The court found that the damage in delaying the sale of the assets of Chrysler LLC would result in substantial harm to the Debtor and the estate, threaten the viability of New Chrysler LLC going forward and was against the public interest.

The Indiana Pensioners have filed a notice with the Bankruptcy Court stating that their withdrawal motion has been assigned Docket No. 09 CIV. 4743 (LAP) and will be handled by District Court Judge Loretta A. Preska during the week of May 25.

To date, more than 70 objections to the Sale Motion have been filed. These include more than 32 objections filed by dealers. Many of the rejected dealers have filed objections documenting the unfairness in Chrysler’s decision to provide rejected dealers approximately three weeks to unwind their Chrysler Jeep and/or Dodge new car franchises with no offer to buy back the unsold inventory. Arguably, the short time frame puts the rejected dealers at the mercy of the assumed dealers remaining in business and nondebtor floor plan financiers seeking payment.

Judge Gonzalez has set the stage for the hearing to consider the sale of substantially all of Debtors’ assets. On May 22, 2009, the court issued an order (on its own motion) stating that opening arguments could only be submitted in writing by 9:00 a.m. on May 27, 2009, and evidence would be heard commencing at 10:00 a.m., followed by argument. In his rulings and in his responsiveness, Judge Gonzalez has made it clear that he will not allow anything to disrupt the sale approval process. As he stated in his order denying the Indiana Pensioners’ Stay Motion, “[t]he record clearly indicates that conducting the Sale Hearing on May 27, 2009 is imperative to the future of the Debtor and any delay could result in substantial and irreparable harm to the Debtor and the estate.”