Hoosiers face off with Chrysler

Indiana state treasurer Richard Mourdock is taking the Chrysler fight to the Court of Appeals.

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NEW YORK (CNNMoney.com) -- Not so fast, Chrysler.

Indiana Treasurer Richard Mourdock is getting his day in court, again. His appeal against a ruling allowing the sale of the bankrupt carmaker's assets, filed on behalf of three Indiana state pension funds, has made its way to the U.S. Court of Appeals in New York. Arguments will be heard Friday.

"Obviously, we're very pleased," said Mourdock, in an interview with CNNMoney.com. "Points of law that we have consistently raised in this debate had never been challenged. Now we're finally going to see the points of law get debated."

The three Indiana funds -- for retired state police officers and teachers, as well as a "Major Moves" construction fund -- total $42 million. That represents less than 1% of Chrysler's $6.9 billion debt.

Mourdock said the funds, as secured creditors, should not be left behind in the bankruptcy process. He argued that the funds shouldn't have to play second fiddle to unsecured creditors, such as the Italian automaker Fiat, which is getting 20% of the New Chrysler, the soon-to-be-formed, post-bankrupt version of the company.

"This is the first time in American history that unsecured creditors have received more value in a bankruptcy than secured creditors," said Mourdock.

Indeed, it wasn't a sure thing that the Indiana appeal would be heard in court. Mourdock will press ahead even as other creditors, including some big Wall Street players, also had to settle for less than what they were owed.

The treasurer said the Indiana pension funds purchased Chrysler's debt at 43 cents on the dollar, but "now we're being told that we're getting 29 cents" on the dollar.

This translates to a $6 million loss for the state of Indiana. Mourdock said that he has received "thousands of letters," many of them from Indiana auto workers, asking him to abandon his fight and not hinder the process. But he said it's his duty as treasurer to carry on.

"If the court is going to say that secured creditors no longer have rights, then that is a huge story for the American economy," said Mourdock. "I want to get maximum value for the secured creditors that I represent as a fiduciary and an office holder."

Day in court: Mourdock, a Republican who was elected to lead the state treasury in 2006, said he is not opposing the Obama-backed bankruptcy for political reasons. And as the owner of two Chrysler vehicles, he emphasized that he is not anti-Chrysler.

"But when the U.S. government rips away the value, I can't sit idly by," he said.

Chrysler spokesman Shawn Morgan said his company is "pleased" that the appeals court "has recognized the sense of urgency Chrysler has to preserve and protect its going concern value. We look forward to an expeditious conclusion to this matter and to getting back to building vehicles."

White & Case, a prominent Wall Street law firm, will continue to represent the holders of Indiana pension funds. In last week's three-day hearing in U.S. Bankruptcy Court, lawyers from White & Case subjected Chrysler executives to hours of aggressive cross-examination.

Despite this, Judge Arthur Gonzalez cleared the way for Chrysler to sell its best-performing assets, such as factories and dealership franchise agreements, to the soon-to-be-formed Chrysler Group. The ruling, if it stands, would clear the way for the new company to emerge from bankruptcy protection after Chrysler's filing on April 30.

The Chrysler Group will be controlled primarily by a United Auto Workers union trust, which will own a majority stake of 55%. Fiat will own 20% initially. Minority stakes would go to governments: 8% for the United States and 2% for Canada.

Gonzalez issued his decision late Sunday, just hours before General Motors (GMGMQ) filed for bankruptcy.

Richard Tilton, a corporate bankruptcy attorney and analyst with credit analysis firm Covenant Review who is not involved in this case, said Mourdock faces an "extremely difficult" fight in trying to upset the Chapter 11 process.

Tilton said Chrysler's legal team from Jones Day is "very well prepared" for the case and that "just about everyone else" is in support of the bankruptcy, including employees, suppliers, retirees and secured lenders.

Most importantly, he said the Indiana treasurer's technical legal points, however sound they may be, are "subject to the court's discretion" and could be overruled.

"I would be astonished if the appellants win," said Tilton.